# **5. Real Unit Labor Costs**

This section examines trends in real unit labor costs (RULCs) over the last two decades. Our focus is on the trends in each country over time, rather than making direct comparisons of unit labor costs between countries, which is fraught with difficulties as discussed in section 3. We construct indices of RULCs denominated in both local currencies and US dollars, using the data sources and methodology described below.

Average monthly wage data for the aggregate economy is used as a proxy for labor costs. Ideally, we should use data covering all labor costs, including the nonwage costs borne by employers, but this is not available for all transition economies, including most of those which are of particular interest in this study. The monthly wage data are obtained from the database of the United Nations Economic Commission for Europe (UNECE), available on its website. Where data are missing from this database, we have used data from the ILO and the World Bank’s Jobs Gateway for Southeastern Europe. One of the difficulties with published wage data is that different sources are not always consistent, because they are compiled from different surveys (e.g. labor force surveys and establishment surveys). Therefore, when supplementing UNECE data with data from other sources, we have only used the latter when it is clear that the applicable data series are consistent; i.e. when overlapping data points have identical entries. For most of the transition economies, we have annual data on average monthly wages from 2000 to 2017, but a few countries (Montenegro, Turkmenistan and Uzbekistan) data for some years are missing.<sup>1</sup> To generate a series on real wages, we deflate the average monthly wage data with the applicable GDP deflator. For each country we generate an index of real wages in local currency.

To estimate labor productivity, we divide GDP in constant price local currency by the number of persons employed, using the data in the WDI, and convert this into an index for each country.<sup>2</sup> This By dividing the index of real monthly wages by the index of labor productivity, the index of RULCs in local currency is obtained. To generate the index of RULCs in US dollars we convert the nominal monthly wage series in local currency into US dollars using the average annual market exchange rates in the WDI and then deflate teach time series with the US GDP deflator. We have set the indices for each country at 100 in 2003 because that is the earliest year for which we have the requisite wage data for all the countries.

Tables 2a, 2b and 2c show the RULCs for the three groups of transition economies identified in table 1, in both local currency (LC) and US dollars. We compare averages over five periods: 2000-04, 2005-08, 2009-11, 2012-14 and 2015-17. The final three-year period covers the period after the global oil price collapse which had a major impact on real exchange rates in many of the transition economies. The main issue that we address is how RULCs have evolved since the first half of the 2000s.

> 1 A real unit labor cost series could not be estimated for Kosovo because there are no data on wages before 2012.

> 2 Labor production is usually defined as real value added per unit of labor. We follow the practice in much of the literature, where labor productivity is measured as GDP (or one of its sectoral components) divided by the total number of persons employed (e.g. Turner and Golub, 1997; Felipe and Kumar, 2011). In some countries, such as the United States, more sophisticated estimates of labor productivity are available which incorporate the number of hours worked but data on hours worked are not available for most of the countries covered in this study.

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