Towards a System of Multilateral Unit Labor Cost-Based Competitiveness Indicators for Advanced, Developing, and Transition Countries


WP/97/151-EAWP/97/151


.Towards a System of Multilateral Unit Labor Cost-Based Competitiveness
Indicators for Advanced, Developing, and Transition Countries.

by Anthony G. Turner and Stephen S. Golub


This paper attempts to extend the range of countries covered by the IMF's
multilateral real exchange rate indexes based on relative unit labor costs
(REER-ULCs) in manufacturing. Currently, the Fund's REER-ULCs cover 21
industrial countries, representing 68 percent of world exports and 53 percent
of world GDP in 1996. The Fund computes real exchange rates on the basis of
consumer price indexes (REER-CPIs) for a broader group of countries, but it is
generally accepted that for some purposes unit labor costs are preferable to
consumer price indexes as measures of international competitiveness, for the
reasons outlined below. This paper expands the Fund's REER-ULCs to include 23
newly industrialized, developing, and transition economies, which increases the
covered countries' share of 1996 world exports and GDP to 91 percent and 88
percent, respectively.


The paper reviews the issues in calculating and evaluating competitiveness
indicators and summarizes the IMF's approach to REER computation. It then
discusses the data sets used to expand the coverage to newly industrialized,
developing, and transition countries and presents the new indexes in graphic
form. The measures that are based on unit labor costs are compared with the
measures that are based on consumer price indexes. The strengths and weaknesses
of the expanded indexes are assessed, and the paper concludes that the ULC.
based indicators should supplement rather than replace the current system.