Labour Productivity and Cost: Dialectics of Interdependence

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Labour Productivity and Cost: Dialectics of Interdependence

Journal Title: Демографія та соціальна економіка - Year 2013, Vol 19, Issue

Abstract

The interdependence between the concepts of productivity and labour cost in Ukraine is usually treated as unilateral – labour productivity determines the amount of earnings, hence the widespread thesis that the growth rate of wages must meet the growth rate of labour productivity. This thesis can be justified only in the case when the productivity indicators are presented in the output of physical units, and the result of the work belongs only to the employee. In market conditions, the value added is to be distributed between the employee (in the form of compensation for the work, including wage and employers’ social contributions), the owner of capital (in the form of gross profit, mixed income) and the state (in the form of taxes on production and imports). Generally, the current distribution proportion of GDP by income categories in Ukraine is similar to many European countries, where the share of employees’ compensation is typically about half of GDP. However, in Ukraine, a quarter of the compensation is provided by the social contributions of employers, whose contribution rate is the highest in Europe. The indicator «unit labour cost», which is defined as the ratio between compensation per employee and the amount of added value generated by a single employed individual, is recommended for comparison of employee remuneration with their productivity. Unit labour cost belongs to the labour intensity indicators, and along with the cost of capital (capital intensity) reflects the cost competitiveness of the economy. In Ukraine, since 2006 the unit labour cost remains almost unchanged, that is, compensation and productivity change in the same direction and appropriate rates. Because wage is the basis for payment of social security contributions of employers and the formation of employee compensation, it can be argued that it is not low productivity which causes low wages, but on the contrary – low wage causes low productivity, because it limits the volume of the generated added value. This is supported by a comparative analysis of labour productivity by economic activity, particularly in the public sector. In a global recession, the problem of labour compensation in the real sector of economy, where the remuneration is more directly related to the output, is exacerbated. However, this output depends not so much on the skill and diligence of an employee, but on technologies and the business cycle. Currently, the ways of overcoming the “great recession” are actively being discussed: to prefer austerity measures (including wage cuts), or to try to stimulate consumer demand and employment, providing the wage growth. Studies of international organizations show that limiting the wage growth does not contribute to sustainable economic recovery, and causes prolonged stagnation of production and productivity, since investment in R&D and the introduction of labour-saving technologies become meaningless. The regulation of income differentiation is especially relevant today due to a growing trend towards greater inequality of distribution and concentration of incomes in the most highly paid employees and owners of capital. This issue is beyond the scope of labour market regulation, and is resolved in the area of redistribution. One of the main policy instruments to reduce the inequalities should be the implementation of full-scale advanced taxation schemes for population income.

Authors and Affiliations

L. G. Tkathcenko

Keywords

labour productivity labour cost unit labour cost wage income redistribution of income decent work.

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EP ID EP287262
DOI 10.15407/dse2013.01.132
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