# can Unit Labour Cost > 100%?

I struggle to interpret this ECB chart:

Several countries show consistently $$Unit Labour Cost \gg 100%$$. For example, Lithuania.

Cost of labour $$\gg$$ Total Output, doesn't that mean than all companies are losing money?

First of all it is a unit labor index. Second of all it is not 100%. It is an index, so when you see 100 there in the graph it literally means index is 100 not 100%.

As explained by the information provided by the Euro Area Statistics:

Harmonised competitiveness indicators based on unit labour cost indices for the total economy (period averages; index: Q1 1999=100). Unit labour costs for the total economy are calculated as the ratio of compensation per employee to labour productivity. Labour productivity is measured as GDP at constant prices divided by the total number of persons employed using quarterly national accounts as published by Eurostat (period averages; index: Q1 1999=100).

can Unit Labour Cost > 100%?

Unit labor cost index can be above 100 (although this is index number not %).

Consequently, what the index measures is labor compensation $$(w)$$ divided by productivity which is in turn given by real GDP ($$Y$$) divided by the number of employees ($$L$$) thus $$Y/L$$, so they measure $$\frac{w}{Y/L}$$.

Next they index the number by dividing all values by the 1999Q1 value of $$\frac{w}{Y/L}$$ (so for example for 2002Q2 you have $$\frac{\frac{w}{Y/L}_{2002Q2}}{\frac{w}{Y/L}_{1999Q1}} \cdot 100$$).

Such index can be trivially higher than 100. Compensation to employees is part of $$w$$ so $$w but regardless of this you can easily have index much higher than 100.

For example, let us assume that in 1999Q1 the parameters of the economy are:

$$Y=100$$, $$w=20$$, $$L=20$$,

so we have $$\left(\frac{w}{Y/L}\right)_{1999Q1}=4$$.

Afterwards let us suppose that in 2002Q2 we have:

$$Y=110$$, $$w=70$$ and $$L=30$$

this will gives us $$\left(\frac{w}{Y/L}\right)_{2002Q2} \approx 19.1$$

This would give us index value for 2002Q2 of $$19.1/4 \cdot 100 = 477.5$$ which is completely plausible scenario that does not violate any economic identities or hard constraints, and cost of labor is still smaller than the output $$(w. Nor does it imply that companies are loosing money.

• "it is not 100%. It is an index, so when you see 100 there in the graph it literally means index is 100 not 100%." One could argue X is X% times the 1999 Q1 value. Commented Aug 2, 2021 at 19:33
• @Giskard well yes, but I think one should be rigorous here, because even though you are correct interpreting index number directly as a percentage value for what is measured would be incorrect, and people often have problem properly interpreting indexes so I think its appropriate to be careful with language
– 1muflon1
Commented Aug 2, 2021 at 20:10