Wage containment, competitiveness and exports

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October 3rd, 2013

The containment of labour costs being carried out by firms should be key to the Spanish economy's recovery. This adjustment should help them improve their competitiveness and therefore their export capacity and rate of job creation, something that will also help to mitigate the effect of the fall in domestic demand and to correct the economy's imbalances. However, for the moment the drop in unit labour costs does not seem to be leading to a fall in export prices, presumably a vital factor for wage adjustments to result in greater competitiveness. Is the transmission mechanism blocked?

The most direct way of verifying this is to analyse the relationship between labour costs and exports. During the period 2009-2012, labour costs fell by 7.6% while exports grew by 30.2%. Although these figures suggest a certain relationship, it is undeniable that the increase in exports could be due to other factors such as increased demand for Spanish products. To carry out a more thorough analysis, we need to verify whether this relationship also exists among different industries. If we group these industries according to the wage containment they carried out between 2009 and 2011, we can see that those Spanish firms that reduced their labour costs the most were also those that saw the greatest rise in exports. The causal relationship between containment of labour costs and export trends is consequently more difficult to reject. So why does it seem as if export prices are not responding to wage containment?

Once again, an industry-level analysis helps us answer this question. The effect of wage containment should be different in each industry: those whose production requires a higher proportion of workers (labour-intensive industries) should have benefitted more from wage containment. To verify whether this relationship exists, we have classified industries into labour-intensive and non labour-intensive. As we supposed, the biggest drop in labour costs has been in labour-intensive firms. But even more significant is the fact that the asymmetric fall in labour costs also seems to be passed on to export prices, with the rise in export prices in labour-intensive industries being lower. Moreover, exports also grew more in labour-intensive firms.

A drop in labour costs therefore seems to have helped firms avoid a greater rise in export prices, this being a crucial factor for firms to be able to improve their competitive position internationally and therefore their export capacity.