# Unit labour costs

## Introduction

20.22 The ABS produces a range of statistics relating to employee remuneration and the price of labour. These statistics have been developed to provide information on the returns to labour from economic production, the level of employee earnings, and labour costs and prices. Relevant series include compensation of employees from the ASNA, average weekly earnings, and the wage price index. Unit labour costs (ULC) are an indicator of the average cost of labour per unit of output produced in the economy. They provide a link between productivity and the cost of labour.

20.23 ULC are a measure of the costs associated with the employment of labour, adjusted for labour productivity. As a result, there will be no change in ULC if there is an increase in average labour costs and a commensurate increase in labour productivity. Unlike ULC, any increase in labour costs associated with increased productivity would be reflected in an increase in the wage price index, average compensation of employees, and average weekly earnings.

20.24 ULC are defined as:

\(\large ULC={Average \ labour \ costs \ (ALC)\over Average \ labour \ productivity \ (ALP)}\hspace{2cm}(1)\)

20.25 Average labour costs (ALC) are calculated as compensation of employees plus payroll tax minus employment subsidies, divided by total hours worked by employees. Training and recruitment costs are excluded due to measurement difficulties.

20.26 Average labour productivity (ALP) is defined here as volume GDP divided by total hours worked. Total hours worked here includes hours worked by employees, employers, and the self-employed, as it is not possible to decompose real GDP into an 'employee only' component. As labour productivity includes employees, employers, and the self-employed, it measures average productivity in both the incorporated and unincorporated sectors.

20.27 Labour productivity growth reflects growth in two areas. The first is from an increasing capital-labour ratio (capital deepening), indicating more capital per unit of labour input. The second is from increasing multifactor productivity, which can occur through the introduction of new disembodied technologies, organisational improvements, economies of scale, or the implementation of research and development. ULC will decrease as capital deepening and multifactor productivity increase (if average labour costs remain constant).

20.28 The ALC and the ALP expressions are:

\(\large ALC={Labour \ costs \ (LC)\over Hours \ worked \ by \ employees}\hspace{2cm}(2)\)

\(\large ALP={Volume \ GDP\over Total \ hours \ worked \ by \ employees \ and \ self \ employed}\hspace{2cm}(3)\)

20.29 An apparent issue in the ULC formula is that the scope of the denominator (average labour productivity), which includes the self-employed, is broader than the scope of the numerator (average labour costs). The implicit assumption is that average labour costs are the same for the self-employed and for employees (shown in equation 4). Total hours worked by employees and the self-employed can be shifted to the numerator in the ULC equation, using equations 1 and 3. As shown in equation 4, this effectively scales up employee labour costs (LC) to the whole economy, and the scope of the numerator and denominator are now the same. Scaling up labour costs in this way depends on the assumption that average hourly labour costs are the same for the self-employed and employees.

\(\large ULC={Labour \ costs(LC) \ \times ({Total \ hours \ worked\over Hours \ worked \ by \ employees })\over Volume \ GDP}\hspace{2cm}(4)\)

20.30 Calculating ULC in this way means that technically, it is an indicator of labour costs for all employed people, not just employees. However, since this involves the assumption that labour costs are the same for employees and the self-employed, ULC have greater explanatory power for the costs of employing employees than employing the self-employed.

20.31 The ASNA publishes the following:

- nominal unit labour costs
- nominal unit labour costs – non-farm
- real unit labour costs
- real unit labour costs – non-farm.

## Real unit labour costs

20.32 Nominal ULC are affected by general increases in prices across the economy as the numerator uses nominal labour costs. Real unit labour costs (RULC) eliminate this issue by deflating ALC with the GDP deflator. RULC are an indicator of the direct labour cost pressures associated with the employment of labour, and exclude general price impacts. RULC are calculated as:

\(\large RULC = {(ALC/GDP \ deflator) \over ALP}\hspace{2cm}(5)\)

20.33 Substituting equation 3 into 5, the GDP deflator cancels out and the expression reduces to:

\(\large RULC = {LC\ \times ({Total \ hours \ worked \over Hours \ worked \ by \ employees}) \over {Current \ price \ GDP }} \hspace{2cm}(6)\)

20.34 The labour income share of total factor income (LIS) is defined as labour income (compensation of employees) divided by total factor income. Equation 6 shows that RULC are similar, but not identical to LIS. This is because the denominator for RULC, GDP, is slightly larger than the denominator for LIS, total factor income. If RULC is equated to the LIS, then RULC can be placed within a broader theoretical framework defining the link between wages and productivity.

20.35 The quarterly calculations for RULC are:

Step 1: Derive hours worked by employees (see paragraph 19.79 for more information on calculations of hours worked).

\( { Hours \ worked \ by \ employees }= Total \ hours \ worked \times\left(\frac{{ Employees }}{ { Total \ employed }}\right) \)

Step 2: Calculate GDP per hour

\(GDP \ per \ hour=\frac{Volume \ GDP}{{ Total \ hours \ worked }}\)

Step 3: Calculate labour cost per hour

\( { Labour \ cost \ per \ hour }=\frac{ { Labour \ costs }}{{ Hours \ worked \ by \ employees }} \)

Step 4: Calculate nominal ULC

\(Nominal \ unit \ labour \ cost =\frac{{ Labour \ costs \ per \ hour }}{{ GDP \ per \ hour }}\)

Step 5: Calculate RULC by deflating nominal ULC with the GDP deflator

Step 6: Index the RULC series to the reference year

Step 7: Derive annual RULC from the quarterly series by averaging the level over the four quarters in each year

## Real unit labour costs - non-farm

20.36 Due to the highly seasonal and variable nature of the agricultural industry, it can be useful to remove the farm economy from RULC. The quarterly calculations for non-farm RULC are:

Step 1: Derive hours worked by non-farm employees

\({ Hours \ worked \ by \ non \ farm \ employees }={ Total \ non \ farm \ hours \ worked } \times\left(\frac{{ Employees }-{ farm \ employees }}{{ Total\ employed }-{ farm \ employed }}\right)\)

Step 2: Calculate non-farm GDP per hour

\(Non \ farm \ GDP \ per \ hour =\frac{ Non \ farm \ volume \ GDP}{{ Total \ non \ farm \ hours \ worked }} \)

Step 3: Calculate non-farm labour cost per hour

\({ Non \ farm \ labour \ cost \ per \ hour }=\frac{{ Non \ farm \ labour \ costs }}{{ Hours \ worked \ by \ non \ farm \ employees }} \)

Step 4: Calculate nominal non-farm ULC

\({ Nominal \ non \ farm \ ULC }=\frac{{ Non \ farm \ labour \ cost \ per \ hour }}{{ Non \ farm \ GDP \ per \ hour }} \)

Step 5: Calculate non-farm RULC by deflating nominal non-farm ULC with the non- farm GDP deflator

Step 6: Index the non-farm RULC series to the reference year

Step 7: Derive annual non-farm RULC from the quarterly series by averaging the level over the four quarters in each year