Persistently weak labor productivity growth has created a situation in which unit labor costs do not fall, even if real wages remain stagnant or decline. Indeed, despite a 1.3 drop in real wages in 2011, unit labor costs remained unchanged.

Declining competitiveness is best captured in a single indicator unit labor costs, which measure the average cost of labor per unit of output. In a monetary union, discrepancies in wage growth relative to productivity gains that is, unit labor costs will result in a chronic accumulation of trade surpluses or deficits.

The result is that free markets don t generate enough final demand. In the US, for example, slashing labor costs has sharply reduced the share of labor income in GDP.

As labor costs continue to climb, is China set to lose its coveted spot as the world s workshop?

That said, Europe s disparities in production costs and competitiveness, reflected in the problem countries substantial current account deficits, may prove to be an even more difficult problem to resolve. Unit labor costs in Greece, Portugal, Spain, and Italy grew 20 30 faster than in Germany in the euro s first decade, and somewhat faster than unit labor costs in northern Europe as a whole.

These are economies that, even a decade ago, were losing market share to China and Asia, owing to their labor intensive and low value added exports. After a decade that saw wages grow faster than productivity, unit labor costs (and the real exchange rate based on those costs) appreciated sharply.

Another factor behind the upturn is the meaningful progress that a number of European countries, such as Spain, have made on structural reform. Labor market regulation has been loosened, and unit labor costs have come down.

Optimal trade intensity depends on many factors such as relative labor costs, transport costs, productivity levels, and economy of scale effects. Trends in these factors might make reduced trade intensity not only inevitable but desirable.

Second, the early success of China infrastructure was built on cheap land, capital, and labor. But, despite modern infrastructure, logistical costs within China are 18 of production costs, compared with 10 in the US, owing to various internal inefficiencies.

From 1992 to 2011, labor productivity grew at an average annual rate of 0.9 , the lowest in the OECD. Since 2001, unit labor costs have been growing faster than real GDP and employment, undermining the economy s competitiveness vis à vis developing countries.

The first baby boomers have reached retirement age, and the labor force will soon be shrinking in most parts of Europe. To cover the costs of aging and maintain its position as an economic power, Europe must increase overall labor participation considerably.

It can raise Ethiopian workers productivity to half or more of Chinese levels through in house training. The savings in labor costs more than offset other incremental costs of doing business in an African environment, such as poor infrastructure and bureaucratic red tape.

To realize that potential, the tradable sector has to re expand at the margin as a weakening currency causes imports to fall and real unit labor costs decline as nominal wages flatten out, unemployed labor and capital flow toward external markets for goods, services, and resources.

The problem is that, until now, the major cause of inflation has been rapidly rising manufacturing costs, and there is no sign of a slowdown in energy and raw material prices. Moreover, a new labor law and income policies will further increase workforce costs.

Since the euro s introduction, unit labor costs have risen dramatically faster in France than they have in Germany. According to Eurostat data published in April 2011, the hourly labor cost in France was 34.2, compared to 30.1 in Germany and nearly 20 higher than the eurozone average of 27.6.

High unit labor costs and unemployment rates are responsible, in turn, for reducing the trend rate of economic growth, mainly owing to under utilized labor, while the combination of lackluster growth and an ever mounting welfare burden has resulted in chronic budget deficits. The last surplus was in 1974.

These countries had already lost export market shares to China and other low value added and labor intensive Asian economies. Then a decade of nominal wage growth that out paced productivity gains led to a rise in unit labor costs, real exchange rate appreciation, and large current account deficits.

There is a vast difference between unit labor costs real wages adjusted for productivity in Germany and in the heavily indebted southern countries. When the crisis began, production costs in Greece were about 30 higher than in Germany, so Greece exported very little and imported very much.

These adverse conditions have inadvertently propelled a long delayed restructuring of China s labor intensive industries. As costs surge, Chinese producers are seeking higher value, new niches, and more influence over policymaking.

As a result, labor is now some 20 cheaper in Mexico in relative terms. Taking productivity trends into account, unit labor costs have also risen less than in China and other major competitors, allowing Mexico to recover since the mid 2000s some of the market share it had previously lost.

If women in Europe work more hours in better quality jobs, it will stimulate demand for service jobs like cleaning and child care, thus reducing unemployment among low skilled workers. Moreover, the increased supply of high quality female labor will not incur additional healthcare and pension costs, unlike labor immigration.

According to the 12th Five Year Plan, the minimum wage should grow by 13 per year. Together with real appreciation, the increase in labor costs is bound to weaken the competitiveness of China s labor intensive export sector, which will be reflected in the trade balance more clearly in the coming years.

And Italy s parliament rejected many of Monti s proposed reductions in government spending. Labor and many product markets remain closed, despite the urgent need to increase competition, lower production costs, and raise productivity.

A rapid reduction in unit labor costs, via acceleration of structural reform and productivity growth relative to wage growth, is also unlikely, as that process took 15 years to restore competitiveness to Germany.

In the US, for example, slashing labor costs has sharply reduced the share of labor income in GDP. With credit exhausted, the effects on aggregate demand of decades of redistribution of income and wealth from labor to capital, from wages to profits, from poor to rich, and from households to corporate firms have become severe, owing to the lower marginal propensity of firms capital owners rich households to spend.

The path to recovery, though difficult and lengthy, has been relatively clear and specific. First, unit labor costs needed to decline toward productivity levels to restore competitiveness a painful process without the exchange rate mechanism.

First, favorable conditions for the growth of the world factory have begun to dissipate. Production costs in terms of labor, resources, regulation, and infrastructure have been rising domestically, while consumption bubbles in the West have burst.

The increase in child labor reflects families dire economic situation children are frequently a family s only breadwinners, and they work cheap. Contractors in municipal services, for example, prefer to use children in order to cut costs.

Labor Law

FI conducted a Training Workshop on UN and International Labor Organization Mechanisms on Trafficking, Bonded Labor and Forced Labor from June 5 7, 2002.

Those differences are so huge that some people consider efforts to compete futile. But, as productivity is much higher in Germany, an effective reduction of hourly labor costs by uncompensated increases in working hours seems worth trying.

The economic benefits of rebalancing the global labor market are compelling the human costs of failing to do so are enormous. The imperative for businesses, educators, governments, and young people to take action could not be stronger.

We examined the costs and benefits of an expansion in international migration over a 25 year period, amounting to a 3 boost in host countries labor forces by 2025. The costs would include one off expenses to migrants transport, obtaining visas and permits, and finding housing, schooling, and employment, as well as the emotional cost of separation from family.

In order to curb investment demand, tighter credit rationing and monetary policy are inevitable in 2008, while investment projects and land use will be subject to more rigorous control. Likewise, increasing pressure from growing labor costs will force enterprises to lower their profit expectations and cut costs, negatively affecting output growth and employment in the short run.

Labor Force Estimates

Japan seized its opportunity in the years following World War II, using labor intensive industries, such as textiles and simple electronics, to drive its economy until rising labor costs eroded its comparative advantage in those sectors. That shift then allowed other low income Asian economies South Korea, Taiwan, Hong Kong, Singapore, and to some extent Malaysia and Thailand to follow in Japan's footsteps.

Second, both capital and labor needed to flow to the tradable sector, where demand constraints can be relaxed as relative productivity converges. Like many other southern European countries, however, labor market and other rigidities dramatically reduced the speed and increased the costs of structural economic adjustment, resulting in lower levels of growth and employment, especially for young people and first time job seekers.

The Department of Supervision of Labor Laws in the Ministry of Industry, Trade and Labor

When costs for labor intensive goods and services became too high in these countries, production was shifted elsewhere. This relocation of manufacturing has since been accompanied by the off shoring of services whose information intensive components have become tradable.

When costs for labor intensive goods and services became too high in these countries, production was shifted elsewhere. This relocation of manufacturing has since been accompanied by the off shoring of services whose information intensive components have become tradable.

If the ball costs 10, the bat costs...

Scarce labor drives wages.

nbsp nbsp nbsp nbsp nbsp nbsp nbsp nbsp A rapid reduction in unit labor costs, via acceleration of structural reform and productivity growth relative to wage growth, is also unlikely, as that process took 15 years to restore competitiveness to Germany.

Though Spain and Italy are similarly depressed in terms of current growth and employment, especially for the young, two significant differences stand out. One is that, unlike Spain, Italy has experienced relatively little convergence of unit labor costs with productivity.

In addition, as the economists Erik Brynjolfsson and Andrew McAfee of MIT have argued in their book The Second Machine Age, rapid advances in information technology may enable increasingly extensive automation. Some manufacturing activities, though few jobs, may well return to developed countries, as the advantages of proximity to customers and lower transport costs outweigh decreasingly important differences in labor costs.