Mednarodno inovativno poslovanje Journal of Innovative Business and Management 1.01 Original scientific article = Izvirni znanstveni članek 1 Senior Analyst in the Analysis and research department (ARC), Banka Slovenije, Slovenska cesta 35, 1505 Ljubljana; crt.lenarcic@bsi.si How to cite this paper = Kako citirati ta članek: Lenarčič, Č. (2019). Unit Labour Cost and Unit Capital Cost Indicators in Slovenia and the Other Euro Area Countries. Mednarodno inovativno poslovanje = Journal of Innovative Business and Management, 11(2), 1-14. DOI: 10.32015/JIBM/2019-11-2-1 © Copyrights are protected by = Avtorske pravice so zaščitene s Creative Commons Attribution-Noncommercial 4.0 International License (CC BY-NC 4.0) / Creative Commons priznanje avtorstva-nekomercialno 4.0 mednarodno licenco (CC BY-NC 4.0) Mednarodno inovativno poslovanje = Journal of Innovative Business and Management ISSN: 1855-6175 Unit Labour Cost and Unit Capital Cost Indicators in Slovenia and the other Euro Area Countries Črt Lenarčič1 Abstract: Prices and costs are often the main points of interest in a typical competitiveness analysis. If studying prices cover the inflation and exchange rate perspectives, studying costs usually covers the relationship between labour costs and labour productivity. Strictly focusing on the labour side within the cost analysis does not offer a complete cost-overview of the production process. In this paper we try to complement the toolbox for assessing competitiveness in Slovenia and the rest of the euro area countries by constructing a unit capital cost index (UKC). Keywords: unit capital cost; unit labour cost; competitiveness; nominal wages JEL classification: D31, D33, E25, J30 Kazalniki stroškov dela na enoto in stroškov kapitala na enoto v Sloveniji in drugih državah evrskega območja Povzetek: Cene in stroški so pogosto najpomembnejše točke v tipični analizi konkurenčnosti. Če študijske cene pokrivajo inflacijske in tečajne perspektive, stroški študija običajno zajemajo razmerje med stroški dela in produktivnostjo dela. Strogo osredotočanje na delovno stran v analizi stroškov ne ponuja popolnega pregleda stroškov v proizvodnem procesu. V tem prispevku skušamo dopolniti orodje za ocenjevanje konkurenčnosti v Sloveniji in ostalih državah evro območja z izgradnjo indeksa stroškov kapitala na enoto (UKC). Ključne besede: stroški kapitala na enoto; stroški dela na enoto; konkurenčnost; nominalne plače JEL klasifikacija: D31, D33, E25, J30 1 Lenarčič, Č. (2019). Unit Labour Cost and Unit Capital Cost Indicators in Slovenia and the Other Euro Area Countries 1 Introduction Analysing competitiveness of a country usually leads us to study the measure of unit labour costs (ULCs) per unit of output. Looking at the share of labour in the production process (compensation of employees per gross value added), it amounts to a maximum of 60-65% for most developed countries, while for less developed countries the labour share is even lower. In this respect, a large share of the production process is unobserved when studying competitiveness only through labour costs. The aim of this paper is therefore to broaden the scope of available analytical tools in order to study competitiveness in Slovenia and the rest of the euro area by constructing a unit capital cost (UKC) indicator, based on the methodology proposed by Kumar and Felipe (2011). We believe that relying on a unit labour cost index (ULC) is not sufficient enough for giving policy recommendations that advocate wage moderation since the labour share in value added is only slightly higher than the capital share in value added in euro area countries. The results vary across countries; however, some general conclusions can still be made. The dynamics of both indexes through time are more stable and share a common path in more developed countries. In less developed euro area countries, the periods of divergence of both indexes are more evident, especially in countries that were hit the most by the global financial crisis. This was mostly due to limited wage growth in these countries.1 The structure of the paper is as follows. In section 2 we provide an overview of nominal wage growth and the ULC dynamics across euro area countries. In section 3 we construct the unit capital cost index, while in section 4 we offer a comparison of the ULC and UKC indexes in euro area countries. In section 5 we conclude. 2 Overview of the nominal wage growth and ULC dynamics in the euro area In this section we discuss the motivation of the paper in more detail by examining some stylised facts of competitiveness in the labour market in the euro area and provide the reasoning behind the implementation of the unit capital costs index (UKC). There are many measures of monitoring the international competitiveness of a particular country, however, by far the most popular and influential measure is the growth in relative unit labour costs (ULCs) (Fagerberg, 1988).2 Thus, monitoring nominal wage growth plays a key role in competitiveness determination. Nominal wage growth dispersion has been quite volatile in Europe from the mid 90's on.3 This dynamic is presented in figure 1. The unweighted standard deviation of the nominal wages across the euro area countries has been on a clear downward trend in the 90's as it fell from 10 percentage points to around 3 percentage points in the beginning of 2000's.4 The decrease of nominal wage dispersion was more or less due to the fact that most European countries entered the ERM system in 1999. The decline in the nominal wage growth dispersion was accompanied by a decline in the inflation dispersion. The nominal wage growth dispersion stayed relatively low until the beginning of the overheating period in most euro area countries that started in 2005. Several countries, especially the less developed ones, experienced high nominal wage growth during this period. The high nominal wage growth trend abruptly ended at the start of the global financial crisis. In the postcrisis period, the nominal wage growth dispersion steadied at around 2 to 3 percentage points as countries that were affected by the crisis had gone through labour market reforms, limiting wage growth as one of a variety of structural measures that were implemented during the crisis. The reasons behind wage growth restrictions were also restrictive labour market reforms during financial crisis. The indicators of competitiveness span from economic performance, profitability, single-factor and complex composite indicators (Fagerberg, 1988). Nominal wage growth is defined as the change in compensation of employees, while we use data from a constant panel of all euro area countries (except Malta) despite different entry dates of the euro area candidates during the observed period. Andersson et al. (2008) provide more on stylised facts with respect to wages in the 90's and beginning of 2000's. 2 Mednarodno inovativno poslovanje = Journal of Innovative Business and Management T T (2), T -T 2, DOI: T 0.32015/JIBM/20T 9-11 -2-1 Lenarčič, Č. (2019). Unit Labour Cost and Unit Capital Cost Indicators in Slovenia and the Other Euro Area Countries 12 1G 12 1G coi^coa>OT-cNP3^rmcoi^coa>OT- COCOCOCOOOOOOOOOOOT— T— T— T— T— T— T— t— T— 0)0)0)0)0000000000000000000 t— T— T— T— CMCSICSICSICSICSICSICSICSICSICSICSICSICSICSICSICSICSICSI Figure 1: Unweighted nominal wage growth dispersion in the euro area - standard deviation through time (in p.p.) Source: Eurostat, own calculations. Figure 2 backs up the story of high nominal wage growth rates during the overheating period, especially in the new member states (NMS) and partially in periphery countries. On the other hand, the core countries experienced a more stable nominal wage growth rate.5 With the beginning of the financial crisis the high nominal wage growth and high inflation trend was disrupted, as high wage growth figures for most of the euro area countries slowed down significantly. Even more so, a majority of the peripheral countries experienced negative wage growth in the financial crisis period. In the recovery period, despite the low inflation environment, somewhat higher nominal wage growth rates were restored, but these did not reach the pre-crisis growth levels. 18 16 ♦ LT ♦ LV O ra d) ra ra 14 12 1O B e 4 2 SK LT LU DE ♦ EE FI AT. NL FR bEL^T X>E AAT SK NL FR „-HAT F» *FI BE * NIA «CY DE •IT 0.5 1 1.5 .5 3 3.5 4 4.5 5 5.5 6 y ¿ _ i -1 0) CT ro iB ia i4 i2 io B a 4 2 ♦ LT ♦ LV ♦ EE • IE ♦ SK LT EE SK NL A LU DE ï NL j™ BEL^t • PT PR AT *eAatbe*AT AFI* BE A NIA #CY DE API ♦ EE /SI' 2. -0.5 0) 3 GR —-2 --4 -a o.5 i i.5 • PT • IE • ES 5 3 3.5 4 4.5 ♦ LT 5 5.5 6 6.5 Average y-o-y HICP inflation (in %) Figure 5: Average y-o-y nominal wage growth vs. GDP per employee growth in the euro area12 Source: Eurostat, own calculations. Syverson (2010), in contrast to quantitative measuring of productivity proxies, tried to gather the productivity determinants in a survey-based analysis. His work classifies the productivity determinants into two groups. First, he collected factors that operate primarily within firms and are under the control of their management layer. These are managerial practices, higher-quality labour and capital inputs, technology, innovation and R&D implementation, and firms' structures. Second, he mentions factors that are external to firms, such as productivity spill overs, level of competition, regulation, flexibility/rigidity of markets. He concludes, however, that it is not completely clear which one of the determinants is more important quantitatively and that further research might be needed. In discussions amongst policy makers, often the policy recommendations are to increase productivity, particularly the reforming of labour markets. Fagerberg (1988), and Felipe and Kumar (2011) add a key issue to the competitiveness discussion. They refer to Kaldor's paradox (Kaldor, 1978). Kaldor discovers that countries that had experienced the largest decline in their price competitiveness in the post-war era (i.e. highest increase in ULCs) also had the largest increase in their market share. They argue that the belief that low nominal wage growth vis-à-vis productivity growth will restore competitiveness and eventually lead back to higher output growth might be too simplistic and does not have strong empirical evidence. If the argument about the importance of ULCs as a measure of competitiveness were that straightforward, researchers would have found an unambiguous relationship between them and growth rates. However, according to Kaldor, export competitiveness depends on the dynamic evolution of money-wage and productivity. The evidence on the inverse relationship between output growth and the growth rate of ULCs is, paradoxically, inconclusive, because at times researchers have found that the fastest growing countries in terms of exports and GDP in the post-war period have at the same time experienced faster growth in their unit labour costs than other countries, and vice versa. Fagerberg (1996) revisited this enduring puzzle by analysing the period 1978-1994 and concluded that the paradox also holds for this period. CY GR ES LU SI SI PT ES T CY PI GR Note: Blue colour represents the average values in the pre-crisis period of 1997Q1-2008Q3; the red colour represents the average values of the crisis period of 2008Q4-2013Q3; while the green colour represents the average values of the post-crisis period of 2013Q4-2018Q3. The squares represent Slovenia; the diamonds represent the NMS countries (EE, LT, LV and SK); the circles represent the periphery euro area countries (CY, ES, GR, IE, IT and PT); the triangles represent the core euro area countries (AT, BE, DE, FI, FR, LU and NL). 7 2 Mednarodno inovativno poslovanje = Journal of Innovative Business and Management T T (2), T -T 7, DOI: T 0.32015/JIBM/20T 9-11 -2-1 Lenarčič, Č. (2019). Unit Labour Cost and Unit Capital Cost Indicators in Slovenia and the Other Euro Area Countries Until now, we discussed mostly containing competiveness by monitoring the ULCs. Based on the discussion above, it is clear that just monitoring ULCs would not be sufficient to conclude the complete competitiveness stance of the observed countries. Since ULCs only capture the economy's labour share in the production process, we suggest capturing the economy's capital share in the production process as well. Put differently, if ULCs provide a measure of competitiveness from the workers' side, there is no reason why one could not calculate a parallel measure of competitiveness from the capital side. This way we might get a clearer picture of what is going on in the production process of the economies in the euro area. To complement the above point of view, the shares of compensation of employees, gross operating surplus and gross fixed capital formation per gross value added show the importance of the capital share in the production process (see Figure 6). The shares of compensation of employees per gross value added are higher and more stable in more developed euro area countries.13 l.O 0.9 0.8 0.7 0.6 0.5 O.4 0.3 O.2 O.l .....Share of gross oper. surpl. in GVA in SI ---Share of GFCF in GVA in SI .....Share of gross oper. surpl. in GVA in NMS -Share of comp. of empl. to GVA in periphery countries ---Share of GFCF in GVA in periphery countries .....Share of gross oper. surpl. in GVA in core countries -Share of comp. of empl. to GVA in SI Share of comp. of empl. to GVA in NMS ---Share of GFCF in GVA in NMS ......Share of gross oper. surpl. in GVA in periphery countries -Share of comp. of empl. to GVA in core countries ---Share of GFCF in GVA in core countries _______- = = = = = --------------------------V l.O O.9 O.8 O.7 O.6 O.5 O.4 O.3 O.2 O.l O.O O.O / # # ^ # # # ^ # / ^ ^ ^ # ^ ^ J ^ J ^ Figure 6: Shares of compensation of employees, gross operating surplus gross fixed capital formation per gross value added in selected group of countries (unweighted average within groups) Source: Eurostat, own calculations. However, the literature with respect to unit capital costs is scarce. Kumar and Felipe (2011) proposed a methodology of a unit capital cost indicator (UKC) that is derived from a simple national account representation.14 Their analysis showed that, in the case of India, policy recommendations that moderate wage growth might be misleading. They base their argument that ULCs are in a declining trend since the 2000s, while the real wages increased only minimally during this period. On the other hand, labour productivity, real profit rate and UKC increased during the same period. They add that a long-term decline in labour share may have important consequences as it induces a decline in consumption, even if an economy is growing. Consequently, a mismatch between supply and demand could arise as the increase in capacity caused by the increase in investment will not be matched by an increase in consumption demand (Kumar and Felipe, 2011). Using the same methodology, Uxo et al. (2014), for example, look at ULC and UKC developments in What is also observable is that before the start of the financial crisis, the shares of compensation of employees per gross value added in NMS and periphery countries were converging toward the core countries. The convergence trend was disrupted by the financial crisis in the less developed countries. However, in recent years, only the NMS countries managed to start converging back to higher core country share levels. The periphery country shares remained low, thus suggesting the pick-up in wages in the NMS countries. Additionally, Kumar and Felipe (2011) report that the share of compensation of employees per gross value added only amounts to 20 percent in India. Consequently, they argue that in the rising ULCs could not be the only reason of losing India's competitiveness. The derivation of the UKC index comes from a simple national account representation, where the nominal gross value added is defined as the sum of labour and capital inputs, so that VAn = wnL + rnK. See Kumar in Felipe (2011) for more details. 8 13 14 Mednarodno inovativno poslovanje = Journal of Innovative Business and Management T T (2), T -T 8, DOI: T 0.32015/JIBM/20T 9-11 -2-1 Lenarčič, Č. (2019). Unit Labour Cost and Unit Capital Cost Indicators in Slovenia and the Other Euro Area Countries Greece, Spain and Portugal. They conclude that while ULCs in these countries adjusted to euro area aggregate levels, UKCs and profit margins rose. 3 Construction of the UKC index and its components Based on the discussion above we construct a unit capital cost measure by following Kumar and Felipe (2011). The UKC index measures capital efficiency in value added. The index is constructed as follows UKCn = r\ ■prodK 1n 1rP _ p (VAr/K) (VAr/K) VAr where the variable UKCn represents the nominal unit capital cost, while the variable prodK = VAr/K is the productivity of capital. The index UKC is defined as the price of capital with respect to its productivity. The variable VAr is real total value added, K is the real capital stock, rn is the ex post nominal profit rate obtained from the nominal gross operating surplus-to-nominal gross total fixed assets ratio. Variable P is the investment deflator. In order to express the UKC index in real terms, we rewrite the above equation rrK UKCr = VAr The intuition behind the UKC index is the similar as for the ULC index. Higher UKC values or the rising UKC trend dynamics would hamper an economy's competitiveness in comparison to other economies. And the other way around, if an economy's UKC index dynamic is lower than of the others, than the economy is gaining its competitiveness against others. The data entering the UKC index calculation is the real gross value index, VAr, and the investment deflator, P. Both of the indexes are directly available at Eurostat database. Other components of the UKC index have to be calculated separately. Real capital stock index, K, is proxied by gross total fixed assets in current prices index deflated by investment deflator, P. The real profit rate, rr, is defined as the nominal profit rate, rn, deflated by investment deflator, P. The nominal profit rate, rn, is defined as nominal operating surplus divided by the gross total fixed assets in current prices index. Lastly, the nominal operating surplus is defined as gross value added in current prices in millions of euros subtracted by compensation of employees in current prices in millions of euros. All of the obtained indexes have a base of 100 in 2010. We use non-seasonally adjusted data while the new UKC index has a base of 100 in 2010 as well and is presented as a 4-quarter moving average. In order to understand the UKC index better we examine the components of the UKC index. Figure 7 presents the dynamics of the calculated real UKCr indexes for each euro area country through time. The figure also presents the value of capital index (rrK), the capital productivity dynamics (prodK = VAr/K) and the gross fixed capital formation index that serves as a proxy for capital dynamics (K). Interestingly, capital productivity was relatively low in most countries before the start of the financial crisis. In some countries (for example Estonia, France, Latvia, Lithuania, Spain and Slovenia), the capital productivity even decreased during the pre-crisis period. Only later on (with the start of the financial crisis), the productivity of capital significantly improved in most of the euro area countries. There are several reasons for this. As the financial crisis began, investors' risk aversion increased. At the same time, investors demanded better efficiency per unit of invested capital in the production process. Additionally, the gross fixed capital formation index implies the unsustainable growth of investments before the crisis, i.e. in the overheating period. In the case of Slovenia, Delakorda (2011) largely attributes the unsustainable investment growth to over-investing in construction projects during the overheating period.15 We believe that similar processes took place in other euro area Investments into machinery and construction on average accounted for 80% of all investments in the euro area and Slovenia before the overheating period. The construction investments represented 50 p.p., while the investments into machinery and equipment represented the other 30 p.p. in Slovenia. In the overheating period, construction investments rose significantly and at the peak they accounted for 5% of GDP in Slovenia (Delakorda, 2011). 9 15 Mednarodno inovativno poslovanje = Journal of Innovative Business and Management T T (2), T -T 9, DOI: T 0.32015/JIBM/20T 9-11 -2-1 Lenarčič, Č. (2019). Unit Labour Cost and Unit Capital Cost Indicators in Slovenia and the Other Euro Area Countries countries, however varied in size across countries. Consequently, the capital productivity (prodK) increase after the start of the financial crisis slowed down or even decreased the UKC index in most of the euro area countries, thus increasing the capital efficiency and its competitiveness. 120 AT 110 100 so so *-comi^CT)*-comi^ ooooot-t-t-t-ooooooooo CMCMCMCMCMCMCMCMCM 120 110 100 so so yo 120 110 100 so so co m ■t- co m oí o o o o o ooooooooo CMCMCMCMCMCMCMCMCM 120 110 100 so so yo 2oo iso 180 140 120 100 so so 4o 200 iso iso 140 120 100 so so 40 co m I CT) CO lO I CT) CT) CT) O O O O O CT)CT)000000000 t-t-CMCMCMCMCMCMCMCMCM DE CO lO I CMCMCMCMCMCMCMCMCM 125 115 105 s5 s5 y5 190 í70 150 130 110 90 yo 50 30 EE t-comi^CT)t-comi^ ooooot-t-t-t-ooooooooo CMCMCMCMCMCMCMCMCM 190 1 yo 150 130 110 90 yo 50 30 140 130 120 110 100 90 so yo so ES 140 130 120 110 100 90 so yo so t-comi^CT)t-comi^ ooooot-t-t-t-ooooooooo CMCMCMCMCMCMCMCMCM 110 100 90 so yo so co m CO lO I CT) O O O O O ooooooooo CMCMCMCMCMCMCMCMCM 120 110 100 90 so yo so FR 100 90 so yo t-comi^CT)t-comi^ ooooot-t-t-t-ooooooooo CMCMCMCMCMCMCMCMCM 120 110 100 90 so yo 50 150 GR 130 90 yo 150 130 110 90 yo 50 CMCMCMCMCMCMCMCMCM 290 IE 240 190 140 90 40 290 240 190 140 90 40 120 IT 115 IT 100 95 90 s5 so 120 115 110 105 100 95 90 s5 so 210 190 1 yo 150 130 110 90 yo 50 30 210 190 17 0 150 130 110 90 yo 50 30 t-comi^CT)t-comi^ ooooot-t-t-t-ooooooooo CMCMCMCMCMCMCMCMCM t-comi^CT)t-comi^ OOOOOt-t-t-t- ooooooooo CMCMCMCMCMCMCMCMCM t-comi^CT)t-comi^ OOOOOt-t-t-t- ooooooooo CMCMCMCMCMCMCMCMCM 150 LU CO lO I CMCMCMCMCMCMCMCMCM 150 130 110 90 yo 50 iso LV 140 100 so iso 140 120 100 so so 40 130 110 100 90 so 130 120 110 100 90 so yo CMCMCMCMCMCMCMCMCM t-comi^CT)t-comi^ OOOOOt-t-t-t- ooooooooo CMCMCMCMCMCMCMCMCM 140 PT 120 100 so so t-comi^CT)t-comi^ ooooot-t-t-t-ooooooooo CMCMCMCMCMCMCMCMCM 140 120 100 so so 90 y0 50 t-comi^CT)t-comi^ ooooot-t-t-t-ooooooooo CMCMCMCMCMCMCMCMCM 150 130 110 90 y0 50 120 SK 100 s0 so 40 120 100 s0 so 40 t-comi^CT)t-comi^ ooooot-t-t-t-ooooooooo CMCMCMCMCMCMCMCMCM y0 y0 125 115 y5 10 10 10 20 110 s0 50 40 y0 10 Figure 7: Real UKC indexes (black line) and their components: gross fixed capital formation (orange line), capital value (blue line) capital productivity (green line) (2010 = 100, moving averages of last 4 quarters) Source: Eurostat, own calculations. 10 Mednarodno inovativno poslovanje = Journal of Innovative Business and Management T T (2), T -T 10, DOI: T 0.32015/JIBM/20T 9-11 -2-1 Lenarčič, Č. (2019). Unit Labour Cost and Unit Capital Cost Indicators in Slovenia and the Other Euro Area Countries 4 Comparing ULC and UKC dynamics and policy implications The comparison of the UKC index with the ULC index offers a more intuitive perspective of the UKC index within the theory of competitiveness. We compare the UKC and ULC index dynamics as well as comparing the cross-country UKC dynamics within the euro area. Figure 8 presents shows some divergence between both indexes in their dynamics in Slovenia and other euro area countries. If we focus on to the case of Slovenia, the long-term trends of both indexes seem to be relatively similar and stable, but in the short-term some divergence is observable.16 The first period during which the indexes diverged was a consequence of the accession process of the Slovene economy to the European Union in 2004 and later on into the monetary union in 2007, as Slovenia had to fulfil the Maastricht criteria. In order to keep inflation low, wages were kept low. Consequently, the real ULC index decreased by 5 p.p. in the 2000-2007 period. On the other side, the real UKC index increased by 7 p.p. in the same period. The year 2008 was marked by a public-sector wage reform that corrected the sluggishness of the wage growth in the previous years. In only two years (up to the year 2009) the real ULC index grew by almost 7 p.p., while the real UKC index was already responding to the start of the global financial crisis and consequently decreased by 6 p.p. The period of deviation of both indexes concluded in 2009. In the other euro area countries, it is clear that for the most developed euro area countries, the dynamics or trend of both indexes is more or less the same through the whole sample period of 1997Q1-2018Q3. On the other hand, the countries (such as Greece, Ireland, Cyprus, Spain and Portugal) which were hit the most by the financial crisis, have significantly decreased the labour costs during the crisis period, while the UKC indexes rose in the same period. This is visible in the figure 8 as both indexes clearly deviate from each other after the years 2011 and 2012 (thus in the height of the sovereign crisis) in the above-mentioned euro area countries. This means that the competitiveness based on labour costs improved as these countries limited wage growth as part of labour market reforms, but at the same time the competitiveness based on capital did not improve. A similar pattern, but not as significant, is observable in Slovenia after 2012, which marks the second period of diverged indexes. In 2012, a structural labour market reform was implemented in a form of wage limiting legislation ZUJF. With the pickup of the Slovene economy and gradual lifting off of wage limiting legislation in recent years, the expectation is that the divergence between the two indexes will decrease in future. The UKC index was less competitive in less developed countries in the period before the crisis. The productivity and the competitiveness of capital only improved after the start of the financial crisis. In Slovenia, the growth of the real UKC index was amongst the highest in the whole observed period of 1997Q1-2018Q3 with 15.2 p.p., while the unweighted average in the euro area countries accounted for 9.8 p.p. Most of the UKC index growth stems from the transition and overheating periods, as the index increased by 18.9 p.p. In the financial crisis and its aftermath (2008Q3-2018Q3) the real UKC index decreased by 3.6 p.p., suggesting a more competitive dynamic of the Slovene economy, even in comparison to other countries (see Table 1). The dynamics of the Slovene real UKC index in recent years came close to the dynamics of more developed countries such as Germany, Austria and France. On the other hand, the competitiveness of capital, based on the UKC index, is worsening particularly in Ireland and Spain. Figure 8 displays some symmetricity between dynamics of the ULC and UKC indexes. The reason behind it is that both indexes have gross value added (or GDP) in the denominator, meaning that if the compensation of employees is staggering, while gross value added is increasing, the capital (operating surplus) is growing that much faster. The basic assumption is that the compensation of employees is increasing in line with the growth of gross value added. In this case, the cost of growth in compensation of employees is constant in relative terms to gross value added, which is observable in most developed economies. A complete symmetricity between both indexes would be achieved if we would consider the same price deflators in both indexes, but this is not a realistic assumption. 11 16 Mednarodno inovativno poslovanje = Journal of Innovative Business and Management T T (2), T -T 11, DOI: T 0.32015/JIBM/20T 9-11 -2-1 Lenarčič, Č. (2019). Unit Labour Cost and Unit Capital Cost Indicators in Slovenia and the Other Euro Area Countries IIS 110 10S 100 ss so ss so ys AT t-comi^CTit-comi^ OOOOOT-T-T-T- ooooooooo CMCMCMCMCMCMCMCMCM 11S 110 10S 100 ss so ss so ys 11 s BE ys t-comi^CTit-comi^ OOOOOT-T-T-T- ooooooooo CMCMCMCMCMCMCMCMCM 11 S ys 140 130 120 110 100 so so yo so t-comi^CTit-comi^ OOOOOT-T-T-T- ooooooooo CMCMCMCMCMCMCMCMCM 140 130 120 110 100 so so yo so 120 11S DE 1oo ss so ss so t-comi^CTit-comi^ OOOOOT-T-T-T- ooooooooo CMCMCMCMCMCMCMCMCM 120 11 s 110 ios 100 ss so ss so t-comi^CTit-comi^ OOOOOT-T-T-T- ooooooooo CMCMCMCMCMCMCMCMCM 140 120 100 so so 4o 120 110 100 so so ES 120 TS 110 100 so so t-comi^CTit-comi^ OOOOOT-T-T-T- ooooooooo CMCMCMCMCMCMCMCMCM 130 120 110 100 so so yo FI t-comi^CTit-comi^ OOOOOT-T-T-T- ooooooooo CMCMCMCMCMCMCMCMCM 130 120 110 100 so so yo 10S 100 ss so ss so ys t-comi^CTit-comi^ OOOOOT-T-T-T- ooooooooo CMCMCMCMCMCMCMCMCM 110 10S 100 ss so ss so ys 120 110 100 so so yo so GR t-comi^CTit-comi^ OOOOOT-T-T-T- ooooooooo CMCMCMCMCMCMCMCMCM 120 110 100 so so yo so 140 IE 120 100 so so t-comi^CTit-comi^ OOOOOT-T-T-T- ooooooooo CMCMCMCMCMCMCMCMCM 140 120 100 so so 110 10S 100 ss so ss so ys yo t-comi^CTit-comi^ OOOOOT-T-T-T- ooooooooo CMCMCMCMCMCMCMCMCM 110 10S 100 ss so ss so ys yo t-comi^CTit-comi^ OOOOOT-T-T-T- ooooooooo CMCMCMCMCMCMCMCMCM 140 130 120 110 100 so so yo so LU t-comi^CTit-comi^ OOOOOT-T-T-T- ooooooooo CMCMCMCMCMCMCMCMCM 140 130 120 110 100 so so yo so LV so so 4o t-comi^CTit-comi^ OOOOOT-T-T-T- ooooooooo CMCMCMCMCMCMCMCMCM 140 120 100 so so 4o 110 100 so so yo so NL t-comi^CTit-comi^ OOOOOT-T-T-T- ooooooooo CMCMCMCMCMCMCMCMCM 120 110 100 so so yo so 110 100 so so yo so so PT t-comi^CTit-comi^ OOOOOT-T-T-T- ooooooooo CMCMCMCMCMCMCMCMCM 120 110 100 so so yo so so SI 100 so so yo so t-comi^CTit-comi^ OOOOOT-T-T-T- ooooooooo CMCMCMCMCMCMCMCMCM 120 110 100 so so yo so 120 110 100 so so yo so so 4o SK 110 100 so t-comi^CTit-comi^ OOOOOt-T-T-T- ooooooooo CMCMCMCMCMCMCMCMCM so yo so so 4o ss ss ss 110 4o yo yo 110 4o 4o 110 Figure 8: Comparison of the real (continuous line) and nominal (dotted line) UKC (blue line) and ULC (orange line) dynamics across countries (2010 = 100, moving averages of last 4 quarters) Source: Eurostat, own calculations. 12 Mednarodno inovativno poslovanje = Journal of Innovative Business and Management T T (2), T -T 12, DOI: T 0.32015/JIBM/20T 9-11 -2-1 Lenarčič, Č. (2019). Unit Labour Cost and Unit Capital Cost Indicators in Slovenia and the Other Euro Area Countries Table 1. UKC index growth in euro area countries in different periods (in p.p.). country 1997Q1-2018Q3 1997Q1-2008Q3 2008Q3-2018Q3 EE 42.19 32.84 8.68 IE 30.93 -3.48 33.37 LT 24.25 11.11 12.64 LU 21.65 8.20 14.71 PT 15.62 6.67 8.66 SI 15.15 18.87 -3.57 LV 14.91 10.59 4.50 SK 13.34 20.10 -6.99 NL 10.11 8.02 1.68 DE 8.34 15.53 -8.15 ES 3.84 -10.13 13.23 GR 2.71 0.32 2.23 AT 2.45 8.66 -6.56 BE 0.89 -0.13 0.59 FI -1.12 -4.18 3.16 IT -1.44 1.32 -2.95 FR -8.34 -0.52 -8.25 CY -18.52 -24.43 5.65 Unweighted average 9.83 5.52 4.04 (Source: Eurostat, own calculations) From the economic policy perspective, it is important for policy makers to track labour market competitiveness as well as the capital market competitiveness. Solely monitoring the ULC indexes (and their derivation) and giving policy advice based only on the labour market might be to simplified and also misleading if the capital side of the production process is neglected.17 Several studies have also pointed out, that amongst the factors that influence international competitiveness and growth across countries could be technological competitiveness and the ability to compete on delivery. The crucial role is played by investments, and factors influencing investments that create new production capacities (Fagerberg, 1988). Having a full competitiveness toolbox with ULCs and UKCs would provide a good overview of an "internal" market competitiveness stance (cost inflation analysis perspective) in monitoring the production process with capital creation alongside the labour market evolution. If both indexes move in line through time, this would suggest stability of shares of production factors (compensation of employees per gross value added and gross operating surplus per gross value added) in the production process. In order to maintain stable level of those shares, the economic policies would/should have to strive towards "fair" structural reforms that promote higher productivity and value added as a whole, and not just by slashing the wage aspect of the production process. 5 Conclusions If the ULC index represents the competitiveness of an economy through the labour market, then the UKC index could represent the competitiveness of an economy through the capital market. In this paper we tried to present a new viewpoint of following economic competitiveness with the help of implementing the UKC index methodology. By doing this, we try to complete the competitiveness toolbox. We show that the dynamics of both indexes are relatively similar across euro area countries. However, some countries experienced some deviation between the two indexes in the last five years. This is especially evident for the countries that the global financial crisis hit the most. Consequently, they were subject to significant structural reforms, especially in labour markets. Additionally, we show that the 17 Also shown by Uxö et al. (2014) in the case of Spain, Greece and Portugal, and Kumar and Felipe (2011) analysis in the case of India. 13 Mednarodno inovativno poslovanje = Journal of Innovative Business and Management T T (2), T -T 13, DOI: T 0.32015/JIBM/20T 9-11 -2-1 Lenarčič, Č. (2019). Unit Labour Cost and Unit Capital Cost Indicators in Slovenia and the Other Euro Area Countries competitiveness of capital for Slovenia was staggering in comparison to other euro area countries. After the crisis, the productivity of the capital picked up and thus increased the efficiency of capital in the production process. References 1. 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Estimation of the Balassa-Samuelson Effect in Slovenia. Ljubljana: Analitsko raziskovalni center Banke Slovenije. 14 Mednarodno inovativno poslovanje = Journal of Innovative Business and Management T T (2), T -T 14, DOI: T 0.32015/JIBM/20T 9-11 -2-1