4.1.3. Labour costs

Although with a view to the future, the only way to guarantee an improvement in the wellbeing of the population (in the case of a territory) or sustainable profitability (in the case of a firm) is a differentiation-based competitive strategy, in the short term and for a significant number of firms, cost-based competitive strategies continue to play a major role, with labour costs being one of the most important and the one that can most be controlled domestically. For this reason, we will now discuss how the Basque Country has performed, from a comparative perspective, in terms of both the economy as a whole and the manufacturing industry, one of the sectors most open to international trade and competition from low-cost emerging countries. Graph 9 shows the trends in the different indicators broken down in this analysis.

Graph 9. Variation in labour cost per employee, real productivity, unit labour costs and real unit labour costs

Labour cost per employee

Graph 9. Variation in labour cost per employee, real productivity, unit labour costs and real unit labour costs. Labour cost per employee
Graph 9. Variation in labour cost per employee, real productivity, unit labour costs and real unit labour costs. Labour cost per employee

Productivity

Graph 9. Variation in labour cost per employee, real productivity, unit labour costs and real unit labour costs. Productivity
Graph 9. Variation in labour cost per employee, real productivity, unit labour costs and real unit labour costs. Productivity

Unit labour costs

Graph 9. Variation in labour cost per employee, real productivity, unit labour costs and real unit labour costs. Unit labour costs
Graph 9. Variation in labour cost per employee, real productivity, unit labour costs and real unit labour costs. Unit labour costs

Real unit labour cost

Graph 9. Variation in labour cost per employee, real productivity, unit labour costs and real unit labour costs. Real unit labour cost
Graph 9. Variation in labour cost per employee, real productivity, unit labour costs and real unit labour costs. Real unit labour cost
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Source: Eustat (Basque Statistics Office) and Eurostat. Compiled by authors.

Since 2013 there has been a significant moderation in labour costs per employee in the Basque Country and Spain, compared with growth in the EU as a whole and Germany

Both the Spanish and Basque economies began their adjustment to the crisis somewhat later than the other European economies, which made it necessary to engage in a more intense process than in those economies. In recent years, this greater adjustment has made it possible for the Basque and Spanish economies to improve their competitiveness, which is reflected, as indicated above, in the recovery of business activity and employment.

Since 2013, there has been a considerable slowing in the rise of labour costs per employee in Spain and the Basque economy, compared to the growth observed in the EU average and significant growth in Germany.

The productivity of the Basque economy, especially the manufacturing industry, continues to grow thanks to output growth

In terms of the productivity of the economy as a whole, since 2013 productivity has continued to grow in the Basque Country at rates similar to those of the EU-28 and Germany, thanks to increases in output. This performance is also repeated in the manufacturing industry, where it is more marked. This is not the case in Spain, where we are seeing signs of a dual economy: slim productivity growth in the economy as a whole but significant gains in the manufacturing industry.

In terms of the productivity of the economy as a whole, since 2013 productivity has continued to grow in the Basque Country at rates similar to those of the EU-28 and Germany, thanks to increases in output. This performance is also repeated in the manufacturing industry, where it is more marked. This is not the case in Spain, where we are seeing signs of a dual economy: slim productivity growth in the economy as a whole but significant gains in the manufacturing industry.

The reduction in labour costs leads to an improvement in the competitive position of the Basque Country and the recovery of business margins

As a result of pay restraint and productivity growth, nominal unit labour costs (NULC) are declining in the Basque Country, especially in the manufacturing industry, thus improving its competitive position. And as regards real unit labour costs (RULC) the reduction taking place in the Basque Country is even greater, creating favourable conditions for business margins to recover.

As a result of this, in 2017 the labour costs per employee of the Basque economy as a whole were above the EU-28 average (see Table 7). However, as productivity is still higher, the unit labour cost(ULC) is below the EU-28 average. By contrast, the manufacturing industry’s position is less positive, as the higher labour costs found in the Basque Country are not offset by higher productivity. As a result, manufacturing NULC are above the average for Germany and the EU-28, and especially those in Spain.

Table 7. Labour cost per employee (LCE) and productivity, and unit labour costs (ULC) (2017)
Table 7. Labour cost per employee (LCE) and productivity, and unit labour costs (ULC) (2017)
Source: Eustat (Basque Statistics Office) and Eurostat. Compiled by authors.

The trend analysis is supplemented by the regional comparison, which is shown in Graph 10 for the economy as a whole and in Graph 11 for the manufacturing industry. This analysis confirms the above and shows that the majority of the foreign reference regions exceed the Basque Country in LCE and in productivity. However in ULC, which reflect the combined effect of the two variables, they are above the Basque Country. As regards the Spanish reference regions, the Basque Country tops all of them in LCE and productivity. But the most interesting aspect is that, in regard to the manufacturing industry, the Basque Country manages to have ULC below the average for the EU-28 regions and all of its foreign reference regions (except for two). Therefore, the regional comparison does not appear to confirm the disadvantage which the comparison with countries seemed to show for the Basque manufacturing industry.

Graph 10. Labour cost per employee and productivity (GVA per employee) for the economy of the EU-28 regions as a whole (2016 or closest year)
Graph 10 Labour cost per employee and productivity (GVA per employee) for the economy of the EU-28 regions as a whole (2016 or closest year)
Source: Eurostat. Compiled by authors.
NB: There are two regions which are not included in this graph, as their productivity is above 100.
Graph 11. Labour cost per employee and productivity (GVA per employee) for the manufacturing industry in the EU-28 regions (2016 or closest year).
Graph 11 Labour cost per employee and productivity (GVA per employee) for the manufacturing industry in the EU-28 regions (2016 or closest year)
Source: Eurostat. Compiled by authors.
NB: There are three regions which are not included in this graph, as their productivity is above 150.
  1. NULC are calculated based on the nominal variation in both labour costs per employee and productivity. Economists consider NULC to be the most suitable indicator of variation in labour costs for analysing the impact of labour costs on competitiveness.

  2. Variation in RULC makes it possible to determine to what extent firms are able to transfer variations in NULC to prices (so that RULC are reduced and business margins increase) or the opposite (when RULC increase and business margins decline). Therefore, variation in RULC is the most suitable indicator to reflect the influence of labour costs variations on business profitability.

  3. Gross value added