Manufacturers` Export Competitiveness Staggers

Unit Labor Costs` increase rate in manufacturing was the highest last year that it has been since 1996, following a dramatic pay raise for Korean workers. Unit Labor Cost is an important indicator of a product`s price competitiveness of a nation.

In his study titled “What can we see in the recent changes in wages for Korean workers?” Professor Lee Jong-hun of Myongji University`s Management Department noted that Korea`s Unit Labor Cost increased 5.9 percent this year from a year earlier, based on the Korea won. His study was published in the August issue of “Monthly Labor Trend Review” released yesterday by the Korea Labor Institute.

Korea`s year-on-year increase rates of Unit Labor Cost have been rising over the past few years except for the three years when a financial crisis enveloped the nation. The increase rates have been recorded at 3.5 percent in 1996, -7.1 percent in 1997, -10.2 percent in 1998, -4.4 percent in 1999, 1.9 percent in 2000, and 5.2 percent in 2001.

By contrast, increase rates of Unit Labor Cost based on their national currencies last year were –1.3 percent for the U.S., -4.5 percent for Japan, and –8.8 percent for Taiwan.

U.S. dollar-based increase rates of Unit Labor Cost last year were –1.3 percent for the U.S., -7.4 percent for Japan, and –7.9 percent for Taiwan, while Korea witnessed a 9.3 percent rise in the figure.

Unit Labor Cost is calculated from dividing labor costs, such as salaries and severance payments, by labor productivity output, such as products. Labor costs generally reflect nominal wages. Unit Labor Cost is used to assess cost competitiveness of a product as well as to compare by nation.

“Wages for Korean workers have gone up constantly since 1987, exceeding the increase rate of workers` productivity,” said Prof. Lee. He added, “The excess wage hike has been rising further recently. The pay raise of 2002, in particular, is beyond the level anybody can explain from economic factors.”

As of 2002, average nominal wages for Korean workers was just over 2.03 million won, a five-fold increase from 387,000 won in 1987.

An analysis showed that in 2001 fixed wage increase rates began to exceed the increase rates of aggregate wages.

“Fixed wages accounted for 79.9 and 76.6 percent of wage increase rates in total in 2001 and 2002 respectively,” said Prof. Lee, adding “Given that the ratio was below 70 percent in the past, the recent unprecedented developments have to do with a drop in labor flexibility.” He went on to say, “A rapid pay raise is estimated to weaken price competitiveness for Korean products and this is clearly seen by comparing labor costs in manufacturing with other nations.” A source at the Korea Productivity Center said, “Wage increases after 1999 seem more than just to compensate losses from the financial crisis,” adding later, “Besides various factors and variables, economic recession this year can also be affected by excessive pay raises.”

Jin Lee leej@donga.com