Unit Labour Costs

In this video we look at the important concept of unit labour costs – a key measure of international price competitiveness.

What do we mean by unit labour costs?

Unit labour costs are defined as the average cost of labour per unit of output produced

Formula for calculating unit labour costs is:

Total labour cost ÷ total level of output

What are the key factors that determine unit labour costs?

Rate of change of wages in the labour market

• Influenced by bargaining power of workers / strength of a country’s trade unions
• Influenced by changes in national minimum wages
• Can be affected by changes in inflation – and inflation expectations
• Also affected by amount of spare capacity in the labour market - perhaps measured by the unemployment rate

Rate of change of labour productivity

• Impact of capital investment to improve the stock of machinery
• Quality of management / worker incentives
• Rate of growth of demand – higher demand can lead to increased productivity