4.1.3. Labour costs
Labour costs continue to be a key determining factor of economic competitiveness due to their potential impact on the development of the general price index (inflation) and on foreign trade. As indicated in previous competitiveness reports prepared by Orkestra, labour costs do not represent an exclusive indicator of competitiveness, but rather interpretation of their variation and their effects must be analysed alongside other indicators. Thus, factors such as public intervention, the institutional framework of the labour market, and/or the level of commercial and financial integration of an economy, among other things, are other underlying factors of the balance between salary pressure and productivity.
The aim of this section is to update, from a comparative international perspective, the analysis of the trends in labour costs in the Basque economy, and its significant manufacturing industry, which is very open to international competition. To this end, Graph 13 shows the trends in the different indicators broken down in this analysis.
Basque firms remain in a strong position in terms of productivity and labour costs
As regards to labour costs per employee (LCE), both the Spanish and Basque economies experienced a downturn as a result of the crisis somewhat later than the other European economies, but more intensely at a later point. In the last year, we can see an upturn in LCE in all territories, something which had already been ongoing in Germany. Even so, in comparison with its 2013 position, the Basque Country continues to report lower values than those of the other territories, both for the economy as a whole and for the manufacturing industry.
Concerning productivity, we are again detecting the effects of the downturns in the Spanish labour market, such as staff reductions and the disappearance of lower value-added jobs. Consequently, there is evidence of a pronounced recovery in the productivity indicator. Beginning in 2013, we see a similar trajectory in productivity growth in the EU-28, Germany and the Basque Country, while in Spain, progress in productivity stalled until 2015, when it began to gain momentum again. In the manufacturing industry, the effects are magnified in comparison with the economy as a whole, and productivity grew at a more pronounced rate in the EU-28, Germany and the Basque Country starting in 2013. However, in the last year, productivity has maintained almost the same level as in the previous year.
The Basque and Spanish economies began an extended process of competitive improvement in unit labour costs (NULC) in 2010. This trend in falling NULC halted and even reversed slightly in 2018. In the manufacturing industry, variability is more marked in comparison with that seen in the economy as a whole. After 2013, the Basque Country reported better competitive improvement in relation to the three benchmark territories. Until 2015, Spain matched the Basque Country in this improvement, then improvement slowed in Spain. During the last two years, the EU-28 and Germany have experienced a pattern of growth. The improvement in the competitiveness of NULC has been somewhat offset by appreciation in the nominal effective exchange rate of Spain compared to developed countries, which rose slightly between 2015 and 2018.
There has been an improvement in competitiveness in the Basque Country in terms of unit labour costs (NULC) and especially in real unit labour costs (RULC)
And as regards to real unit labour costs (RULC), the reduction taking place in the Basque Country is even greater, creating favourable conditions for business margins to recover.
CAs a result of all this, in Table 18 we can see two noteworthy characteristics in 2018: the high correlation between LCE and productivity, and the differences in ULC between the economy as a whole and the manufacturing industry. The first characteristic is explained by the fact that high productivity means high salaries, which in turn drive the search for greater innovation and the replacement of workers with capital. As regards apparent productivity of labour for the economy as a whole, it is possible to identify two groups: Germany and the Basque Country at a similar and higher level, and the EU-28 and Spain at a lower level. Despite everything, the ULC column gives a low value for the Basque economy due to the combination of relatively lower LCE and high productivity. By contrast, in the manufacturing industry, which has higher LCE and productivity levels than the economy as a whole, the Basque Country has higher relative ULC than the other areas, which is the result of lower relative productivity. In turn, given the manufacturing and industrial specialisation of the Basque economy, the greater productivity found in this sector partially explains the higher level of productivity in the economy as a whole.
In the manufacturing industry, the Basque Country has unit labour costs (ULC) below the average for the EU-28 regions and the majority of its comparable foreign regions
The trend analysis is supplemented by the regional comparison, which is shown in Graph 14 for the economy as a whole and in Graph 15 for the manufacturing industry. This confirms the result of the comparison between the Basque economy as a whole and the averages for countries, with the additional information that the majority of comparable foreign regions exceed the Basque Country in LCE and in productivity, but also in ULC, and that, in comparison with comparable Spanish regions, the Basque Country tops all of them in LCE and productivity. But the most interesting thing is that, as regards to the manufacturing industry, the Basque Country manages to have ULC below the average for the EU-28 regions and all of its comparable foreign regions (except for two). In other words, the regional comparison does not appear to confirm the disadvantage which the comparison with countries seemed to show for the Basque manufacturing industry.
The labour cost analyses conducted thus far have been calculated in relation to working personnel, but they could also have been calculated in relation to hours worked. This would have an impact on calculations of LCE and productivity levels, as the average annual hours of work per employee varies significantly from one place to another. Graph 16 shows how the average number of hours worked per year by an employee has varied.
Two salient aspects can be identified in the graph. First, the number of hours worked per operator in the manufacturing industry exceeds that of the economy as a whole in all countries. Second, we can see that Germany clearly stands out for its lower number of hours of work, while Spain is the country reporting the highest annual averages for hours worked.
Unlike in most countries, in the Basque economy as a whole, since 2014, there appears to be a slight upward trend in the number of hours worked per person employed
From the perspective of trends, the performance of the economy as a whole is somewhat different from the manufacturing industry. In the economy as a whole, we see a slight downward trend in the number of hours worked in most countries. The exception is in fact the Basque Country, where since 2014, with the economic recovery, there appears to be a slight upward trend in the number of hours worked per operator. In the manufacturing industry, the drop was more pronounced during the crisis in the EU-28, Germany and the Basque Country, while in Spain, the (slight) trend was an increase in the average number of hours worked.
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 changes in labour costs for analysing the impact of labour costs on foreign competitiveness.ç
If in 2017 the base was 100.0, in 2015 it was 99.3 and in 2018 it was 101.2.
Change in RULC makes it possible to determine to what extent firms are able to transfer changes in NULC to their 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 changes in labour costs on business profitability.