Comparative labour costs are becoming more important in determining countries' export success
for most industries, according to new research by Wendy Carlin, Andrew Glyn and John van
Reenen, published in the latest issue of the Economic Journal. What is more, the exports of some
countries, notably the UK and Sweden, are more sensitive to costs than others, notably the eurozone
countries. This provides an economic explanation for the reluctance of the UK and Sweden
to participate in the monetary union. Once inside, they could no longer use what for them may be
the potent weapon of exchange rate changes to improve their export performance.
The researchers note that in current debates about sterling and the euro, the role of cost
competitiveness is of central importance. If comparative labour costs are crucial for export
performance as competition builds up in world markets, then the value of sterling is critical and
entry into the euro must be at an appropriate rate. But if trade is increasingly dominated by hightech
products, differentiated by quality, then labour costs and thus sterling's value are becoming
less significant.
Glyn and his colleagues ask two core questions:
l How much do labour costs matter in explaining export performance in 12 key industries in
the main 14 OECD countries?
l What determines the sensitivity with which exports react to cost changes across time,
industries and countries?
The results show that global competition has actually increased the importance of labour costs
over time. They also indicate that the non-euro-zone members of the European Union (the UK and
Sweden) have greater cost sensitivity than the euro-zone countries, which may explain their
reluctance to join the single currency.
The research analyses the determinants of changes in export market shares over the period 1970-
92. It looks first at the importance of relative unit labour costs - where this measure takes account
of wages and non-wage labour costs such as social security contributions, labour productivity and
the exchange rate.
Relative unit labour costs certainly do matter for exports. The researchers estimate that over the
longer run, a 10% improvement in costs - whether from wage restraint, productivity improvement
or exchange rate devaluation - leads to a 2-3% improvement in export market share. And cost
sensitivity in the UK is similar to that in the United States but larger than in its major European
competitors. Moreover, the full effects of cost differences take some five years to feed through.
Despite the growth of high-tech industries, the research indicates that labour costs have become
more important in determining exports for most industries. This is likely to be due to the growth of
global competition: the industries with the biggest increases in cost sensitivity are also those that
have faced the stiffest increases in global competition.
Even after accounting for unit labour costs, countries still exhibit strong underlying export trends.
Investment has an effect on export performance over and above its effect on costs. A more
educated workforce appears to enable a faster improvement in the quality of manufactured
products. And the export performance of individual industries appears to be boosted by
improvements in efficiency in the broader business sector. These are among the 'deep structural'
factors that seem to have enabled countries to maintain their shares of export markets.
Such underlying trends in export market shares could be disruptive inside a monetary union.
Although concerns have often been expressed about the ability of euro-zone members to keep the
growth of their unit labour costs in line with their competitors, a country with a poor underlying
export trend would find it necessary to achieve a lower growth rate of unit labour costs than its
neighbours if it was to maintain its share of export markets. In a currency union, weak trade
performance will be reflected directly in output and employment outcomes, and it is no longer
possible to stave this off by declines in the exchange rate.
Strikingly, the researchers find that the euro-zone countries have less export sensitivity to costs
than European countries that are not in the euro-zone like the UK and Sweden. This helps provide
an economic explanation of the reluctance of the latter countries to participate in monetary union.
Once inside, they can no longer use what for them may be the potent weapon of exchange rate
changes.
ENDS
Note for Editors: 'Export Market Performance of OECD Countries: An Empirical Examination of
the Role of Cost Competitiveness' by Wendy Carlin, Andrew Glyn and John van Reenen is
published in the January 2001 issue of the Economic Journal. Carlin and van Reenen are at
University College London; Glyn is at the Corpus Christi College, Oxford. The research was
supported by the Wissenschaftszentrum Berlin, the Leverhulme Trust and the Economic and
Social Research Council (ESRC).
For Further Information: contact Andrew Glyn on 01865-276704 or 01865-276700 (email:
andrew.glyn@ccc.ox.ac.uk); RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or
07768-661095 (email: romesh@compuserve.com); or RES Media Assistant Niall Flynn on 020-
7878-2919 (email: nflynn@cepr.org).