Nominal Unit Labour Costs: a crooked macro indicator
The post 2008 decline of Macro Nominal Unit Labour Costs (NULC) in Ireland was not caused by austerity of wage restraint. It was caused by the housing bust (source: Eurostat, CBS). Which can’t be explained by neoclassical macro models. But which can be explained by simple arithmetic.
The bust led to the almost complete (from the top of my head: -93% at one point!) demise of ‘high NULC’ housing construction, which caused a decline of average macro NULC in Ireland – even when average wages did not change…. But this is not the only problem with the often used variable NULC (look here how Mario Draghi used it to push wage cuts).
In the, basically, ‘one consumer-producer, one product’ economy of neoclassical macro models, the only really important cost of production of the one good are wages which makes unit wages costs the indicator of competitivety. In a rare attempt at direct quantification of a neoclassical variable, this variable is often equated to NULC, or average wage costs per unit of real GDP. This metric has lots of flaws. Look here and here -it is severely crooked.
* For one thing, a shift from self-employed labour to wage labour will result in an increase in wages (and a decline in ‘mixed income) costs without any kind of increase in production and, therewith, to higher NULC. Clearly, the ‘one homogenous consumer-producer’ assumption makes us misunderstand the increase of NULC in Greece before 2008, when many of its self-employed shifted to wage labour. Or to understand developments in Spain, as a the increase of employment in Spain before 2008 was to a largely caused by increased labour participation of women, which tended to have a lower rate of self employment.
* Also, the one product assumption makes us misunderstand developments in Spain and Ireland, where the housing boom led, as construction is characterized by a relatively high NULC, to an increase of the NULC while the opposite happened during the bust.
* One can of course make a straight hit with a crooked bat: maybe lower NULC are, after all, a sign of increased competitivety and do lead to sustained recovery and job growth. But no. Japan managed to decrease NULC almost continuously after 1998, but (largely due to an appreciating Yen) the competitive position of Japan did not really improve. Mind that the East Asian countries after the 1998 crisis took recourse to external devaluation, which worked within a year (Greece, however, after five years etc. etc.). Not because exports boomed – but because, as contrary to the situation in Greece and Japan nominal wages did not decline, domestic producers could, thanks to the lower exchange rate, tap a larger part of total domestic demand. Singapore did pursue a little wage cutting, but not by cutting take at home way but by decreasing the amount of money going to the pension fund (central provident fund), to keep domestic demand stable. Mind also that the present recoveries in Europe (Spain) are largely dependent on increasing domestic demand. Which is possible because of a combination of slowly increasing wages – and decreasing consumer prices.
Aside – the neoclassical macro model is of course just another version of the Robinson Crusoe fantasy, surviving alone on an island. I mean – we’re ruled by men who fantasize about being alone on such an island…
p.S. – the picture is a subspecies of beech which grows on the Montagne de Reims (les faux, great place to wander).