Unit Labor Costs Matter Much More Than Actual Levels of Pay

Nga Discuss the view that unit labour costs matter much more than actual levels of pay. Unit  labour  costs is the  cost  of  labour  per  unit  of. It is determined by the growth of wages and the rate of growth of  labour  productivity. Labour costs include the complete range of costs employers incur when they employ workers. They include not only wages but also the cost of recruiting and training workers, national insurance contributions, redundancy payments and benefits in kind. Wages do, however, constitute over 80% of total labour cost.So they, together with productivity, are the two key influences on unit labour costs. If productivity increases at a faster rate than the wages paid, unit labour costs are likely to fall. During the recession, the UK has seen falls in real wage growth. If real wages are lower, firms may   be more willing to employ labour rather than capital. In other words low wage growth means labour is relatively more attractive than usual. Therefore with lower labour costs, firms are willing to employ more workers and labour intensive production methods.If a country’s firms have higher unit labour costs than firms in rival countries, this may make their products less price competitive. The country will be unlikely to benefit from increased exports, as a result of a depreciating exchange rate. The increasing unit labour costs have caused firms to demand workers from abroad, who are willing to work for lower wages, to decrease the cost of production. But this has caused unemployment in the UK, and therefore a reduction in income. The result is AD shift to the left, which decreases the rate of economic growth.Rising unit labour costs have the potential to cause cost push inflation. This is caused by wage increases which exceed any improvement in productivity. There are those who feel that unit labour costs matter much more than actual levels of pay and this is because  ULC contains within it all total labour co sts divided by output. This includes wages, national insurance and redundancy payments. Wages are only a component of ULC  , which leads people to feel that it does not matter as much; it is only the amount paid to a worker for working a certain number of hours.Unit labour costs can be said to matter more because it  helps determine productivity. If total labour costs are at ? 5000 and output is 5000 units, then ULC would measure at ? 1. If however output increased to 10,000 units, then ULC would measure at 50p. This means that it now costs less per worker and also shows that workers are now more productive. On the other hand, if companies were becoming less productive, then  ULC can help governments decide whether to apply supply-side policies or not.An example of this would be education and training, if a worker gains more knowledge in the field of work, then they should be able to produce more units than they did before. What can be also be noted from the graph is that  t here is a reduction of inflation from A to B when increasing productivity. Therefore ULC are very important and matter more than wages because it helps determine productivity, inflation and helps with decisions on supply-side policies. ULC does have some flaws however in thatsupply-side policies are not entirely determined by ULC, it can also be used to lower inflation as shown in the above graph.While it is agreed that ULC is important, some would argue that wages are more so. Wages make up 80 per cent of ULC  and may suggest that wages determine ULC. If wages increased, then total labour costs would also increase. If total labour costs were at ? 20,000 and output was at 10,000, then ULC would measure at ? 2. If however total labour costs increased to ? 50,000 due to because of wages, and the level of output stayed the same, then ULC would measure at ? 5. This suggests a decrease in productivity as well as a relatively low level of international competitiveness.In countries where minimum wage doesn’t exist, wages may be considerably lower and the result from ULC would suggest high productivity but would not consider infringement of rights. To summarise, wages are more important than ULC because not only is it a significant proportion of ULC itself and can change the result independently , but it alsoallows people to see their independent income; wages are more important to consumers  whereas ULC is more important to firms.In most developed countries however, there exists a minimum wage so wage abuse is not common. Also, the figures used previously assume that output remains at a fixed level, in the case that it doesn’t shows more factors involved and thus weakens the actual levels of pay’s effect. Actual levels of pay are important, but more so to the individual than to the collective. ULC allows a broader scope of how the country is performing economically compared to others and is therefore more important.