Following the tradition of decomposing accounting identities, an exercise that can still provide some very interesting results, this post will decompose the Unit Labor Costs (ULC) paths for Greece and Spain during the past couple of decades. According to Ameco ULC can be decomposed as:
ULC = Compensation per employee / Real GDP per person or ULC = (Compensation of employees / Employees) / (Real GDP / Employment)
Looking at the first relationship we can observe that since 2009 ULCs were driven mainly by compensation per employee which dropped significantly while real GDP per person exhibited much smaller contributions:
A much closer look at each factor which drives ULCs can provide important conclusions:
Compensation per employee shows a large drop since 2009 which was driven by the fall in total compensation. Although employment was much lower each year, total compensation fell even more lowering the wage costs for each remaining employee.
Real GDP per person shows a rather ‘cyclical’ behavior. Between 2008 and 2012 it fell mainly due to the general Greek recession and the drop in real GDP which was not compensated by a corresponding fall in employment (there was some form of labor hoarding). Nevertheless, during 2012 and 2013 the fall in employment was much larger which resulted into a marginal increase in real GDP per person (which can be regarded as ‘productivity per person’) and contributed to the decrease of ULCs.
Overall the ULC decrease since 2009 was accounted mainly by the large fall in employment (which has a positive impact on productivity) and the even larger drop in compensation. These forces probably fed on each other with the fall in employment and compensation eating real GDP and not allowing real GDP per person to contribute significantly to an improvement (fall) in ULCs.
The Spanish case seems to display rather different dynamics compared to Greece:
Instead of compensation per employee (which only had marginal contributions), labor productivity was the main driver of ULCs in Spain after 2009.
Although since 2009 compensation and employment show large changes, these forces managed to counteract each other pointing to the fact that compensation of current employers did not change significantly and only drops in employment lead to corresponding falls in compensation.
Real GDP per person developments show that productivity was improved mainly through the large fall of employment which was not accompanied by a corresponding drop in real GDP. Although Spain displays unemployment figures similar to Greece the drop in real GDP was only 7% between 2008 and 2013 compared to 24% for Greece.
In general it seems that the ULC improvement in Spain was accomplished on the back of the unemployed while in Greece employed persons also contributed significantly through a large fall of their compensation. This difference can probably also explain (combined with the state of the Greek banking sector) why the fall in Greek GDP was much steeper than Spain’s.
* I am also uploading the relevant excel file which might prove useful for any similar decomposition for other periphery countries such as Italy and Portugal.