Unit labor cost levels by major manufacturing
branch, selected years, 1970-90

[United States = 100)

Country pair 1970 1975 1980 1985. 1990

France-United States

78.2 | 1459 | 1890 | 1136 | 1513

68.1 | 1234 | 1620 | 915 | 1458
Chemicals and
allied products 6881 153] 1222 | 853 | 1293
Basic and fabricated
metal products .... 62.1 | 127.0 | 1227 | 743 | '91.8
Machinery and
equipment 54.0 | 87.2 | 960 | 645 | ‘97.7

Other manufacturing... | 703 | 1236 | 1988 | e23 | ‘158
Total manufacturing...| 66.0 | 110.6 | 1201 | 778 | 129.1

Germany-United States

Food, beverages,

and tobacco s74| 942] 1145 | 666 | 1212
‘Textiles, apparel,

and leather ... 670 | 1124 | 151.1} 949 | 1624
‘Chemicals and

allied products 596 | 964 | 1069 | 802 | 160.0
Basic and fabricated

‘metal products .. 684 | 940 | 1131 | 666 | 1213
Machinery and

equipment . 479| 796 | 941 | 608 | 1356
Other manufacturing 608 | 1120 | 130.2) 761 | 139.7

Total manufacturing... | 59.7 | 952) 1123 | 701 | 1416

Japan-United States

Food, beverages,
and tobacco 545 | 973 | 121.0 | 1228 | 2195
44.2 70.4 100.2 80.1 138.5
Chemicals and
allied products .......... 52.1 774 87.4 B16 142.5
Basic and fabricated
metal products ........... 47.0 69.5 62.2 55.4 815
Machinery and
equipment .. 48 70.1 543 44.4 63.7

658 | 1277} 1276 | 91.1 | 1978
4e1| 795| 786 | 655 | 995

Other manufactur
Total manufacturing...

United Kingdom-
United States.

- — | 2055 | 126.1 | 166.8

- — | 2412 | 920 | 1579

Chemicals and

allied products ....... - —| 53 | 724 | 1914
Basic and fabricated

metal products .......- - — | 1632 | 752] 146
Machinery and

equipment ... _ _ 121.0 76.8 125.9
Other manufacturing .. - — | 1743 | 1088 | 1546

775.3) 998 | 1461 | e76 | 197.4

Total manutacturing....

‘Data relate to 1989.
? Data relate to 1971.

Nore: Total manufacturing for France in 1990 based on extrapolation from.
1989 on the basis of information from the U.S. Bureau of Labor Statistics.

Sources: Labor costs are from table 6. Relative value added per hour
worked is from table 5.

Korea. A recent study by Dirk Pilat shows that relative levels
of unit labor costs in Korea were much lower than those in
the United States during the 1970's and 1980's. However, as
in Japan, the variation in unit labor cost levels was quite
large among Korea’s major manufacturing branches. In 1989,
Korean unit labor cost levels were higher than those of the
United States in food products, beverages, and tobacco, and
in chemicals and allied products, although they were only
half the U.S. level in basic metals and metal products and in
machinery and equipment. Pilat emphasises that in making
comparisons with low income countries such as Korea, one
needs also to take account of other costs, such as those of
capital, which account for a larger share of value added than
in high income countries. Given the low value of the U.S.
dollar, average price levels in Korean manufacturing were in
fact 11 per cent above the U.S. level in 1990.'9

Second, the countries discussed in this article are all rela-
tively large in terms of their share of world manufacturing
output. There are a substantial number of smaller industrial-

.ized nations that have much larger export-output ratios than

do the countries considered here, a typical example being the
Netherlands. A recent International Comparisons of Output
and Productivity study has shown that Dutch manufacturing
labor productivity was approximately 5 percent higher than
the U.S. level in 1993. This high productivity was partly as-
sociated with a relatively large share of capital intensive in-
dustries, especially basic chemicals and textile industries, in
Dutch manufacturing. Furthermore, because of fairly strong
wage moderation during the 1980’s, labor.compensation in
Dutch manufacturing was even slightly lower than U.S.
wages in 1993, so that the country’s unit labor cost was only
94 percent of the U.S. level.”

Finally, in recent years and under the influence of authors
such as Michael Porter, the literature has made an increas-
ingly strict distinction between competitiveness related to
efficiency and competitiveness related to differentiation. In
Porter’s view, efficiency refers to lowering of costs per unit
of output, whereas differentiation refers to the creation of
additional value added per unit of output through the im-
provement of product quality, customization, or improved
after-sales services. In both cases productivity is increased,
but the mechanism through which it is achieved is different.
Although Porter acknowledges that both types of competi-
tive advantage are important, he points out that any success-
ful competitiveness strategy needs to focus on only one of the
two factors. For the advanced industrial nations, this usually
implies a strategy based on differentiation.?!

This article posits that, not only in the short term but also
in the long term, the most competitive nations are those that
have simultaneously operated at relatively low cost levels and
that have improved their productivity through an increase in
product volume and, in particular, product quality. There are

Monthly Labor Review July 1995 69



Productivity in Five Economies

Therefore, neither expenditure PPP’s
for total gross domestic product nor
proxy PPP's are a good alternative to the

Continued—Number of unit value ratios (uvr’s), coverage
percentages, and unit value ratios at own-country and
U.S. weights, by major manufacturing branch, 1987

UvR’s in international comparisons of —|——

- ° Maiched sales as rollos
productivity. What is most needed are a percentage of (nc ee rey.)
more detailed and comparable data on Country pair Number total sates

ae + _ oul of Own-
quantities and Prices of products to re- ws own United | county qty Ge
fine the UVvR’s, which take account of county | States | quontity | Weignts | average
cross-country differences in product mix welghts
and product quality. However, at the rela- United Kingdom- Pounds steringU.S. $
tively aggregate level of the six major United States
manufacturing branches, the results pre- | Food, beverages,
sented here are not so much affected by and tobacco ... 3t 24.4 213 0.679 0771 | 0.723
suc 8 Textiles, apparel,
such factors. and leather... 54 40.2 50.3 870 877 673

Chemicals and

. . . allied products .......| 44 22.5 20.2 587 641 613
Covering the entire period. AS a next | Basic and fabricated
step, the UvR’s for 1987 have been ex- Menno and: ern 8 214 124 661 $7 869
trapolated to other years, through the use 20 a3 13.6 42 649 646
of price deflators derived from each mg) 22 nS 78 ‘#09 956 880
country’s national accounts. Chart 1 Total manufacturing...) 176 176 te4 670 748 708

shows the relation between the manufac-

turing UVR and the exchange rate for the
period 1970 to 1990. If a country’s manu-
facturing UVR is below the prevailing ex-
change rate, its relative price level in
manufacturing is lower than that of the
United States, implying that it can com-
pete on favorable terms with the United
States in the world market.

* Double deflation for food products was calculated by applying a uve for agricultural inputs for 1985
derived from Prasada Rao, ‘Intemational Comparisons of Agricultural Output and Productivity" r10
Economic and Social Development Paper no. 112 (ome, Fao, 1993), extrapolated to 1987.

Nore: See original sources for detalis at fevel of 14 to 16 branches,

Sources: See appendix a; B. van Ark and A.D.J. Kouwenhoven, *Productivity in French Manutac-
turing: An international Comparative Perspective,” Research Memorandum co-10 (Groningen, The
Netherlands, Groningen Growth and Development Center, 1994) for France and the United States; B.
van Ark and D. Pilat, “Productivity Levels in Germany, Japan, and the United States: Differences and
Causes,” 8 Papers on Economic Activity: Microeconomics 2, Decamber 1993, for Germarty-
United States (table A.1) and Japan-United States (table A.2); and B. van Ark, “Comparative Produc-
tivity in British and American Manufacturing,” National institute Economic Review, November 1992, for

The chart shows that, following the

the United Kingdom-United States.

collapse of the Bretton Woods system of
fixed exchange rates in 1971, the French franc, the German
mark, and the Japanese yen all appreciated against the dol-
lar, with the result that the relatively low price levels of
all countries compared to the United States were largely
eroded by 1975. By 1980, only Japan still enjoyed lower
price levels than the United States. Between 1975 and 1980,
the United Kingdom showed a strong rise in relative price
levels. The “high dollar” period, from 1980 to 1985, meant
a short-lived return to low price levels for all of the com-
petitor countries, but since 1985, their price levels have
again risen rapidly and the competitiveness of the United
States, so far as relative prices are concerned, has increased
substantially.

Developments by industry branch. Table 4 shows relative
price levels for six major manufacturing branches.° The ap-
preciation of the franc, the mark, and the yen during the
early 1970’s led to a rise in manufacturing price levels in all
major branches in France, Germany, and Japan compared to
the United States. In France and Germany, the increase was
rather rapid for food, beverages, and tobacco products, and

60 Monthly Labor Review July 1995

for textiles, wearing apparel, and leather goods, but was
slower for basic metals and metal products.

By 1980, France and the United Kingdom had lost their
price advantage over the United States in all major branches,
and Germany still enjoyed a smail advantage in only one
branch, machinery and equipment.” In the United Kingdom,
relative price levels were very high for food, beverages, and
tobacco and for “other manufacturing.”

In 1980, only Japan still had lower price levels than the
United States, especially for machinery and equipment. That
branch even showed a slight decline in price level between
1975 and 1980 despite the appreciation of the yen. In con-
trast, relative prices of food, beverages, and tobacco prod-
ucts increased rapidly between 1970 and 1980. After 1980,
there was even more diversity in Japanese price levels by
branch. By 1990, the Japanese price level for food products,
beverages, and tobacco was about 85 percent above the U.S.
level, whereas that for machinery and equipment was 15
percentage points below the U.S. level.

The diversity in relative price levels in France and Ger-
Many was much less than in Japan. In 1990, all manufactur-



| Chart 2 Value added per hour worked in manufacturing by major manufacturing branch, in 1987
dollars, 1970-90

Food, beverages and tobacco products ‘Textiles, wearing apparel, and leather
1987 U.S. $ 1987 U.S. $
50
455
aol
35
30
257
20} woe Tnited
Kingdom
15 rss
Japan
40 A ! H fl 4 ‘
1970 1975, 1980 1985, 1990 1970 1975 1980 1985, 1990
Chemicals and allied products :
Basic metais and metal products
oe US.$ 1987 U.S. $
n 28
United
45 States, 26} United
40> 24r
35 . nal
20
soy 18}
“
ial + 7 United were, °
° ,
20 |- . Kingdom ar .
1s 42 F. France |. “United
‘Japan pol Zier teste ee Kingdom
10 4 1 4 n 1
8
1970 1975 1980 1985 1990 1970 1975 1980 1985 1990
Machinery and transport equipment Other manufacturing branches
1987 U.S. $ 1987 U.S. $
45 35
40

30h
35

30 257

25 207

20

United

15 |
‘8 ove MOET eres:
10-7"
10 Japan
gl A 1 5 fl fl . :
1970 1975 1980 1985 1990 1970 1975 1980 1985 1990

Source: Table 5.

Monthly Labor Review July 1995 65



Productivity in Five Economies

, Manufacturing unit value ratios (uvr's) and currency exchange rates, 1970-92

OECD, 1992).

France-United States Germany-United States
Francs Marks
per US. $ per US. $
10 4
Exchange rate
OF |
Exchange rate 35
alt
3h
7h
257
6b
2k
57 Manufacturing uvR:
ak 157 Manufacturing uva
gl 1 fl 1 f 1 \ n f 1
1970 1975 1980 1985 1990 1970 1975 1980 1985 1990
Japan-United States United Kingdom-United States
Yen Pounds sterling
per US. $ per US. $
400 08
350 + Exchange rate 0.7
300 F 06
250 | 0.5
200 0.4
Manufacturing uvr:
150 0.37 Manufacturing wa
100 : , : . o2u . 1 f
1970 1975 1980 1985 1990 1970 1975 1980 1985 1990

‘Sources: Manufacturing uvr's for 1987 are from table 2, extrapolated using national accounts deflators for manufacturing. (See
appendix A.) Exchange rates are from Organization for Economic Cooperation and Development, National, Accounts, Vol. 1 ( Paris,

62. Monthly Labor Review July 1995



afl Unit value ratios (uve's) for manufacturing,
exchange rates, and gross domestic product-
based purchasing power parities (rpr’s), 1987

Relative | cor purchasing
rice | power parities
Country Wnt exchange) fevei
tatlo rate Gated 1985- | 1990-
aq base | bose
= 100)
7.22 6.01 120 768 | 678
221 180 | 123 257 2.15
1788 | 14464 | 124 | 295.71 | 21363
708 612 116 .604 567

* Ratio of uvr to exchange rate.

Nore: uve's and gross domestic product-based ppr’s are geometric aver-
ages of uva's and pre's weighted at national and U.S. weights.

Source: For uvr’s, see table 2. ppp's for 1985 and 1990 were provided by
Eurostat and extrapolated to 1987 using gross domestic product deflators
from Organization for Economic Cooperation and Development, National
Accounts 1960-1991, Main Aggregates, Volume | (Paris, o€c0, 1992).

ing branches in these two countries had relatively high price ,

levels (15 to 35 percent above the U.S. level), with the ex-
ception of the textiles, wearing apparel, and leather products
branch, which showed even higher relative price levels. In
the United Kingdom, relative price levels in 1990 were high
in other manufacturing (which includes wood and paper
products and nonmetallic mineral products), but rather low
in basic and fabricated metal products and even slightly be-
low the United States’ level in chemicals.

It may be concluded that, in terms of price competitive-
ness, the United States has improved its performance over
the past two decades, especially in light industries such as
food, beverages, and tobacco products and textiles, wearing
apparel, and leather products. However, this U.S. price ad-
vantage is to a large extent due to the depreciation of the
U.S. dollar during the 1970's and second half of the 1980's,
and not simply to a more moderate rise in costs in terms of
national prices. Against the tide of an appreciating currency,
only Japan has been able to keep its price levels, in particu-
lar for machinery and equipment, relatively low into the late
1980's,

Comparing productivity levels

Productivity is one of the most important determinants of
competitiveness. Productivity (especially labor productivity)
improvements are a necessary prerequisite for producing high
quality products at a reasonable cost. Productivity growth
indicates how a company, an industry, or a country manages
to raise output with a minimum increase in inputs. Com-
parisons of productivity levels show how much the average
practice within an industry, within a sector, or for the economy

as a whole differs between countries. If the “numéraire” coun- *
try is the world productivity leader, such comparisons indi-
cate how much each country differs from best practice.

The methodology in brief. The adequate comparison of
productivity levels between countries depends on two com-
ponents, namely reliable and comparable indicators of out-
put and labor input for each country, and a suitable conver-
sion factor to translate output values to a common currency
unit. The exchange rate is not suitable for the latter purpose,
because it is heavily influenced by capital flows and specula-
tion and, in general, does not indicate real price differences
between countries. Therefore, the unit value ratios discussed
in the previous section have been used here.

The basic data for the comparisons of manufacturing pro-
ductivity in this article are derived from the manufacturing
census of each of the countries. Accordingly, estimates of
output and labor input are derived from one and the same
survey of manufacturing establishments, which implies a
relatively consistent data framework. Although production
censuses and surveys are not as well harmonized across coun-
tries as, for example, national accounts, the detail in these
sources is such that one can obtain data according to the
same concepts of employment and value added and the same
classification scheme of industries across the countries.

The industry UVR’s discussed in the previous section may
be used to convert either gross output or value added to a
common currency, after which labor productivity compari-
sons can be made. It has been suggested that the use of value
added as the productivity concept in combination with unit
value ratios based on gross output complicates the connec-
tion between productivity and competitiveness.'' Indeed, at
the industry level there are important theoretical advantages
to measuring productivity using gross output and treating
intermediate inputs symmetrically with capital and labor
inputs.

However, at the relatively aggregate level of this analysis,
value added is a more useful measure because it avoids double
counting of the value of intermediate inputs. If estimates were
derived from gross output measures by industry, aggregation
would then require separate deflation of gross output and
intermediate inputs. In practice, this procedure easily leads
to volatile results because of important measurement prob-
lems.'? In particular, when intermediate inputs make up a
large part of gross output, small measurement errors tend to
become magnified in the double-deflated value added mea-
sures. The measures used here are therefore based on the
“adjusted single deflation method,” through which value
added at national prices is converted to a common currency
on the basis of gross output unit value ratios. This approach
provides more robust results than the double-deflation
method."?

Monthly Labor Review July 1995 61



Productivity in Five Economies

seems related in part to the small scale of its firms, but prob-
ably also reflects a lack of competition.’

In contrast to its performance during the 1970’s, the
United Kingdom showed remarkable improvement in pro-
ductivity during the 1980's. In comparison to the United
States, U.K. productivity levels rose especially rapidly in
food, beverages, and tobacco products and in chemicals and
allied products (particularly during the second half of the
1980's) and in textiles, wearing apparel, and leather prod-
ucts and in basic metals and metal products (particularly
during the first half of the decade). By 1990, the U.K. pro-
ductivity performance in chemicals and allied products was
even better than that of France, Germany, and Japan, al-
though for the manufacturing sector as a whole, it still lagged
substantially behind that of the other three countries.

In summary, in terms of productivity performance, the
United States has been the best performer throughout the
period, although it faced increasing challenges from France
and Germany before 1980 and from Japan thereafter. Pres-
ently, leadership in manufacturing productivity is shared
between Japan and the United States, a situation that is likely
to last for some time given the large differences in the com-
parative productivity performance among the major manu-
facturing branches and the slight widening of the U.S.-Japa-
nese productivity gap in recent years. Although France and
Germany are closer to the U.S. productivity level than is Ja-
pan, there are no industry branches in which they clearly
lead, although the French performance in machinery and
equipment and the German performance in basic and fabri-
cated metal products was relatively good in 1990.

Labor compensation and unit labor costs

The estimates of manufacturing UvR's and productivity lev-
els presented earlier provide an opportunity to look at two
other indicators of competitiveness, namely hourly labor
costs and unit labor costs. Because labor costs are the largest
part of value added in advanced countries, unit labor costs
serve as an important indicator of economic health. The U.S.
Bureau of Labor Statistics regularly publishes trend estimates
of manufacturing unit labor costs.!’

For the calculations of comparative levels of unit labor
costs, labor costs per hour derived from each country’s na-
tional accounts were combined with the estimates of value
added per hour presented above. The labor costs refer to to-
tal compensation, that is, wages and salaries before tax,
employer’s social security contributions, contributions to
pension, insurance, and health plans, and other expenses re-
lated to employment. These figures are more comprehensive
than the labor cost estimates shown in the manufacturing
censuses, which often exclude at least part of employers’ con-
tributions to compensation of labor.

64 Monthly Labor Review July 1995

fiabie 5. IZ TTY added per hour worked in manufacturing,
by major manufacturing branch, selected years,

1970-90

[United States = 100}

Country pair 1970 | 1975 | 1980 | 1988 | 1990
France-United States
Food, beverages,

and tobacco 723 | 722 | 667 | 669 | 788
Textiles, apparel,

and leather . 7a2 | 852 | 032 | 937 | 990
Chemicals and

allied products... aii | 16 | 924 | 33 | s44
Basic and fabricated

metal products sa7 | sa1| 732 | so9 | 992
Machinery and

equipment... 818 | 916 | 1088 | 1010 | 980

Other manufacturing 679 | 720 | 966 | 933 | 90.1

Total manufacturing... | 733 | 785 | 898 | soe | 913
Germany-United States
Food, beverages,

and tobacco 7e5 | 744| 733 | 71.6 | 758
Textiles, apparel,

and leather .... e29 | e680; 845 | 890 | 832
Chemicals and

allied products . 267 | 928 | 1056 | 849 | 767
Basic and fabricated

metal products 677 | 829 | a69 | 920 | 988
Machinery and

equipment... so9 | 996 | 108 | 997 | 976

Other manufacturing seo | 715 | 803 | 799 | 793
‘Total manufacturing... | 78.7. 87.3 95.2 90.5 85.9
Japan-United States

Food, beverages,
and tobacco 374 | 442] 385 | 335 | 37.0
Textiles, apparel,
and feather ..... 526 | 65.1) 619 | 581 | 48.0
Chemicals and
allied products .. 580 | 719 | 831 | 844 | 838
Basic and fabricated
metal products 472 | 625 | e141 | 856 | 956
Machinery and
eqUIPMEN nn 468 | 592 | 900 | 962 | 1144
‘Other manufacturing 31.3 | 330 | 413 | 506 | 549
Total manufacturing... | 445 | 541 | 662 | 699 | 779
United Kingdom-
United States
Food, beverages,
and tobacco .. 40.0 | 401 { 392 | 442 | 538
Textiles, apparel,
and leather 627 | 560 | 667 | 648
‘Chemicals and
allied products.........| 638 / 675 | 713 | 737 | 96.1
Basic and fabricated
metal products 445 | 449] 409 | 640 | 799

Machinery and
55.3 614 | 586 | 608 65.8
47.4 438 | 466 | 505 60.4

51.3 53.0 | 523 | 583 66.0

Source: See appendix A; and sources cited in table 2,



in Five Economies

Bart van Ark

Bart van Ark is an.
economist with the

University of Groningen,

Groningen. The Nether-
lands. The views
Presented here are the
author's own, and do
not represent those of
the Bureau of Labor
Statistics.

Manufacturing prices, productivity,
and labor costs in five economies

The United States continues to surge ahead

of other major industrial economies in terms

of lower prices, higher levels of labor productivity,
and better unit labor cost performance; while

the depreciation of the dollar plays an important role,
real productivity gains are important as well

ver the past decade, there have been sig-
O nificant changes in the competitive per-
formance of the world’s main industrial
nations. Following a massive restructuring in
many industries, U.S. manufacturing has shown
a strong recovery from the slowdown in output
and productivity growth that occurred during the
1970’s. For manufacturing as a whole, the
United States has clearly maintained its position
as a leader in terms of the level of productivity
during the 1980’s and early 1990's. Since the
mid 1980's, the U.S. export volume of manufac-
tured products also has increased rapidly and the
Nation’s current account position has improved.
During the 1970’s and 1980's, the Japanese
share of world output increased sharply in sev-
eral industries, and productivity levels in Japan
Tose rapidly, especially in investment goods in-
dustries. However, the Japanese economy cur-
rently faces a need for major restructuring, fol-
lowing a slowdown in domestic demand and a
continuous appreciation of the yen. At the same
time, the Japanese domestic market continues to
be strongly protected against the potential ex-
ports of other nations.
The competitive performance of European
countries has been diverse. During the 1980's,
Germany’ lost some of its edge in several manu-

56 Monthly Labor Review July 1995

facturing industries. Compared to Germany,
France and the United Kingdom experienced a
faster rise in productivity and a slower increase
in labor cost. German manufactured exports
have also grown more slowly than those of
France and the United Kingdom since the mid-
1980's.

In addition to the changes in competitiveness
among themselves, all advanced industrial na-
tions have experienced increasing competitive
pressure from traditionally low income coun-
tries, in particular from countries in East and
South East Asia and Latin America, which have
made substantial progress in raising productiv-
ity levels over the past two decades.

This article discusses the 1970-93 perfor-
mance of the major industrial nations in terms
of four measures of competitiveness. (See table
1.) All four measures are directly related to each
other. The estimates of relative price levels rep-
resent the average ratio of producer prices of
each country to those of the United States, di-
vided by the currency exchange rate. Value
added per hour worked is compared by express-
ing the output of each country in U.S. dollars
using producer price (or “unit value”) ratios
(UvR's). Labor compensation is compared on the
basis of the exchange rate. Unit labor cost repre-



Labor costs per hour worked by major
manufacturing branch, selected years,
1970-90

States = 100]

1970 | 1975 | 1980 | 1985 | 1990

56.6 | 105.3 | 1260 | 76.0 | "121.1

53.3 105.1 134.8 85.7 125.9

55.8 94.1 113.0 ran 100.9

metal products ........ 441 73.8 89.8 60.1 187.7
Machinery and

equipment .... 442 79.8 104.5 65.2 197.2

Other manufacturing 478 89.0 120.2 76.8 "106.9

Total manutacturing....| 484 | 869 | 1105 | 699 | 1178
Germany-United States

439 | 70.1 | e39 | 477 | 919
Textiles, apparel,
and leather ...
Chemicals and

55.0 | 990 | 1277 | 756 | 143.2

51.7 | 895 | 1129 | 681 | 1228
463 | 779 983 | 613 | 1198

428 | 792 | 1042 | 6061 18.8
46.0 | 80.0 | 1045 | 60.8 | 110.7

470 | 832 | 1068 | 634 | 1216

Total manufacturing
Japan-United States

Food, beverages,

and tobacco 204 | 386 | 465) 414 | 791
Textiles, apparel,

and leather .. 458 | 620] 465 | 665
Chemicals and

allied products.........| 90.2 | 857 | 723) 689 | 1194
Basic and fabricated

metal products .........| 222 | 434 | 505 / 47.4 | 780
Machinery and

equipment ... 196 | 415 | 489 | 428 | 728
Other manufacturing 206 | 421 | 527] 461 | 756
Total manufacturing....| 21.4 | 430 | 621] 458 | 775
United Kingdom-

United States

- - 80.5 | 55.7 | 1005

- — | 1350] 61.3 | 1024

allied products...) = — — | 821] 534 | 959
Basic and fabricated

metal products...) = — — | e687] 41 |] ons
Machinery and

equipment ... - — | 79] 47 | 828
Other manufacturing - — | a2] 550 | 933

Total manufacturing 52.9 76.4) 51.4 90.4

* Data relate to 1989,
? Data relate to 1971.
Nore: Estimate for total manutacturing for France in 1990 based on ex-

trapolation from 1989 on the basis of information from the U.S. Bureau of
Labor Statistics.

Source: For labor costs and employment, see appendix A.

more, by 1990, France had high unit labor costs in food prod-
ucts, and Germany, in chemicals and allied products.

In the United Kingdom, unit labor cost levels in 1980 were
exceptionally high in food products, beverages, and tobacco
and in textiles, wearing apparel, and leather products, and
this was still the case in 1990. However, unit labor cost lev-
els in the United Kingdom were substantially below those of
Germany in chemicals, basic metals and metal products, and
machinery and equipment.

The Japanese experience shows a larger diversity among
manufacturing branches, as well as in changes over time,
than the other countries. In 1970, Japan had lower unit labor
cost levels than Germany in all major branches, but the dif-
ferences were substantial only for textiles, wearing apparel,
and leather products and for basic metals and metal prod-
ucts. After 1970, the diversity among the branches further
increased. Food products, as well as chemicals and textiles,
showed increasingly high unit labor cost levels over time,
whereas in basic metals and metal products and machinery
and equipment, relatively low unit labor costs were main-
tained despite the rising exchange rate. In 1990, Japan en-
joyed a very substantial unit labor cost advantage in machin-
ery and equipment.

In summary, in terms of unit labor costs, France and Ger-
many had already lost most of their competitive edge in manu-
facturing to the United States by the early 1980’s, and since
then have competed only on the basis of the appreciation of
the U.S. dollar during the first half of the 1980’s. During the
second half of the decade, a sharp deterioration of French
and German competitiveness took place (which, for Germany,
continued into the 1990’s) due to slow productivity growth,
rapid wage increases, and currency appreciation.

During the 1970's, Japan greatly benefitted from relatively
low wage levels. However, during the 1980's, Japan’s per-
formance varied widely by major branch. Several manufac-
turing branches were not able to respond to the appreciation
of the yen by way of increasing productivity and cutting costs,
and therefore posted very high levels of unit labor costs. How-
ever, particularly in metals and machinery and equipment,
Japanese companies appeared able to achieve high produc-
tivity levels and remained competitive against U.S. produc-
ers. Between 1990 and 1993, however, Japan’s unit labor
cost position deteriorated strongly.

The broader aspect of competition

Of course, the countries discussed here do not compete only
among themselves, but also with other countries. Therefore,
certain aspects of the ever-widening world of international
‘trade merit some discussion.

First, there has been great concern about competitive pres-
sures generated by the low wage economies, such as South

Monthly Labor Review July 1995 67



Productivity in Five Economies

Table 6 shows labor costs per hour worked of all employ-
ees by major branch of manufacturing. The figures are con-
verted from national currency values to a common currency
using the average exchange rate for each year. The trends in
comparative labor costs are therefore determined not only by
changes in labor costs in national currency values, but also
by exchange rate fluctuations.'*

Between 1970 and 1980, labor costs per hour worked more
than doubled relative to those of the United States for all four
competitor countries. In 1980, relative labor costs in French
and German manufacturing were approximately 10 percent
above the U.S. level; in the United Kingdom, they were about
three-quarters of the U.S. level; and in Japan, about half.
Following the appreciation of the dollar during the early
1980's, relative labor costs in all four countries were signifi-
cantly reduced, although much more so in the European coun-
tries than in Japan. During the second half of the 1980's, the
relative labor cost level rose most rapidly in Germany, driven
by the rapid appreciation of the mark. As a result, Germany
had the highest relative labor costs of all countries by 1990,
followed by France, the United States, the United Kingdom,
and Japan.

There is some variation in hourly labor costs across the
manufacturing branches, but it is significantly less than the
spread in the productivity ratios presented in table 5. In all of
the European countries, labor cost levels in textiles, wearing
apparel, and leather products were relatively high compared
to the those of the United States. France and the United King-
dom had relatively low labor cost levels in basic and fabri-
cated metal products and in machinery and equipment,
whereas Germany had lower labor cost levels than France
and the United Kingdom in food, beverages, and tobacco
products. In Japan, labor cost levels were relatively high in
chemicals, but otherwise were lower than in any of the other
countries.

The trends in hourly labor cost are basically the same
-across the major branches. This is, of course, to be expected
in countries where wage settlements are relatively central-
ized. Only in the United Kingdom were there fairly substan-
tial differences in the trends in relative labor cost levels across
the branches during the 1980's,

The relationship to productivity Unit labor costs are based
on the ratio of labor costs per hour worked to productivity per
hour worked. In U.S. dollars, the unit labor cost of each coun-
try X can therefore be expressed as:

x (LCH*) | ERY
a Oe = ORE) 1 VR
where ER” is the exchange rate between countries X and U;
UVR is the UVR between countries X and U; LCH* are the
labor costs per hour in country X; and OH" is output (value
added) per hour in country X.

66 Monthly Labor Review July 1995

The labor cost comparison thus is based on exchange rates,
whereas that of productivity is based on unit value ratios.
Unit labor costs can therefore be directly derived by dividing
the estimates in table 6 by those in table 5. For each of the
four competitor countries, chart 3 shows relative labor costs
per hour worked, relative value added per hour worked, and
unit labor costs for total manufacturing.

Although relative productivity levels in France and Ger-
many improved significantly during the 1970's, that trend
was slower than the relative increases in labor costs so that
the unit labor cost position of these countries relative to that
of the United States deteriorated. Because of France's lower
productivity level in comparison to Germany, it was the first
country to post unit labor costs in manufacturing that were
higher than those of the United States. France did so in 1975,
followed by Germany and the United Kingdom, in 1978. The
“high dollar” period from 1980 to 1985 led to a short-lived
return to low unit labor cost levels in France and Germany,
but the slowdown in comparative productivity performance
and the rise in labor compensation levels after 1985 caused
another increase in relative unit labor costs. By 1990, the
unit labor cost level in Germany was more than 40 percent
above the U.S. level; by 1993, it was more than 50 percent
higher. (See table 1.)

Because of the substantially lower levels of productivity
in U.K. manufacturing, the relative level of unit labor cost
around 1980 was higher than in any of the other countries.
Similarly, despite the somewhat slower rise in labor com-
pensation in the United Kingdom during the second half of
the 1980’s, unit labor cost levels were much higher than in
the United States during this period. However, table 1 and
chart 3 show that the unit labor cost position of the United
Kingdom had slightly improved by 1993.

Except in 1978, relative labor costs in Japan stayed below
relative productivity up to 1985. Although Japan’s labor cost
position deteriorated during the second half of the 1980's, its
unit labor cost level for total manufacturing more or less
equalled that of the United States in 1990. However, unit
labor costs in Japan rose dramatically between 1990 and 1993
{table 1 and chart 3), which may be partly ascribed to the
appreciation of the yen, but also to the decline in compara-
tive productivity performance.

Table 7 shows the differences in unit labor cost levels for
the major manufacturing branches. It is clear that France
experienced relatively high unit labor cost levels during the
1970's in all branches except machinery and equipment. Unit
labor costs in the latter branch were also relatively low in
Germany during the 1970’s. Following the decline in unit
labor cost levels during the early 1980's, another rise oc-
curred during the second half of the past decade. In 1990,
unit labor cost levels in textiles, wearing apparel, and leather
products proved very high in France and Germany. Further-



The relative productivity estimates were benchmarked on
1987, and extrapolated using national time series of output
and labor input that are derived primarily from national
accounts for the period 1970 to 1990. Table 5 shows the pro-
ductivity estimates for the six major branches in selected
years relative to the United States. For an adequate analysis,
one also needs to take account of the relative growth per-
formance of each country. Chart 2 presents the same esti-
mates in terms of value added per hour worked in 1987 U.S.
dollars.

International developments. Between 1970 and 1980,
France, Germany, and Japan strongly converged towards
US. productivity levels, which in fact was a continuation of
a process that had begun during the 1950’s.'* By 1980,
France and Germany had higher productivity levels than
the United States in the manufacture of machinery and
equipment, and Germany was also ahead in chemicals and
allied products. During the 1970's, almost no convergence
took place in the United Kingdom, and in some major
branches (particularly textiles, basic metals and metal prod-
ucts, and machinery and equipment) quite some divergence
occurred.

During the first half of the 1980’s, the trend by which
France was “catching-up” with the United States stagnated,
and the manufacturing productivity of Germany and the
United States even began to diverge. These developments
were related in part to the acceleration of productivity growth
in the United States during this period; in addition, Germany
suffered a substantial slowdown in productivity growth dur-
ing the 1980’s.'S Germany’s deterioration in comparative
terms was seen especially in chemicals and allied products
and in machinery and equipment. By 1990, German produc-
tivity levels, relative to those of the United States, in these
two major branches were below those of 1970, In comparison
to France, Germany had substantially lower productivity lev-
els in 1990 in the chemicals, machinery and equipment, and
“other manufacturing” branches, whereas it was more or less
at par with France in food, beverages, and tobacco products
and in textiles, wearing apparel, and leather products.

Japan continued to “catch up” to U.S. productivity levels
during the 1980’s, although at a rate slower than during the
1970's. As a result, Japan was much closer to German and
French productivity levels in 1990 than in 1980. However,
there is a wide spread in productivity levels by manufactur-
ing branch in Japan. In machinery and equipment, Japan
surpassed U.S. productivity performance during the late
1980’s, and in basic metals and metal products, Japan stood
roughly at par with the United States. The performance in
food, beverages, and tobacco, and in textiles, apparel, and
leather has been especially poor compared to that in ma-
chinery and equipment. The performance of the food sector

selela-a Relative producer price levels by major
manufacturing branch, selected years,

1970-90
[United States = 100]

Country pair 1970 1975 1980 1985 | 1990

France-United States

1067 | 1592 | 868 | 1272
107.6 | 140.1) 820 | 1482

971 | 1144} 734 | 1145

metal products... 947 | 1121 | 1190] 762 | 1287
Machinery and
equipment .. 59.0 92.6 101.8 67.6 136.4

‘Other manufacturing. 73.3 119.1 126.8 70.2 128.7
Total manufacturing... | 68.8 102.3 n78 728 129.5
Gormany-United States!

e69 | 180] 632 | 1167

1222 | 1509 | 868 | 1683

allied products.........} 704 | 1048 | 1205| 778 | 1313
Basic and fabricated

metal products ........| 3.0 | 980 | 1103] 689 | 1251
Machinery and

equipment .. 502 | 819 | 953) 641 | 1327
Other manutacturi 7e2 | 115.1 | 1304] 740 | 1379

Total manufacturing... | 65.7 968 | 1132] 701 | 1328

62.6 81.0 | 1355 | 1243 | 1646

51.5 73.5 89.8 76.1 128.7

67.5 70.7 99] 723 | 110.4

Basic and fabricated

‘metal products .... e67 | 890 | 964] 747 | 1145
Machinery and

equipment .. 658 | 849 | 723] 606 | 848
Other manufacturing 73.5 113.5 18.3 90.5 138.2

Total manutacturing....| 68.1 | @32 | 919] 757 | 1103

United Kingdom-
United States

Food, beverages,

and tobacco - — | 1685] 911 | 1325
Textiles, apparel,

- — | 139.7 | 802 | 1370

- — | at] 727 97.0

metal products...) — — | 1392] 792 | 1186
Machinery and

equipment .. - — |} 192] 779 | 1308
Other manufactu - — |} 185.2] 1118 | 163.7

Total manufacturing... | 70.3 916 | 1405] 862 | i329

Nore: Relative price levels are defined as the average ratio of producer
Prices between each country and the United States, divided by the exchange
rate.

Source: Based on 1987 benchmark vrs from table 2, extrapolated using
national accounts deflators for manufacturing (appendix A). Exchange rates
are from Organization for Economic Cooperation and Development, Nationat
Accounts.

—

Monthly Labor Review July 1995 63



ET .. ot veh urn) cndunt With respect to the base 1985 variant, the
lumber of unit value ratios (uve's), coverage percentages, 5 ic i ‘acturing
value ratios at own-country and U.S. weights, by major manufacturing relative price levels in manufacturing
branch, 1987 (UVR's) are lower than the expenditure
Maiched sales as Unt vetue ratios Price levels (PPP's), vis-a-vis the United
G percentage of (national ct 08.8) States for France, Germany, and Japan,
fotol sales urency, . +
Numer but not for the United Kingdom. How-
‘Country pair uvR's Own | united county US. lcsometic| CVE a comparison of the manufacturing
country | states | quontity wenity his | sverage | UVR's with the base-1990 variant of the
weights PPP’s suggests that France and Germany
Francs/U.S. $ also have lower expenditure price levels
~ —+-—-— | than manufacturing price levels com-
18 309 | OAH 730) 8.02 7.65 pared to the United States, though not by
25 214 174 7.76 8.72 8.23 as much as the United Kingdom. This
13 63 73 693 881 768 last observation could imply that, in the
European countries, price levels in manu-
metal products .. 6 n4 65 744 7 752 facturing are relatively high compared to
35 19.1 13.68 6.47 m1 6.78 those in services, whereas in Japan they
v7 B4 $4 682 | 781 7:00 are relatively low. Alternatively, it could
Total manufacturing... 109 15.1 125 6.87 7.59 7.22 also be that distribution o transport mar-
Germany-United States Marks/U.S. $ gins (which are included in the PPP esti-
Foad, beverages T 3 “
‘and tobacco 55 479 39.0 1.94 2.00 197 mates and not in the manufacturing
UvR’s) are lower in the European coun-
58 485 498 2.66 282 274 tries than in the United States and Japan
26 13.6 305, 2.40 251 2.45, or that the European prices of intermedi-
31 465 239 216 225 220 ate goods (which are included in the
manufacturing UVR and not in the PPP)
61 249 18.7 2.08 2.04 2.08 i i
39 18 | 170 | 216 ) 235 | 225 are relatively nigh. tructed
Total manufacturing... 271 24.4 248 2.16 2.25 221 ther authors have constructed "proxy
Japan-United S Yeouus.$ PpP’s” by selecting PPP's for certain expen-
Food, beverages, |—- — — diture items which were then allocated
‘and tobacco... 20 19.0 179 | 3326 | 9083 | s202 to industries.* Here the problem remains
With doubie ; .
deflation’ _ _ _ 2510 | 2949 2428 that cross-country differences in transport
‘Textiles, apparel, and distribution margins and net indirect
rotatory 2 25.1 S42 | 181.9 | 1847 | 1833 taxes may affect the estimates, and that
allied products 43 20.7 319 1738 | 2176 194.4 the prices of imported products are re-
Basic and fabricated * .
‘metal products .. 34 249 29 104.4 | 1937 178.4 flected in the expenditure PPP’s, whereas
Machinery and the prices of exported products are ex-
equipment ... 45 174 16.1 108.7 | 158.4 131.2
Other manufacturing 2t 159 1.3 196.4 | 2374 | 2159 cluded. D.W. Jorgenson and M. Kuroda
Total manufacturing... 190 19.1 | 19.91 150.7 | 2122 178.8 came a step closer to measuring relative
With double deflation Prices on an industry basis by “peeling
for food’ . a = — — | 1485 | 2029 | 1736 off” indirect taxes and trade and trans-

nomic Cooperation and Development (OECD), and the United
Nations,

Some analysts have used these PpP’s for comparisons of
relative prices at the industry level.‘ This obviously creates
biases if relative prices at the industry level differ from those
at the level of total GDP. Table 3 shows two variants of the
PPP's, from the 1985 and 1990 benchmark studies by the In-
ternational Comparisons Project; both estimates have been
extrapolated to 1987 using national GDP deflators.

The two variants show surprisingly large differences.‘

portation margins from the expenditure
PPP's.’ All these adjustments seem an improvement over the
use of unadjusted expenditure PPP's, but they also make the
PPP's increasingly sensitive to the procedures used and the
quality of the data. However, the most fundamental problem
of using PPP's from the International Comparisons Project
for the purpose of industry comparisons is that those PPP's
exclude price measures for intermediate products (iron and
steel, cement, pulp and paper and most kinds of semiman-
ufactured goods), which account for a substantial part of
manufacturing output.

Monthly Labor Review July 1995 59



Productivity in Five Economies

at least two reasons why high income countries should not
concentrate only on differentiation. First, as the productivity
gaps among the high income countries themselves narrow, a
reduction of costs and prices may be more effective in main-
taining a competitive edge than differentiation, because all
countries at the productivity frontier may be able to pursue

Footnotes

the latter strategy. Second, improving cost and price com-
petitiveness through cutting costs denominated in national
currency not only improves the cost and price position rela-
tive to other countries, but also increases the room for ma-
neuver to introduce and strengthen aspects of competitive-
ness based on differentiation strategies. a

ACKNOWLEDGMENT: This article is an extension of an earlier article by Dirk
Pilat and the author, “Competitiveness in Manufacturing: A Comparison of Ger-
many, Japan and the United States,” Banca Nazionale de! Lavoro Quarterly
Review, June 1994, The author thanks Dirk Pilat for sharing the ideas on the
earlier article and for his comments on an earlier draft. The author also thanks
Angus Maddison, Arthur Neef, and Karin Wagner for helpful comments.

‘Throughout this article, “Germany” refers to the former Federal Republic of

2 For an up-to-date description and presentation of the Intemational Com-
parisons of Output and Productivity project, see A. Maddison and B. van Ark,
“Comparisons of Real Output and Productivity,” Research Memorandum Gb-6
(Groningen, The Netherlands, Groningen Growth and Development Centre,
1994). Most of the project's studies so far have dealt with the manufacturing
sector. Research has been conducted for 20 countries: Argentina, Australia, Brazil,
China, Czechoslovakia, Ecuador, France, Germany (Federal Republic of Ger-
many and German Democratic Republic), India, Indonesia, Korea, Japan,
Mexico, the Netherlands, Portugal, the former Soviet Union, Spain, the United
Kingdom, and the United States. See B. van Ark and D. Pilat, “Productivity
Levels in Germany, Japan, and the United States: Differences and Causes,”
Brookings Papers on Economic Activity: Microeconomics 2, December 1993,
pp. 1-48, on Germany, Japan, and the United States; and B. van Ark, The Eco-
nomics of Convergence, A Comparative Analysis of Industrial Productivity
Since 1950 (Aldershot, Edward Elgar publishers, forthcoming) on most coun-
tries mentioned above. Substantial progress has also been made on studies for
other sectors of the economy, including agricuiture (A. Maddison and H. van
oststroom, “The International Comparison of Value Added, Producti
Purchasing Power Parities in Agriculture,” Research Memorandum Gp-1
(Groningen, The Netherlands, Groningen Growth and Development Centre,
1993)) and distribution (N. Mulder and A. Maddison, “The International Com-
parison of Performance in Distribution: Value Added, Labor Productivity and
Peps in Mexican and U.S. Wholesale and Retail Trade 1975/7,” Research Memo-
randum Go-2 (Groningen, The Netherlands, Groningen Growth and Develop-
ment Centre, 1993)). See D. Pilat, The Economics of Rapid Growth: The Ex-
perience of Japan and Korea (Aldershot, Edward Elgar Publishers, 1994) for
total economy comparison based on sectoral estimates.

> The first industry of origin studies often made comparisons on the basis of
comparing physical output quantities (tons, liters, units). See for example L,
Rostas, Comparative Productivity in British and American Industry (London,
Cambridge University Press, National Institute of Economic and Social Research,
1948); A. Maddison, “Productivity in Canada, the United Kingdom and the
United States,” Oxford Economic Papers, October 1952; and, at least partly,
D, Paige and G. Bombach, A Comparison of National Output and Productiv-
ity (Paris, OEEC, 1959). However, as over the course of time the number of prod-
uct items to be compared increased and the number of product varieties rose
exponentially, it became increasingly difficult to arrive at satisfactory coverage
of output with physical quantity indicators. In the literature on national accounts
and reat output series, a consensus emerged that the representativity of mea-
sured quantities for nonmeasured quantities is not as good as that of measured
prices for unmeasured prices. See for example S. Fabricant, The Output of Manu-
facturing Industries 1899-1937, NBER no. 19 (New York, National Bureau of
Economic Research, 1940); and R. Stone, Quantity and Price Indexes in Na-
tional Accounts (Paris, OEEC, 1956). The use of unit value ratios in industry of
origin studies was first adopted in A. Maizels, “Comparative Productivity in
Manufacturing Industry: A Case Study of Australia and Canada,” The Eco-

70 Monthly Labor Review July 1995.

nomic Record, April 1958; and in Paige and Bombach, A Comparison.

“See, for example, D. Dollar and E.N. Wolff, Competitiveness, Conver-
gence and International Specialization (Cambridge, MA, MIT Press, 1993).

5 See A. Maddison, Monitoring the World Economy, 1820-1992 (Paris,
o&cD Development Center, 1995), appendix C, for a more detailed account of
differences in pe»’s and per capita income estimates from various International
Comparisons Project rounds. For the countries in this study, Maddison’s esti-
mates suggest that the PPP estimates from icP1v (for 1980) andice vi (for 1990)
are more consistent with each other than the 1cr v estimates (for 1985). As the
UvR's presented here are of a binary nature, they are compared with the unpub-
lished Fisher variant of the gross domestic product-based PPP's instead of the
published multilateral variants. (See also appendix B).

® See P. Hooper and K.A. Larin, “International Comparisons of Labor Costs.
in Manufacturing,” The Review of Income and Wealth, December 1989, pp.
335-56.

7.D.W. Jorgenson and M. Kuroda, “Productivity and International Competi-
tiveness in Japan and the United States, 1960-1985,” The Economic Studies
Quarterly, December 1992, pp. 313-25.

* A study of the McKinsey Global Institute (Manufacturing Productivity
(Washington, 1993)) looked in more detai] at several of the International Com-
parisons of Output and Productivity project uvr’s for the Germany-U.S. and
Japan-U.S. comparisons. In some cases (in particular in the machinery and
equipment sector), substantial adjustments were made at the product level to
correct for different product mixes or qualities among the countries. However,
no systematic bias in the original Intemational Comparisons of Output and Pro-
ductivity estimates was found, so that at the aggregate level at which the esti-
nates are presented here, these adjustments led to changes of the results on the
order of only 3 to 5 per cent. See H. Gersbach and B. van Ark, “Micro Founda-
tions for Intemational Productivity Comparisons,” Research Memorandum GD-
11 Groningen, The Netherlands, Groningen Growth and Development Center,
1994); and H. Gersbach and M.N. Baily, “Explanations of International Pro-
ductivity Differences: Lessons from Manufacturing,” in K. Wagner and B. van
Ark, eds., Intemational Productivity Differences, Measurement and Expla-
nations (Amsterdam, North Holland, forthcoming).

° Unfortunately, appropriate deflators to extrapolate the relative price levels
by major branch to the period before 1978 could not be constructed for the
United Kingdom.

°° Clearly there may have been industries with lower relative price levels
within other major branches. The fairly aggregate analysis inthis article locates
only those areas of manufacturing in which countries enjoy an overall competi-
tive advantage,

"See, for example, ‘Comment by Dale Jorgenson,’ in van Ark and Pilat,
“Productivity Levels,” pp. 45-56.

""Firstly, double-deflated estimates are very sensitive to the weights used in
the index. This may be overcome by the use of translogarithmic indexes, which
are based on the average value shares of the two countries in each binary com-
parison, (See, for example, the comparison of Japan and the United States by
Jorgenson and Kuroda, “Productivity and Intemational Competitiveness.”).
However, the latter method still requires meticulous measurement of the value
and prices of output and material inputs. In particular, in the case of material
inputs, the coverage of measured prices needs to be quite substantial, Further-



Productivity in Five Economies

Appendix B: The aggregation of unit value ratios

For purposes of this study, the manufacturing sector was divided
into 16 branches, which roughly correspond to the International
Standard Industrial Classification (sic) of the United Nations. For
each binary comparison, a maximum number of industries within
each branch was distinguished as producing the same products in
each country. Matches were then made for as many products as
possible within each industry. The average unit value ratio for the
industry was obtained by weighting the unit values by the corre-
sponding quantity weights for one of the two countries:

SPX * OF

so
DPy * QF
a

(B.lay UVRXU00 =

at quantity weights of country X, and:
:
Ber
UvRIeTM = js)

DPP* ay

isl

(B.1b)

at quantity weights of country U (here, the United States), where
i=1...s is the sample of matched items in matched industry j.

In the International Comparisons of Output and Productivity
studies of manufacturing, the first-stage aggregation was applied
only for so-called “matched” industries, for which at least 25 per-
cent of output in both countries could be matched. For industries
within each branch with lower coverage percentages, equations
(B.1a) and (B.1b) customarily were used for all items within a
branch to obtain the UVR for each “non-matched” industry UVR,
which therefore resulted in the same UVR across all nonmatched
industries in the branch.

The second stage of aggregation from industry to branch level
was constructed by weighting the unit value ratios for gross output

72 Monthly Labor Review July 1995

(uvr,,) as derived above from the value added of each industry in
country X or country U, that is:

Z [uve + vay]

(B.2a) UVRXUW) = ist

VAL
for the UVR of branch k at quantity weights of country U, and:

UVRXE%) = Vag

2 VAX / UVRX3G””
i

(B.2b)

for the uvR of branch k at country X’s quantity weights, where
(j= Lr are the industries jin branch k).

In the final stages, branch UvR’s were weighted at branch value
added to obtain unit value ratios for major groups of branches (such
as in table 2) and for total manufacturing.

Industry of origin UvR’s are usually based on binary compari-
sons between pairs of countries, in contrast to expenditure PPP's
which are usually based on index numbers of a multilateral nature.
This makes the results sensitive to the choice of the numéraire
country, which in this case is the United States. This implies that
comparisons of three countries based on binary UVR’s are not tran-
sitive. For example, a direct comparison between Germany and the
United Kingdom does not yield a result identical to that from an
implicit comparison between these countries based on UvR’s for
Germany-United States and United Kingdom-United States.See D.
Pilat and D.S. Prasada Rao, “A Multilateral Approach to Intema-
tional Comparisons of Real Output, Productivity and Purchasing
Power Parities in Manufacturing,” Research Memorandum no. 440
(Groningen, The Netherlands, Institute of Economic Research,
1991) for experimentation with multilateral weights in industry
studies. In general, the differences between PPP's using binary and
multilateral weights are not very large for a small sample of coun-
tries with comparable price structures.



Productivity In Five Economies

over the past decade, only the U.S.-Japan productivity gap
narrowed substantially, while the U.K.-U.S. gap narrowed
slightly.

The following sections discuss the estimates summarized
above in more detail, and also present the evidence for six
major branches of manufacturing. Comparisons of relative
levels of prices, productivity, and unit labor costs are sparse
in the literature, even though such measures add substan-
tially to our knowledge on the comparative performance of
nations in terms of production potential and competitive po-
sition. In particular, the estimation of productivity levels is
complicated by theoretical problems concerning the concepts
of output to be compared, methodological problems in valu-
ing output in a common currency, and the lack of interna-
tionally comparable data at the industry level.

The estimates presented here are derived from the com-
parative analytical framework provided by the International
Comparisons of Output and Productivity (COP) project at the
University of Groningen. Although the primary purpose of
IcoP is to throw light on the output and productivity perfor-
mance by industry of origin,’ it also produces unit value ra-
tios (or “purchasing power parities” by industry) that can be
compared to the exchange rates to obtain measures of rela-
tive price levels. Finally, its productivity measures are com-
bined here with comparisons of relative labor cost per hour
worked to obtain unit labor cost estimates.

Relative price levels for manufactures

Unit value ratios (UVR’s), as defined here, are estimates of
price relatives for manufactured goods. Specifically, they
are ratios of the producers’ sales value per unit of output
for matched products between each country and the United
States. (In other studies, such measures have been called
“purchasing power parities.”) Although these measures
were compiled primarily to convert the value of output by
industry in each nation’s own currency to U.S. dollars, when
compared to the official exchange rate they are them-
selves one of the most straightforward measures of cost
competitiveness.

Developing UvR’s. Unit values are obtained from each
country’s production census or survey for a recent benchmark
year (in this study, 1987) by dividing producers’ sales values
by the corresponding quantities of sales. Matches are then
made for as many products as possible. However, in practice,
only a proportion of manufacturing products could be matched
to calculate the unit value ratios. For many products, values
are reported, but not quantities. In addition, for some prod-
ucts, there is no counterpart in the other country, for other
products the information is not disclosed for confidentiality
reasons, and some products could not be compared because

58 Monthly Labor Review July 1995

they represent a different mix of product varieties for each
country or because there are large quality differences.

For the benchmark comparison between Germany and the
United States, 271 unit value ratios were derived, which rep-
resented 24.4 percent of German manufacturing shipments
and 24.8 percent of U.S. manufacturing shipments. (See table
2.) Coverage was lowest for the France-U.S. comparison,
which comprised 109 product matches covering 12.5 and
15.1 percent of shipments in France and the United States,
respectively,

As it appeared impossible to match all products between
nations, a method was required to fill the holes for the 75 to
85 percent of output that could not be covered by unit value
ratios. This method, which is explained in more detail in
appendix B, basically involves a stage-wise aggregation of
the Uvr’s, using quantities (in the first stage, from product to
industry level) and value added (in the subsequent stages up
to branch level and total manufacturing) as weights. The
original product UvR’s are therefore successively reweighted
according to their relative importance in the aggregate,
which makes the aggregate unit value ratios less sensitive to
outlier UVR’s?

The variation in UVR’s was greatest for Japan, with food,
beverages, and tobacco having the highest UVR at 320.2 Yen/
U.S.$, and machinery and equipment the lowest UVR at 131.2
Yen/U.S.$. (See table 2.) This result indicates the dual na-
ture of Japanese manufacturing. Some branches (in particu-
lar electronics and cars) are very competitive on the export
market, and other branches (in particular, food) are almost
entirely protected from the world market.

Table 3 shows the resulting manufacturing unit value ra-
tios for 1987, along with market exchange rates and with
expenditure purchasing power parities (PPP's) for gross do-
mestic product (GDP) from the United Nations’ International
Comparisons Project. In the case of all four country pair-
ings, the manufacturing UVR’s were substantially above the
exchange rates in 1987, which implies that the price level of
manufactured products was higher in each of the competitor
countries than in the United States. Because of the low ex-
change value of the U.S. dollar in 1987, none of the other
countries was able to compete on favorable terms with the
United States on the basis of relative prices in 1987, although
in this respect the United Kingdom was in a slightly better
position than Germany.

The last two columns of table 3 show expenditure pur-
chasing power parities for total gross domestic product from
the U.N. International Comparisons Project. The latter are
based on relative prices of consumer goods and investment
goods, as derived from estimates of gross domestic product.
Expenditure PpP’s are nowadays provided on a regular basis
by international organizations such as EUROSTAT (the statis-
tical office of the European Union), the Organization for Eco-



sents the ratio of relative labor cost to the
comparative productivity levels.

An overview

Table 1 shows that although the United
States had substantially higher productiv-
ity levels than did Germany, Japan,
France and Great Britain , the latter coun-
tries were more competitive in terms of
prices and unit labor costs in 1970. Be-
tween 1970 and 1980, the relative pro-
ductivity performance of 3 of these 4 “fol-
lower” countries (the United Kingdom is
excluded) improved significantly. By
1980, France and Germany strongly chal-
lenged the U.S. productivity leadership
position, and in some major branches
such as machinery and equipment manu-
facturing (in both countries) and chemi-
cals (in Germany), productivity levels
were even higher than in the United
States by that time.

On the other hand, relative prices and
labor compensation rose rapidly in the
three European countries and Japan vis-
a-vis the United States during the 1970's.
This was partly due to a more rapid rise
in labor compensation in nominal terms,
and partly to the depreciation of the U.S.
dollar. As a result, the three European
countries were less competitive than the
United States in 1980.

Despite a slowdown in the productiv-
ity catch-up process, the appreciation of
the U.S. dollar led to a shortlived return

USI indexes of manutacturing price levels, labor productivity, and unit

labor costs, selected years, 1970-93
(US.=100] —
Country pair and measure 1970 | 1975 | 1980 1905 | 1990 | 1993
~~ France-United States
Relative producer price .
ess | 1023 | ‘1178 | 728 | 1295 | +1339
733 78.5 ase | 898 913 87.8
48.4 869 | 1105 | 699 | 178 | 1113
680 | 106 | 1231 | 778 | 1291 | 1269
Germany-United States
Relative producer price
level 657 v8 | 1132 | 701 | 1928 | ‘1400
‘Value added per hour
worked .... 787 873 952 | 905 85.9 825
Labor cost per hour 470 832 | 1068 | 634 | 1216 | 1259
Unit tabor costs... 59.7 952 | 1123 | 701 | 1416 | 1526
Japan-United States |
Relative producer price | |
se 66.1 83,2 o19 | 757 | 103 | 1216
Value added per hour | |
worked ..., 4A5 544 662 | 699 779 76.2
Labor cost per hour 214 430 | 521 | 458 7715 | 1013
Unit labor costs... 48.1 795 76 | 655 | 995 | 1320
United Kingdom-United States | |
Relative producer price | |
level... 70.3 916 | 1405 | 862 | 1329 } 11329
Value added per hour | |
worked ..... 513 53.0 523 | 583 66.0 698
Labor cost per hour 238.0 529 764 | 51.1 90.4 877
Unit tabor costs °753 99.8 | 146.1 | 876 | 137.1 | 125.7
' Data relate to 1992,
2 Data relate to 1971,
» = preliminary.
Nore: Relative price levels are defined as the average ratio of producer prices between each coun-
try and the United States, divided by the currency exchange rate.
Source: See tables 4 to 7. Updated from 1990 to 1993 on the basis of information from the U.S.
Bureau of Labor Statistics.

to lower prices and unit labor costs—relative to those of the
United States—in the “follower” countries during the first
half of the 1980’s. However, between 1985 and 1990, the
competitive position of these countries deteriorated again.
This was particularly the case for Germany, where a very
large rise in labor compensation per hour occurred. More-
over, the comparative productivity level in German manu-
facturing declined by 10 percentage points between 1980 and
1990.

Between 1990 and 1993, relative prices and unit labor
costs in German manufacturing worsened further, but Japan
experienced the most dramatic deterioration in competitive-
ness, Although the latter case may be largely ascribed to the
appreciation of the yen, it is striking to note that in recent
years the productivity gap between Japan and the United
States widened as well.

By 1993, the United Kingdom had reversed the pattern
that had prevailed in 1970. At that time, its unit labor cost
level was the highest of all “follower” countries, but by 1993
it was the lowest. However, the shift in the U.S. position was
most extreme: in 1970, it had had higher relative price lev-
els and unit labor costs than all of the “follower” countries,
whereas its position was completely reversed by 1993.

Clearly, these shifts were dominated by the volatility of
exchange rate movements since the breakdown of the Bretton
Woods system of fixed exchange rates in 1971. However,
the strong position of the United States in terms of costs
can also be explained, in part, by the Nation’s relatively slow
increase in labor compensation and its continuously high
level of labor productivity. Even though the manufactur-
ing productivity gap between each country and the United
States has narrowed when one looks at the period as a whole,

Monthly Labor Review July 1995 57



Indexes of relative hourly labor costs, labor productivity, and unit labor costs, 1970-93

France-United States Germany-United States
(United States = 100) (United States = 100)
160 160
140 F 140
120
100
80 +
a
:
60; /
! ?
“ Hourly labor costs o* Hourly labor costs
40 40
20 20-
1 1 1 1 f nl \ f

0
1970 1975 1980 1985 1990

0
1970 1975 1980 1985 1990

80

60

40

| »** Hourly labor costs

20

L L

Japan-United States United Kingdom-United States
(United States = 100) (United States = 100)
160 160
140 5 140 F Unit labor costs
120 + 120 |-
Unit labor casts /\
100 fe 100

80

60

40

Hourly labor costs

207

L L L L L

o A
1970 1975 1980 1985 1990
Source: Tables 5, 6, and 7.

0
1970 1975 1980 1985 1990

68 Monthly Labor Review July 1995



more, itis necessary to have an integrated framework of intersectoral accounts,
the production census, and the national product accounts, These conditions are
difficult to meet in practice. Comparable price measures for intermediate inputs
are rarely available, and, as mentioned above, by definition, cannot be obtained
from International Comparisons Project expenditure PPP's.

See B. van Ark, “International Comparisons of Output and Productivity.”
‘Monograph Series no. 1 (Groningen, The Netherlands, Groningen Growth and
Development Center, 1993); van Ark, The Economics of Convergence; and
Pilat, The Economics, for a description of estimates using double-deflation tech-
niques. An exception to “adjusted single deflation” was made in the case of the
food products branch in Japan, for which the “double-deflated” vr from table
2.was used. As intermediate inputs were excessively high priced in Japan, it was
felt necessary to derive a specific “value added” vk for this extreme case.

TM For example, in 1950, value added per hour worked in manufacturing in
France and the United Kingdom was only 38 percent of that in the United States;
in Germany, it was 39 percent, whereas in Japan, it was only 12 percent, See
van Ark, The Economics of Convergence.

"The annual compound growth rates of value added per hour worked in
manufacturing between 1979 and 1990 were 3.1 percent for France, 1.8 per-

Appendix A: Statistical sources

cent for Germany, 4.9 percent for Japan, 4.8 percent for the United Kingdom,
and 2.8 percent for the United States.

% See McKinsey Global Institute, Manufacturing Productivity.

TM See Arthur Neef, Christopher Kask, and Christopher Sparks, “Interna-
tional comparisons of manufacturing unit labor costs,” Monthly Labor Re-
view, December 1994, pp. 47-58; and M. Greiner, Christopher Kask, and Chris-
topher Sparks, “Comparative manufacturing productivity and unit labor costs,”
Monthly Labor Review, February 1995.

Compare, for example, the estimates of changes in unit labor costs on a
national currency basis and on a U.S. dollar basis as presented regularly at the
back of the Monthly Labor Review.

'? See Pilat, The Economics, pp. 193-204.

» See B. van Ark, “Arbeidsproduktiviteit, arbeidskosten en internationale
concurrentie,” Economische en Statistische Berichien, November 23, 1994,
updated; and van Ark, The Economics of Convergence.

2 See, for example, M. Porter, The Competitive Advantage of Nations (New
York, The Free Press, 1990), pp. 37-38.

Unit value ratios (table 1) for 1987 are derived from the following
sources: For France, from Service d'Etude et des Statistiques
Industrielles/Organisation professionnels/Service Central des
Enquetes et Etudes Statistique, Enquétes de Branches 1987, Paris.
For Germany, from Statistisches Bundesamt, Produktion im
Produzierenden Gewerbe 1987, Wiesbaden. For Japan, from Min-
istry of International Trade and Industry qurrp. Census of Manufac-
tures 1987, Report by Commodities, Tokyo. For the United King-
dom, from Business Statistics Office,- Business Monitor, Quarterly
Sales Inquiries, various issues. For the United States, from Bureau
of the Census, 1987 Census of Manufactures, Industry Series,
Washington.

Value added and employment for productivity calculations for
1987 are derived from the following sources: For France, from
Institut National de la Statistique et des Emdes Economiques anszE)
La situation de l'industrie en 1987. Résultats définitiefs de
Venquéte annuelle d'entreprise 1987, Paris. For Germany, from
Statistisches Bundesamt, Kostenstruktur der Unternehmen 1987,
Wiesbaden. For Japan, from mri, Census of Manufactures 1987,
Report by Industries, Tokyo. For the United Kingdom, from Busi-
ness Statistics Office, Business Monitor, Report on the Census of
Production, various issues. For the United States, from Bureau of
the Census, 1987 Census of Manufactures, Industry Series, Wash-
ington.

The series on value added, employment, and deflators are de-
tived from the following national accounts sources:. For France,
from see, 20 ans de comptes de la nation, Paris, 1992; and isze,
Rapport sur les comptes de la nation, Paris, 1993. For Germany,
from Statistisches Bundesamt, Volkswirtschaftliche Gesam-
trechnungen, Revidierte Ergebnisse 1950-1990, Wiesbaden, 1991;
and Statistisches Bundesamt, Volkswirtschaftliche Gesam-
trechnungen, Konten und Standardtabellen 1991, Wiesbaden, 1992.
For Japan, from Economic Planning Agency, Report on National
Accounts from 1955 to 1989, Tokyo, 1991, and Economic Planning
Agency, Annual Report on National Accounts 1993, Tokyo, 1993.
For the United Kingdom, from Central Statistical Office, United

Kingdom National Accounts, various issues. U.K. employment
from Department of Employment, Employment Gazette, and addi-
tional series supplied by the Department of Employment, For the
United States, from Bureau of Economic Analysis, The National
Income and Product Accounts of the United States, 1929-1982,
Washington, 1986, and Survey of Current Business, April 1991 and
May 1993.

For the calculations of hours, see the detailed explanations in
B. van Ark and R.D.J. Kouwenhoven, “Productivity in French
Manufacturing: An International Comparative Perspective,” Re-
search Memorandum cp-10 (Groningen Growth and Development
Center,1994) for France; van Ark and D. Pilat “Productivity Levels
in Germany, Japan, and the United States: Differences and Causes,”
Brookings Papers on Economic Activity: Microeconomics 2, De-
cember 1993, for Germany, Japan, and the United States; and van
Ark, “Comparative Productivity in British and American Manu-
facturing,” National Institute Economic Review, November 1992,
for the United Kingdom, though the time series of the last has been
revised on the basis of more up-to-date information kindly pro-
vided by Mary O’Mahony of the National Institute of Economic
and Social Research, London.

Labor compensation and employment estimates for labor cost
calculations are derived from the following sources: For France
(1977-89), from Organization for Economic Cooperation and De-
velopment «oEcp), National Accounts Volume II, Paris, 1993, and
for France (1970-77), from wser, Les Comptes de I'industrie en
1987, Les collections de vinseE no, C150, 1988. For Germany, Ja-
pan, and the United States, from the national accounts sources cited
above. See also D. Pilat and B. van Ark, “Competitiveness in Manu-
facturing: A Comparison of Germany, Japan and the United States,”
Banca Nazionale del Lavoro Quarterly Review, June 1994. For the
United Kingdom (1983-90), from national accounts sources as de-
scribed above; for the United Kingdom (1975-83), from oscp, Na-
tional Accounts Volume II, 1975-87, Paris; and for the United King-
dom (1971-75), from oecp, National Accounts Volume I, 1971-
83, Paris.

Monthly Labor Review July 1995 71