ULC measurement issues
20.37 The GDP deflator is used to calculate RULC because its scope covers the production of goods and services in the domestic economy. Alternative measures such as the domestic final demand (DFD) deflator and the household final consumption expenditure (HFCE) deflator provide a demand side view of price change, which is less relevant here. The GDP deflator is affected by trade prices, however, and this is discussed further below. Choosing an appropriate deflator does not need to be considered when calculating nominal ULC, as labour costs are not deflated.
Terms of trade effect
20.38 The GDP deflator will be affected by changes in the terms of trade and for example all else equal will increase as the terms of trade increases. Use of the GDP deflator will therefore capture trading gain / loss as well as changes in productivity and domestic labour prices in RULC.
20.39 At an aggregate level, a sustained shift in the terms of trade will impact the capacity of the economy to pay higher wages. However, if the interest is in the link between labour productivity and labour costs, then including the terms of trade effect would be inappropriate.
Treatment of self-employed
20.40 ULC include an estimate for the cost of self-employed labour by assuming that the self-employed earn, on average, the same amount per hour as employees. Ideally, a return to labour from gross mixed income, which measures returns to unincorporated businesses (including the self-employed), would be used. Calculating this, however, requires too many assumptions for ULC compilation purposes.
20.41 More critically, if the purpose of ULC is to examine the costs of employees – that is, an employers' willingness to employ – then the self-employed should be excluded. However, while labour costs are already measured for employees only (and scaled up to include the self-employed), it is not possible to define volume GVA excluding the self-employed.