International Comparison Labor Costs Per Employee

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 |  Includes: FXE, UDN, UUP
by: Marc Chandler

Summary

In a stunning reversal, the major central banks want workers to have higher wages.

The US and Germany have among the highest wages (and productivity).

Mexico's labor costs (wages and benefits) are about 40% of US and German labor costs.

It almost seems surreal. The major central banks seem to agree that wages need to rise. Usually, to the extent central banks address the issue, they traditionally have cautioned against large pay increases. And in so doing, reveal their underlying pro-business agenda. Why should it matter to a central bank how the productivity gains are divided between wages on one hand, and profits on the other.

One reason for the usual desire to keep wages intact is that there is the belief that wages are the key driver for core inflation. Yet, the cost of labor in the total cost of production has steadily fallen. This is the mirror image of increased productivity. This can be seen in the secular decline in manufacturing employment.

Services are by definition more labor intensive. However, even in many services, that account for the bulk of services employment, technological advances, including the rise of the internet, has increased the productivity of service sector workers. Increasingly, shoppers are expected to scan their own goods at check-out counters, for example.

The lack of aggregate demand and low inflation has facilitated the shift in central bank views. Even the German Bundesbank has come out in favor of higher wages throughout the euro area. At Jackson Hole, the issue for US and UK officials was how to measure the slack in the labor markets, and how much of that slack is cyclical and how much is structural.

Some pundits points out that central bankers simply do not know. While that may be a fair assessment, as a criticism it is not very biting, as private sector economists also do not know. Or to say it better, there is a vigorous debate over these issues, and reasonable people can and do differ.

Yellen's attitude differed from her immediate predecessors. She did not appear to project greater confidence in her views than she had. She recognized the difference of opinion. At the same time, her bias seemed clear. She argued that there is both a cyclical and structural component, and with inflation expectations anchored, the Federal Reserve will continue to try to address the cyclical component.

This Great Graphic was in a new report by KPMG. It shows the labor costs of 10 large countries. Labor costs include wages and benefits. There are two parts of benefits, those that legally required and those that are not. According to the table below, the US average wages are among the highest. The required benefits are the lowest, but the non-statutory benefits are the highest. This leaves total labor costs the second highest after Germany.

In contrast, Mexican wages are the lowest of the countries examined here, the statutory benefits are middling, and other benefits are at the upper end. Nevertheless, KPMG reckons labor costs in Mexico are the lowest, 40% of the US and Germany. This should help prod our thinking into what is missing here. To appreciate the true cost of labor, one needs to take into account productivity. The measure that captures wages, benefits and productivity is unit labor costs.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.