Appendix - Definitions, Sources, and Methods

Section 3 focuses on several key labor-related indicators of competitiveness in world markets for goods: the level and trends in manufacturing hourly compensation costs, trends in productivity and unit labor costs, and manufacturing output as a percent of world manufacturing. The manufacturing sector provides the best data for such comparisons, and the BLS indicators presented in charts 3.1 - 3.6 have been adjusted to a common conceptual framework to facilitate comparisons. Nevertheless, it should be noted that these indicators allow only for a partial assessment of international competitiveness of countries. The aggregate (all manufacturing) nature of the indicators may mask important variations in competitiveness of manufacturing sub-sectors. In addition, competitiveness relationships in manufacturing may not be the same as the relationships in services, a growing sector for trade flows. Although competitiveness is heavily dependent on labor costs, there are many other factors that also influence competitiveness, including the quality of the product, the timeliness of its delivery, after-sales service, and the flexibility needed to respond to changes in customers' requirements. Note that the hourly compensation costs indicators in charts 3.1 - 3.3 show levels and trends, whereas the productivity and unit labor costs indicators in charts 3.4 - 3.6 are limited to trend comparisons.

Hourly compensation costs for production workers in manufacturing (charts 3.1 - 3.3)

These charts present data on comparative hourly compensation costs for manufacturing production workers in order to assess international differences in employer labor costs. Comparisons based on the more readily available average earnings statistics published by many countries can be very misleading—national definitions of average earnings differ considerably, average earnings do not include all items of labor compensation, and the omitted items of compensation frequently represent a large proportion of total compensation.

The compensation measures are computed in national currency units and are converted into U.S. dollars at prevailing commercial market currency exchange rates. The foreign currency exchange rates used in the calculations are the average daily exchange rates for the reference period. They are appropriate measures for comparing levels of employer labor costs. They do not indicate relative living standards of workers or the purchasing power of their income.

Hourly compensation costs include (1) hourly direct pay and (2) employer social insurance expenditures and other labor taxes. Hourly direct pay includes all payments made directly to the worker, before payroll deductions of any kind, consisting of (a) pay for time worked and (b) other direct pay. Pay for time worked includes basic time and piece rates plus overtime premiums, shift differentials, other premiums and bonuses paid regularly each pay period, and cost-of-living adjustments. Other direct pay includes pay for time not worked (vacation, holidays, and other leave, except sick leave), seasonal or irregular bonuses and other special payments, selected social allowances, and the cost of payments in kind. Social insurance expenditures and other labor taxes include (c) employer expenditures for legally required insurance programs and contractual and private benefit plans and (d) other labor taxes. Social insurance expenditures include employer expenditures for retirement and disability pensions, health insurance, income guarantee insurance and sick leave, life and accident insurance, occupational injury and illness compensation, unemployment insurance, and family allowances. Other labor taxes includes taxes on payrolls or employment (or reductions to reflect subsidies), even if they do not finance programs that directly benefit workers, because such taxes are regarded as labor costs.

The BLS definition of hourly compensation costs is not the same as the ILO definition of total labor costs. Hourly compensation costs do not include all items of labor costs. The costs of recruitment, employee training, and plant facilities and services—such as cafeterias and medical clinics—are not included because data are not available for most countries. The labor costs not included account for no more than 4 percent of total labor costs in any country for which the data are available.

Production workers generally include those employees who are engaged in fabricating, assembly, and related activities; material handling, warehousing, and shipping; maintenance and repair; janitorial and guard services; auxiliary production (for example, power plants); and other services closely related to the above activities. Working supervisors are generally included; apprentices and other trainees are generally excluded.

Total compensation is computed by adjusting each country's average earnings series for items of direct pay not included in earnings and for employer expenditures for legally required insurance, contractual and private benefit plans, and other labor taxes. For the United States and other countries that measure earnings on an hours-paid basis, the figures are also adjusted in order to approximate compensation per hour worked. Earnings statistics are obtained from surveys of employment, hours, and earnings or from surveys or censuses of manufactures.

Adjustment factors are obtained from periodic labor cost surveys and interpolated or projected to non-survey years on the basis of other information for most countries. The information used includes tabulations of employer social security contribution rates provided by the International Social Security Association, information on contractual and legislated fringe benefit changes from ILO and national labor bulletins, and statistical series on indirect labor costs. For other countries, adjustment factors are obtained from surveys or censuses of manufactures or from reports on fringe-benefit systems and social security. For the United States, the adjustment factors are special calculations for international comparisons based on data from several surveys.

The statistics are also adjusted, where necessary, to account for major differences in worker coverage; differences in industrial classification systems; and changes over time in survey coverage, sample benchmarks, and frequency of surveys. Nevertheless, some differences in industrial coverage remain, and in many countries other than the United States, the data exclude very small establishments (less than 5 employees in Japan and less than 10 employees in most other countries). For the United States, the methods used, as well as the results, differ somewhat from those of other BLS series on U.S. compensation costs.

Hourly compensation costs are converted to U.S. dollars using the average daily exchange rate for the reference period. The exchange rates used are prevailing commercial market exchange rates as published by either the U.S. Federal Reserve Board or the International Monetary Fund.

The hourly compensation figures in U.S. dollars shown in the tables provide comparative measures of employer labor costs; they do not provide inter-country comparisons of the purchasing power of worker incomes. Prices of goods and services vary greatly among countries, and the commercial market exchange rates used to compare employer labor costs do not reliably indicate relative differences in prices. Purchasing Power Parities (defined previously in the Gross Domestic Product section) must be used for meaningful international comparisons of the relative purchasing power of worker incomes.

Total compensation converted to U.S. dollars at Purchasing Power Parities would provide one measure for comparing relative real levels of labor income. It should be noted, however, that total compensation includes employer payments to funds for the benefit of workers in addition to payments made directly to workers. Payments into these funds provide either deferred income (for example, payments to retirement funds), a type of insurance (for example, payments to unemployment or health benefit funds), or current social benefits (for example, family allowances), and the relationship between employer payments and current or future worker benefits is indirect. On the other hand, excluding these payments would understate the total value of income derived from work because they substitute for worker savings or self-insurance to cover retirement, medical costs, etc.

Total compensation, because it takes account of employer payments into funds for the benefit of workers, is a broader income concept than either total direct earnings or direct spendable earnings. An even broader concept would take account of all social benefits available to workers, including those financed out of general revenues as well as those financed through employment or payroll taxes.

Source: BLS, “International Comparisons of Hourly Compensation Costs of Production Workers in Manufacturing, 2005,” November 30, 2006, Department of Labor News Release USDL 06-2020, http://www.bls.gov/fls/.

Manufacturing productivity and unit labor costs (charts 3.4 - 3.6)

The productivity estimates refer to labor productivity, defined as real output per hour worked. It is based on the manufacturing output produced in each country and the total labor input in the form of hours worked. Output is defined as the real (deflated) GDP produced in the manufacturing sector of the economy. GDP has been defined previously (see Gross Domestic Product section). The output data are published as part of each country's national accounts.

Hours worked in manufacturing include the hours of all persons engaged in the manufacturing process, including the self-employed. For some countries, the data on the number of hours worked in manufacturing are also published with the national accounts. For other countries, BLS constructs its own estimates of aggregate hours worked, multiplying employment figures published with the national accounts by estimates of average annual hours worked.

Manufacturing unit labor costs are defined as the cost of labor compensation per unit of output. Because labor costs are frequently a major factor in total production costs, changes in unit labor costs affect the prices of manufactured products.

Labor compensation includes employer expenditures for legally required insurance programs and contractual and private benefit plans, in addition to all payments made in cash or in kind directly to employees. Data on labor compensation are usually taken from the countries' national accounts. When data for the self-employed are not available, total compensation is estimated by assuming the same hourly compensation for self-employed and employees.

Changes in a country's unit labor costs, expressed in U.S. dollars, are estimated by combining changes in the unit labor cost expressed in each nation's currency with changes in the exchange rate of the country's currency against the U.S. dollar.

Source: BLS, "International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends 2005, Revised," February 22, 2007, Department of Labor News Release USDL 07-0283, http://www.bls.gov/fls/.

Manufacturing output as a percent of world manufacturing output (charts 3.7 and 5.8)

Manufacturing output is defined as the value added in the manufacturing sector of each country.

Each country's manufacturing value added in 2005, expressed in U.S. dollars, is divided by world manufacturing value added. The value added series are converted to U.S. dollars by applying the corresponding 2005 exchange rates, as reported by the International Monetary Fund (IMF). Reported rates are annual averages of the exchange rates communicated to the IMF by the monetary authority of each member country.

While exchange rates are the most appropriate conversion method, one must keep in mind that they are volatile by nature and can change suddenly and significantly, leading to sharp realignments of the comparative levels shown in the charts. For example, if a country's currency is relatively "undervalued," the share of world manufacturing output shown on the chart for that country will be relatively low. If the currency were to strengthen, the country's share (in U.S. dollars) would rise, even if its manufacturing output (in local currency units) remained unchanged.

Source: United Nations, National Accounts Main Aggregates Database, http://unstats.un.org/.