Unit Labor Costs Matter Much More Than Actual Levels of Pay

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Discuss the view that unit labour costs matter much more than actual levels of pay.

Unit labour costs is the cost of labour per unit of. It is determined by the growth of wages and the rate of growth of labour productivity. Labour costs include the complete range of costs employers incur when they employ workers. They include not only wages but also the cost of recruiting and training workers, national insurance contributions, redundancy payments and benefits in kind. Wages do, however, constitute over 80% of total labour cost. So they, together with productivity, are the two key influences on unit labour costs. If productivity increases at a faster rate than the wages paid, unit labour costs are likely to fall.  During the recession, the UK has seen falls in real wage growth. If real wages are lower, firms may  be more willing to employ labour rather than capital. In other words low wage growth means labour is relatively more attractive than usual. Therefore with lower labour costs, firms are willing to employ more workers and labour intensive production methods.

If a country’s firms have higher unit labour costs than firms in rival countries, this may make their products less price competitive. The country will be unlikely to benefit from increased exports, as a result of a depreciating exchange rate.

The increasing unit labour costs have caused firms to demand workers from abroad, who are willing to work for lower wages, to decrease the cost of production. But this has caused unemployment in the UK, and therefore a reduction in income. The result is AD shift to the left, which decreases the rate of economic growth.

Rising unit labour costs have the potential to cause cost push inflation. This is caused by wage increases which exceed any improvement in productivity.

There are those who feel that unit labour costs matter much more than actual levels of pay and this is because ULC contains within it all total labour costs divided by...
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