From the perspective of international competitiveness, real unit labor costs in a relevant foreign currency is the most useful indicator. As can be seen from equations (4) and (5), this indicator comprises two components: a real unit labor cost in domestic currency and a real exchange rate <u>�</u><sup>PP</sup> �P <u>�</u> ~~.~~ Hence a rise (fall) in real unit labor costs denominated in a foreign currency can be<sup>ff</sup> brought about by a rise (fall) in real unit labor costs in domestic currency and/or an appreciation ee (depreciation) of the real exchange rate.

Unit labor costs have been used in three principal ways. First, as an input into real effective exchange rate (REER) indices, where they are an alternative to price indices such as the consumer price index (CPI) (see Turner and Golub, 1997; Lewney et al, 2012)). The latter are much more commonly used to compute the REER in part because CPI data are more readily available and more up to date than ULC data. Second, to compare levels of ULC across countries (usually countries which are competitors on international markets) at a point in time (see Ark, et al 2005; Golub et al 2017). Third, to track the evolution of unit labor costs in a specific country or countries across time, which usually involves converting the RULC data into indices (see Havlik, 2005; Landesmann and Hanzl-Weiss, 2013; Ordóñez et al, 2015).

The second use (sometimes referred to as relative unit labor costs) is potentially problematic for several reasons. In particular, the data on labor costs may not be fully consistent across all countries, especially in EMDEs. For example, wage data may be derived from surveys (such as establishment surveys) which comprise only part of the employed workforce and the scale of coverage may vary between countries. In EMDEs with a substantial informal sector, the coverage of wage data is likely to be less than comprehensive in terms of its share of the total employed workforce. Also, if wage data are used to compute ULCs, nonwage labor costs will be omitted (often this is unavoidable as the nonwage data are not available). If nonwage labor costs differ across countries (e.g. because of differences in the applicable rates for employers’ contributions to social security funds) direct comparisons of ULCs across countries could be misleading. Finally, ULCs are affected by the capital intensity of production, because the greater is the contribution of capital to output, the larger must be the share of returns to capital in income, ceteris paribus. Therefore, a more capital intensive economy would be expected to have lower unit labor costs than a less capital intensive one, but that does not mean that the former is more competitive than the latter, as competitiveness depends on the total costs of production and not just labor costs (Peters, 2010).

Although these issues could also distort time series measures of ULCs in a single country, they are likely to be less problematic for this use than for cross country comparisons. If care is taken with data sources, it should be possible to obtain time series data which are reasonably consistent over time. Changes in nonwage labor costs are a potential problem, but in most countries they probably do not change dramatically over time. While capital output ratios are not constant, they generally only change slowly over time. Since the question we are trying to answer is whether competitiveness is impacted by remittance levels, we are more concerned with the trends in real unit labor costs over time within countries rather than specific comparisons of real unit labor costs between countries at a point in time.

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