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Federal
The three
countries
(Canada,
United
States, and France) with smaller increases
in unit-labor
costs experienced
unit-value
increases somewhat
larger than their unitlabor-cost
increases;
the four
countries
(Italy, United
Kingdom,
Japan, and West
Germany)
with larger unit-labor-cost
increases experienced
unit-value increases that
were smaller than their unit-labor-cost
increases. This rather puzzling phenomenon
might have been caused by changes in raw
materials
prices,
interest
rates, or other
producer
costs or by changes
in profit
margins. The profit margin explanation
is
consistent with reasoning that manufacturers
experiencing
relatively
small increases
in
unit-labor
costs may have been able to
increase their profit margins, while those
burdened
with relatively large increases in
unit-labor costs may have been compelled to
reduce profit margins to remain competitive.
Despite
its enhanced
price-competitive
position, the United States lost market share.
The U.S. share of exports from 15 major
industrial countries
declined from 20.3 percent in 1967 to 15.5 percent in 1979 (see
table 3). In the same period, France, West
Germany, Italy, and Japan all increased their
market shares, despite their disadvantages of
substantially
greater increases in unit·labor
costs and unit values of exports. Adding to
the mystery, Canada also lost market share
despite
enhanced
price
competitiveness.
Perhaps the composition
of U.S. export goods
and U.S. market
areas played important
roles in the loss of market share. It may be
that demand for particular U.S. goods or the
demand from particular
market areas grew
less rapidly than the average experienced
by other
major exporting
nations.
The
United States experienced
a sharp reduction
of market share-from
20.3 percent to 15.7
percent- in the six years from 1967 to 1973,
but little net change in the following six
years.
Price competitiveness
improved
in
both periods,
but the improvement
was
greater in the earlier period, prior to the
time that the market
share decline
was
arrested. Perhaps the earlier period's increase
in price competitiveness,
acting with a lag,
stanched the decline of market share.
U.S. Economic
Performance
There is ample reason for dissatisfaction
with U.S. international
economic
performance.
Improved
price
competitiveness
failed to yield an increased market share; at
best, it can be argued that the sharp decl ine
in market share prior to 1973 was arrested.
Moreover,
the improvement
in price competitiveness was achieved in two undesirable
ways.
First, U.S. unit-labor
costs rose more
slowly than foreign costs because of slow increases in nominal compensation
rather than
the preferred
avenue of rapid increases in
labor productivity.
Faster increase in labor
productivity
would
have been a better
avenue, as it would have been more likely
also to lead to faster gains in real compensation, which is a rough proxy for worker
real income. But because the United States
had the smallest increase in labor productivity in the period, it also had the smallest
gain in real (inflation-adjusted)
compensa-
the international
terms of trade in the sense
that a depreciated
dollar means the United
States must export more to pay for an unchanged amount of imported goods.
Shares of World Exports
United
States
Period
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
16.8
15.8
15.7
16.7
17.2
16.8
15.3
15.0
15.5
are defined
to the United
SOURCE:
West
Germany
8.1
7.8
7.8
8.3
8.4
8.9
9.1
8.7
9.7
9.2
9.3
9.3
10.0
20.3
20.1
19.3
18.4
a. World exports
exports
France
of Manufactures,
Conclusion
tion (see table 1, columns 2 and 7).
Dollar depreciation
was the second avenue
that led the United States to enhanced price
competitiveness.
The U.S. dollar fell in value
relative to the currencies of Japan, France,
The fact that
productivity
in manufacturing
has been growing slower in the
United States than abroad could be expected
to give a price advantage to foreign firms.
However, that has not been the case. Relatively slow increases in U.S. labor compensation and depreciation
of the U.S. dollar
against some currencies
improved the price
competitiveness
of the United States
in
manufactured
goods.
Improved price competitiveness
notwithstanding, the United States has seen its share
of the world market for manufactured
goods
shrink. This surprisingly dismal performance
compounds
one injury with another.
Increased price competitiveness
was obtained
in undesirable
ways, but the hard-won ad-
and West Germany between 1967 and 1979.
Currency depreciation
is undesirable in that
it exacerbates
inflation by making imported
goods more expensive. Moreover, it worsens
vantage failed to lead to a larger market
share. The cause for this failure to exploit
the improved
relative
price position
remains a puzzle.
18.7
18.6
18.7
19.0
19.3
Italy
19.6
21.0
6.7
7.0
7.0
6.9
7.0
7.3
6.5
20.6
19.4
6.5
7.1
19.7
6.8
7.3
7.3
8.0
19.9
19.8
19.9
as the sum of the exports
from
Japan
9.4
11.6
10.8
10.7
10.1
10.5
9.6
9.0
8.4
10.2
10.7
11.2
12.5
12.8
12.3
13.8
13.0
14.1
14.8
14.9
13.1
8.9
8.4
8.9
9.1
9.3
15 major
Federal Reserve Bank of Cleveland
industrial
countries,
Canada
5.7
6.1
6.0
6.0
5.8
5.5
4.8
4.3
4.1
4.5
4.4
4.3
4.0
Research
BULK RATE
U.S. Postage Paid
Cleveland,OH
Department
P.O. Box 6387
Cleveland,OH
44101
Address correction
Permit No. 385
requested
u.s. and
of Commerce.
Foreign Productivity and Competitiveness
by Gerald H. Anderson
Although
the level of productivity
is very
high in the United
States,
productivity
growth has slowed sharply in recent years.
Moreover, growth of productivity
is significantly slower in the United States than in
the other major industrialized
nations. For
example, annual real growth in gross national
product per employed worker in the United
States slowed from 1.9 percent in 1963-73
to only 0.1 percent in 1973-79. In the latter
period, Japan's productivity
growth was 3.4
per
and
year, West Germany's,
3.2
France's,
2.7 oercent."
This
Economic Commentary compares U.S. and
foreign productivity
growth rates, explores
the relationship
between productivity growth
and changes
in international
price competitiveness,
and examines
the impact on
the
U.S. share
of world
manufactured
goods exports.
This study yields some surprising results.
With productivity
growth being slower in
the United States than abroad, one might expect that costs and prices of U.S. export
goods would rise faster than the costs and
1. See Economic Report of the President, Jan uary
1980, p, 85, Table 15.
Address Change
Correct as shown
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o
including
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States.
U.S. Department
1967-79a
United
Kingdom
March 9, 1981
~£QI)omicCommentary
percent
percent,
Table 3
Reserve Bank of Cleveland
Federal
Reserve Bank of Cleveland,
Department,
P.O. Box 6387, Cleveland,
OH 44101.
Gerald Anderson is an economic advisor, Federal
ReserveBank of Cleveland.
The views stated herein are those of the author
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors of
the Federal ReserveSystem.
prices
of
foreign
goods,
with
the
result
that American goods would lose price competitiveness. However, exchange-rate
changes
and a slower increase in wages have offset
the slower growth in U.S. productivity,
so
that prices of U.S. goods are rising less
rapidly than those of foreign goods. The improvement in U.S. competitiveness
has helped
arrest the sharp decline in the share of U.S.
manufactured
goods in world markets. However, U.S. manufactured
goods have not regained their earlier position of relative importance in world export markets.
Slowdown
in Productivity
Growth
Productivity
is a ratio of outputs to inputs, and it reflects the quality of inputs
to production
and the skill with which they
are combined.
Total factor productivity
is
the ratio of outputs
to inputs of all the
factors of production-labor,
capital equipment,
and land. Instead of total factor
productivity,
this study examines
the productivity,
and particularly
the increases
in productivity,
of just one factor-labor.
Labor productivity-output
per man-hour
or GNP per employed worker-is
used here
because labor productivity
data are readily
available for several countries
and because
labor costs are a high proportion
of total
costs in manufacturing.
Growth
in labor productivity
in the
U.S. private
business
sector
has slowed
sharply since 1968 from the average rate
Chart 1
Output per Man-Hour in the U.S. Private Business Economy, 1947-78
1967 = 100
Index
140
""",,'
",,'
120
""
./ ""
.",,' ~ {}
.....•.
{)?
~/
100
••••••
••••••
./~;
"""'..;
80
........
.;;?r'......•.•.•.••••.•
.....
60
"
..'.....
...,.([1
viously, international differences in rates
of home currency price changes can be
altered when adjusted for changes in cur-
.. ~'
<
••••••••••••••••••
••••••••
~~.
~r•••••••••••
t'l
1950
--
Productivity
1955
1965
1960
1968 1970
at constant 3.2% annual growth rate
SOURCE: American Productivity
Bureau of Labor Statistics.
1975
Actual productivity
Center, Productivity Perspectives; based on data from U.S.
of the preceding 20 years (see chart
1).
The subsectors of the private business
sector have not behaved uniformly.
The
productivity
growth rates of the mining
and construction subsectors, for example,
have been substantially slower, while that of
the communications subsector has been substantially faster, than the productivity growth
rate of the entire private business sector.
The manufacturing subsector, which is
the primary focus of this article, has exhibited a persistent slowing in productivity
growth that began before the slowing in
the private business sector as a whole.
Average annual growth of labor productivity
in manufacturing was 3.2 percent
from 1948 to 1955, 2.8 percent from 1955
to 1965, 2.4 percent from 1965 to 1973,
and 1.5 percent from 1973 to 1978.2
so many links in the chain from productivity
growth
to exchange-rate-adjusted
price changes makes the connection between
the two rather loose. Productivity growth
combines with labor compensation increases
to determine changes in unit-labor costs.
Unit-labor-cost
changes, together
with
changes in unit costs of materials and capital,
determine changes in total cost of production. Changes in production
costs plus
changes in profit margins determine changes
in market price, measured in home country
currency.
International
comparisons, of
course, require that prices measured in different currencies be converted to a common
currency. Such conversions are done at the
rate of exchange between currencies. Ob-
Between the fourth quarter of 1978 and
the fourth quarter of 1980, productivity
grew at only a 0.7 percent annual rate, but
much of that poor performance probably
is a cyclical phenomenon. Productivity
often is adversely affected when output
falls, because firms reduce output before
they cut employment; during this period,
output in manufacturing fell at a 1.1 percent
annual rate.
Productivity Growth, Price
Competitiveness, and Market Share
The relationship between productivity
growth and international price competitiveness contains several links. The existence of
2. See Economic Report of the President, January
1980, p. 85, Table 16.
rency exchange rates.
A nation's price competitiveness in exporting is said to have improved if its export prices rise less than those of other
nations. Improvement in price competitiveness can be reflected in growth of a nation's
share of the world market for exports, but
this is not always the case. If a firm, or a
nation, is able to reduce its price for a product, relative to the price charged for a similar
product by other firms or nations, the price
cutter will enhance its ability to sell the
product. The responsiveness to a given price
reduction is called the price elasticity of
demand for the product and is measured
as the ratio of the percentage change in
quantity sold to the percentage change
in price, assuming other factors affecting
demand are unchanged. Elasticity, however,
can differ greatly among products; while it
can be asserted th at a (rei ati ve) p rice reduction enhances a seller's price competitiveness, more information would be needed to
specify the magnitude of the increase in sales
and market share.
The impact on sales and market share of
a change in price competitiveness is even
more difficult to assessfor a broad category
of goods, such as manufactured goods, because of differences in the price elasticities
of different goods. Suppose, for example,
that prices for some goods decl ine, wh ile
prices for other goods rise, with the net
result being a reduction in a nation's price
level relative to prices of goods from competitors. Although the nation's overall price
competitiveness will be enhanced, it might
not capture a larger share of the overall
export market if the price elasticity is high
for products whose prices have risen but low
for products whose prices have fallen.
Factors other than changes in price
competitiveness can also alter market shares.
A nation's overall market share will change
if the nation specializes in goods whose
demand is growing faster or slower than the
average for other goods or if its exports are
concentrated
in geographic areas whose
demands for imports are growing faster or
slower than average.
The United States had the slowest growth
of productivity in manufacturing from 1967
to 1979 of seven major nations, including
Canada, Japan, France, West Germany,
Italy, and the United Kingdom (see table 1).
These nations together account for 83 percent of the GNP of the 23 industrialized
nations that are members of the Organization for Economic Cooperation and Development (OECD) and account for most of
the world's production
of manufactured
goods. In this 12-year period, productivity
of manufacturing
employees increased a
total of only 29 percent in the United States,
compared with increases ranging from 56
percent to 131 percent in the other countries (except the United Kingdom, which
at 33 percent barely exceeded the performance of the United States).
In the same period, hourly compensation
of manufacturing employees also increased
at a substantially slower pace in the United
States than abroad. Hourly compensation
is a broad measure of labor cost, because it
incl udes wages, the cost of fringe benefits,
and other employer expenses such as social
security taxes, workmen's compensation
insurance premiums, and unemployment
compensation fund contributions. The data
are based on total cost per hour worked
and are nominal increases, without adjustment for inflation.
Table 1
Productivity,
Compensation, and Unit-Labor Costs in Manufacturing,
Output per
Hourly
man-hour, compensation,
percent
percent
change
change
Country
United States
United Kingdom
Canada
Italy
West Germany
France
Japan
29
33
56
88
84
90
131
151
430
213
670
237
354
434
Unit-labor
cost in
national
currency,
percent
change
94
299
100
310
84
139
132
Exchange
rate,a
percent
change
1967-79
Unit-labor
cost in U.S.
Real
dollars,
compensation,
percent
percent
change
change
-22.8
-7.9
94
208
84
15
48
42
-24.9
117.5
15.6
66.0
208
299
177
284
134
103
76
104
a, Price in U.S, dollars of one unit of national currency.
SOURCE:
U. S. Department
Productivity
of Commerce.
increases and hourly
com-
pensation increases have opposing influences
on unit-labor cost: productivity
increases
reduce unit-labor cost, and compensation increases raise unit-labor cost. In the 1967-79
period, all seven countries experienced compensation increases that were larger than
their productivity
increases, raising unitlabor costs by amounts ranging from 84
percent to 310 percent. The United States
experienced the second smallest increase
in unit-labor
cost, because the relative
slowness of its compensation
increases
outweighed the meagerness of its productivity gains.
Exchange-rate changes in this period
were substantial. The German mark more
than doubled in value relative to the U.S.
dollar, while the value of the Italian lira
fell by one-fourth relative to the U.S. dollar.
The Japanese, British, and French currencies
also experienced large changes, while the
Canadian
unit
had a smaller change
(see table 1).
When the unit-labor-cost increases cited
above are adjusted for exchange-rate changes,
home currencies, rose slightly less than U.S.
costs when the depreciation of the Canadian
doll ar is taken into account.
Labor costs constitute the major share of
total costs of production in manufacturing,
so it might be expected that increases in
total costs, and in prices, would be in proportion to unit-labor-cost increases. If indexes of the unit value of exports are used
as proxies for price indexes, they suggest
that prices of manufactured export goods
increased roughly in proportion to increases
in unit-labor costs in manufacturing (see
table 2). The United States, which showed
the second smallest increase in unit-labor
costs, also experienced the second smallest
increase in unit value of exports.
Table 2 Unit-Labor Costs and Unit
Values of Manufactures Exports, 1967-79
Unit-labor
cost in
U.S. dollars
Country
Percent
increase
84
U.S. unit-labor-cost increases are found to be ' Canada
United States
94
much smaller than in other countries except
France
177
Canada. The U.S. increase, for example, is
Italy
208
only about one-third the size of the Japanese
United
Kingdom
208
and German increases and one-half of the
284
Italian, British, and French increases. Ca- Japan
West Germany
299
nadian unit-labor costs, which rose slightly
more than U.S. costs when measured in
SOURCE: U.S. Department
Rank
Unit value
in U.S. dollars
Percent
increase
Rank
1
2
3
4
104
140
194
177
1
2
5
4
4
6
7
200
172
221
6
3
7
of Commerce.
Chart 1
Output per Man-Hour in the U.S. Private Business Economy, 1947-78
1967 = 100
Index
140
""",,'
",,'
120
""
./ ""
.",,' ~ {}
.....•.
{)?
~/
100
••••••
••••••
./~;
"""'..;
80
........
.;;?r'......•.•.•.••••.•
.....
60
"
..'.....
...,.([1
viously, international differences in rates
of home currency price changes can be
altered when adjusted for changes in cur-
.. ~'
<
••••••••••••••••••
••••••••
~~.
~r•••••••••••
t'l
1950
--
Productivity
1955
1965
1960
1968 1970
at constant 3.2% annual growth rate
SOURCE: American Productivity
Bureau of Labor Statistics.
1975
Actual productivity
Center, Productivity Perspectives; based on data from U.S.
of the preceding 20 years (see chart
1).
The subsectors of the private business
sector have not behaved uniformly.
The
productivity
growth rates of the mining
and construction subsectors, for example,
have been substantially slower, while that of
the communications subsector has been substantially faster, than the productivity growth
rate of the entire private business sector.
The manufacturing subsector, which is
the primary focus of this article, has exhibited a persistent slowing in productivity
growth that began before the slowing in
the private business sector as a whole.
Average annual growth of labor productivity
in manufacturing was 3.2 percent
from 1948 to 1955, 2.8 percent from 1955
to 1965, 2.4 percent from 1965 to 1973,
and 1.5 percent from 1973 to 1978.2
so many links in the chain from productivity
growth
to exchange-rate-adjusted
price changes makes the connection between
the two rather loose. Productivity growth
combines with labor compensation increases
to determine changes in unit-labor costs.
Unit-labor-cost
changes, together
with
changes in unit costs of materials and capital,
determine changes in total cost of production. Changes in production
costs plus
changes in profit margins determine changes
in market price, measured in home country
currency.
International
comparisons, of
course, require that prices measured in different currencies be converted to a common
currency. Such conversions are done at the
rate of exchange between currencies. Ob-
Between the fourth quarter of 1978 and
the fourth quarter of 1980, productivity
grew at only a 0.7 percent annual rate, but
much of that poor performance probably
is a cyclical phenomenon. Productivity
often is adversely affected when output
falls, because firms reduce output before
they cut employment; during this period,
output in manufacturing fell at a 1.1 percent
annual rate.
Productivity Growth, Price
Competitiveness, and Market Share
The relationship between productivity
growth and international price competitiveness contains several links. The existence of
2. See Economic Report of the President, January
1980, p. 85, Table 16.
rency exchange rates.
A nation's price competitiveness in exporting is said to have improved if its export prices rise less than those of other
nations. Improvement in price competitiveness can be reflected in growth of a nation's
share of the world market for exports, but
this is not always the case. If a firm, or a
nation, is able to reduce its price for a product, relative to the price charged for a similar
product by other firms or nations, the price
cutter will enhance its ability to sell the
product. The responsiveness to a given price
reduction is called the price elasticity of
demand for the product and is measured
as the ratio of the percentage change in
quantity sold to the percentage change
in price, assuming other factors affecting
demand are unchanged. Elasticity, however,
can differ greatly among products; while it
can be asserted th at a (rei ati ve) p rice reduction enhances a seller's price competitiveness, more information would be needed to
specify the magnitude of the increase in sales
and market share.
The impact on sales and market share of
a change in price competitiveness is even
more difficult to assessfor a broad category
of goods, such as manufactured goods, because of differences in the price elasticities
of different goods. Suppose, for example,
that prices for some goods decl ine, wh ile
prices for other goods rise, with the net
result being a reduction in a nation's price
level relative to prices of goods from competitors. Although the nation's overall price
competitiveness will be enhanced, it might
not capture a larger share of the overall
export market if the price elasticity is high
for products whose prices have risen but low
for products whose prices have fallen.
Factors other than changes in price
competitiveness can also alter market shares.
A nation's overall market share will change
if the nation specializes in goods whose
demand is growing faster or slower than the
average for other goods or if its exports are
concentrated
in geographic areas whose
demands for imports are growing faster or
slower than average.
The United States had the slowest growth
of productivity in manufacturing from 1967
to 1979 of seven major nations, including
Canada, Japan, France, West Germany,
Italy, and the United Kingdom (see table 1).
These nations together account for 83 percent of the GNP of the 23 industrialized
nations that are members of the Organization for Economic Cooperation and Development (OECD) and account for most of
the world's production
of manufactured
goods. In this 12-year period, productivity
of manufacturing
employees increased a
total of only 29 percent in the United States,
compared with increases ranging from 56
percent to 131 percent in the other countries (except the United Kingdom, which
at 33 percent barely exceeded the performance of the United States).
In the same period, hourly compensation
of manufacturing employees also increased
at a substantially slower pace in the United
States than abroad. Hourly compensation
is a broad measure of labor cost, because it
incl udes wages, the cost of fringe benefits,
and other employer expenses such as social
security taxes, workmen's compensation
insurance premiums, and unemployment
compensation fund contributions. The data
are based on total cost per hour worked
and are nominal increases, without adjustment for inflation.
Table 1
Productivity,
Compensation, and Unit-Labor Costs in Manufacturing,
Output per
Hourly
man-hour, compensation,
percent
percent
change
change
Country
United States
United Kingdom
Canada
Italy
West Germany
France
Japan
29
33
56
88
84
90
131
151
430
213
670
237
354
434
Unit-labor
cost in
national
currency,
percent
change
94
299
100
310
84
139
132
Exchange
rate,a
percent
change
1967-79
Unit-labor
cost in U.S.
Real
dollars,
compensation,
percent
percent
change
change
-22.8
-7.9
94
208
84
15
48
42
-24.9
117.5
15.6
66.0
208
299
177
284
134
103
76
104
a, Price in U.S, dollars of one unit of national currency.
SOURCE:
U. S. Department
Productivity
of Commerce.
increases and hourly
com-
pensation increases have opposing influences
on unit-labor cost: productivity
increases
reduce unit-labor cost, and compensation increases raise unit-labor cost. In the 1967-79
period, all seven countries experienced compensation increases that were larger than
their productivity
increases, raising unitlabor costs by amounts ranging from 84
percent to 310 percent. The United States
experienced the second smallest increase
in unit-labor
cost, because the relative
slowness of its compensation
increases
outweighed the meagerness of its productivity gains.
Exchange-rate changes in this period
were substantial. The German mark more
than doubled in value relative to the U.S.
dollar, while the value of the Italian lira
fell by one-fourth relative to the U.S. dollar.
The Japanese, British, and French currencies
also experienced large changes, while the
Canadian
unit
had a smaller change
(see table 1).
When the unit-labor-cost increases cited
above are adjusted for exchange-rate changes,
home currencies, rose slightly less than U.S.
costs when the depreciation of the Canadian
doll ar is taken into account.
Labor costs constitute the major share of
total costs of production in manufacturing,
so it might be expected that increases in
total costs, and in prices, would be in proportion to unit-labor-cost increases. If indexes of the unit value of exports are used
as proxies for price indexes, they suggest
that prices of manufactured export goods
increased roughly in proportion to increases
in unit-labor costs in manufacturing (see
table 2). The United States, which showed
the second smallest increase in unit-labor
costs, also experienced the second smallest
increase in unit value of exports.
Table 2 Unit-Labor Costs and Unit
Values of Manufactures Exports, 1967-79
Unit-labor
cost in
U.S. dollars
Country
Percent
increase
84
U.S. unit-labor-cost increases are found to be ' Canada
United States
94
much smaller than in other countries except
France
177
Canada. The U.S. increase, for example, is
Italy
208
only about one-third the size of the Japanese
United
Kingdom
208
and German increases and one-half of the
284
Italian, British, and French increases. Ca- Japan
West Germany
299
nadian unit-labor costs, which rose slightly
more than U.S. costs when measured in
SOURCE: U.S. Department
Rank
Unit value
in U.S. dollars
Percent
increase
Rank
1
2
3
4
104
140
194
177
1
2
5
4
4
6
7
200
172
221
6
3
7
of Commerce.
Chart 1
Output per Man-Hour in the U.S. Private Business Economy, 1947-78
1967 = 100
Index
140
""",,'
",,'
120
""
./ ""
.",,' ~ {}
.....•.
{)?
~/
100
••••••
••••••
./~;
"""'..;
80
........
.;;?r'......•.•.•.••••.•
.....
60
"
..'.....
...,.([1
viously, international differences in rates
of home currency price changes can be
altered when adjusted for changes in cur-
.. ~'
<
••••••••••••••••••
••••••••
~~.
~r•••••••••••
t'l
1950
--
Productivity
1955
1965
1960
1968 1970
at constant 3.2% annual growth rate
SOURCE: American Productivity
Bureau of Labor Statistics.
1975
Actual productivity
Center, Productivity Perspectives; based on data from U.S.
of the preceding 20 years (see chart
1).
The subsectors of the private business
sector have not behaved uniformly.
The
productivity
growth rates of the mining
and construction subsectors, for example,
have been substantially slower, while that of
the communications subsector has been substantially faster, than the productivity growth
rate of the entire private business sector.
The manufacturing subsector, which is
the primary focus of this article, has exhibited a persistent slowing in productivity
growth that began before the slowing in
the private business sector as a whole.
Average annual growth of labor productivity
in manufacturing was 3.2 percent
from 1948 to 1955, 2.8 percent from 1955
to 1965, 2.4 percent from 1965 to 1973,
and 1.5 percent from 1973 to 1978.2
so many links in the chain from productivity
growth
to exchange-rate-adjusted
price changes makes the connection between
the two rather loose. Productivity growth
combines with labor compensation increases
to determine changes in unit-labor costs.
Unit-labor-cost
changes, together
with
changes in unit costs of materials and capital,
determine changes in total cost of production. Changes in production
costs plus
changes in profit margins determine changes
in market price, measured in home country
currency.
International
comparisons, of
course, require that prices measured in different currencies be converted to a common
currency. Such conversions are done at the
rate of exchange between currencies. Ob-
Between the fourth quarter of 1978 and
the fourth quarter of 1980, productivity
grew at only a 0.7 percent annual rate, but
much of that poor performance probably
is a cyclical phenomenon. Productivity
often is adversely affected when output
falls, because firms reduce output before
they cut employment; during this period,
output in manufacturing fell at a 1.1 percent
annual rate.
Productivity Growth, Price
Competitiveness, and Market Share
The relationship between productivity
growth and international price competitiveness contains several links. The existence of
2. See Economic Report of the President, January
1980, p. 85, Table 16.
rency exchange rates.
A nation's price competitiveness in exporting is said to have improved if its export prices rise less than those of other
nations. Improvement in price competitiveness can be reflected in growth of a nation's
share of the world market for exports, but
this is not always the case. If a firm, or a
nation, is able to reduce its price for a product, relative to the price charged for a similar
product by other firms or nations, the price
cutter will enhance its ability to sell the
product. The responsiveness to a given price
reduction is called the price elasticity of
demand for the product and is measured
as the ratio of the percentage change in
quantity sold to the percentage change
in price, assuming other factors affecting
demand are unchanged. Elasticity, however,
can differ greatly among products; while it
can be asserted th at a (rei ati ve) p rice reduction enhances a seller's price competitiveness, more information would be needed to
specify the magnitude of the increase in sales
and market share.
The impact on sales and market share of
a change in price competitiveness is even
more difficult to assessfor a broad category
of goods, such as manufactured goods, because of differences in the price elasticities
of different goods. Suppose, for example,
that prices for some goods decl ine, wh ile
prices for other goods rise, with the net
result being a reduction in a nation's price
level relative to prices of goods from competitors. Although the nation's overall price
competitiveness will be enhanced, it might
not capture a larger share of the overall
export market if the price elasticity is high
for products whose prices have risen but low
for products whose prices have fallen.
Factors other than changes in price
competitiveness can also alter market shares.
A nation's overall market share will change
if the nation specializes in goods whose
demand is growing faster or slower than the
average for other goods or if its exports are
concentrated
in geographic areas whose
demands for imports are growing faster or
slower than average.
The United States had the slowest growth
of productivity in manufacturing from 1967
to 1979 of seven major nations, including
Canada, Japan, France, West Germany,
Italy, and the United Kingdom (see table 1).
These nations together account for 83 percent of the GNP of the 23 industrialized
nations that are members of the Organization for Economic Cooperation and Development (OECD) and account for most of
the world's production
of manufactured
goods. In this 12-year period, productivity
of manufacturing
employees increased a
total of only 29 percent in the United States,
compared with increases ranging from 56
percent to 131 percent in the other countries (except the United Kingdom, which
at 33 percent barely exceeded the performance of the United States).
In the same period, hourly compensation
of manufacturing employees also increased
at a substantially slower pace in the United
States than abroad. Hourly compensation
is a broad measure of labor cost, because it
incl udes wages, the cost of fringe benefits,
and other employer expenses such as social
security taxes, workmen's compensation
insurance premiums, and unemployment
compensation fund contributions. The data
are based on total cost per hour worked
and are nominal increases, without adjustment for inflation.
Table 1
Productivity,
Compensation, and Unit-Labor Costs in Manufacturing,
Output per
Hourly
man-hour, compensation,
percent
percent
change
change
Country
United States
United Kingdom
Canada
Italy
West Germany
France
Japan
29
33
56
88
84
90
131
151
430
213
670
237
354
434
Unit-labor
cost in
national
currency,
percent
change
94
299
100
310
84
139
132
Exchange
rate,a
percent
change
1967-79
Unit-labor
cost in U.S.
Real
dollars,
compensation,
percent
percent
change
change
-22.8
-7.9
94
208
84
15
48
42
-24.9
117.5
15.6
66.0
208
299
177
284
134
103
76
104
a, Price in U.S, dollars of one unit of national currency.
SOURCE:
U. S. Department
Productivity
of Commerce.
increases and hourly
com-
pensation increases have opposing influences
on unit-labor cost: productivity
increases
reduce unit-labor cost, and compensation increases raise unit-labor cost. In the 1967-79
period, all seven countries experienced compensation increases that were larger than
their productivity
increases, raising unitlabor costs by amounts ranging from 84
percent to 310 percent. The United States
experienced the second smallest increase
in unit-labor
cost, because the relative
slowness of its compensation
increases
outweighed the meagerness of its productivity gains.
Exchange-rate changes in this period
were substantial. The German mark more
than doubled in value relative to the U.S.
dollar, while the value of the Italian lira
fell by one-fourth relative to the U.S. dollar.
The Japanese, British, and French currencies
also experienced large changes, while the
Canadian
unit
had a smaller change
(see table 1).
When the unit-labor-cost increases cited
above are adjusted for exchange-rate changes,
home currencies, rose slightly less than U.S.
costs when the depreciation of the Canadian
doll ar is taken into account.
Labor costs constitute the major share of
total costs of production in manufacturing,
so it might be expected that increases in
total costs, and in prices, would be in proportion to unit-labor-cost increases. If indexes of the unit value of exports are used
as proxies for price indexes, they suggest
that prices of manufactured export goods
increased roughly in proportion to increases
in unit-labor costs in manufacturing (see
table 2). The United States, which showed
the second smallest increase in unit-labor
costs, also experienced the second smallest
increase in unit value of exports.
Table 2 Unit-Labor Costs and Unit
Values of Manufactures Exports, 1967-79
Unit-labor
cost in
U.S. dollars
Country
Percent
increase
84
U.S. unit-labor-cost increases are found to be ' Canada
United States
94
much smaller than in other countries except
France
177
Canada. The U.S. increase, for example, is
Italy
208
only about one-third the size of the Japanese
United
Kingdom
208
and German increases and one-half of the
284
Italian, British, and French increases. Ca- Japan
West Germany
299
nadian unit-labor costs, which rose slightly
more than U.S. costs when measured in
SOURCE: U.S. Department
Rank
Unit value
in U.S. dollars
Percent
increase
Rank
1
2
3
4
104
140
194
177
1
2
5
4
4
6
7
200
172
221
6
3
7
of Commerce.
Federal
The three
countries
(Canada,
United
States, and France) with smaller increases
in unit-labor
costs experienced
unit-value
increases somewhat
larger than their unitlabor-cost
increases;
the four
countries
(Italy, United
Kingdom,
Japan, and West
Germany)
with larger unit-labor-cost
increases experienced
unit-value increases that
were smaller than their unit-labor-cost
increases. This rather puzzling phenomenon
might have been caused by changes in raw
materials
prices,
interest
rates, or other
producer
costs or by changes
in profit
margins. The profit margin explanation
is
consistent with reasoning that manufacturers
experiencing
relatively
small increases
in
unit-labor
costs may have been able to
increase their profit margins, while those
burdened
with relatively large increases in
unit-labor costs may have been compelled to
reduce profit margins to remain competitive.
Despite
its enhanced
price-competitive
position, the United States lost market share.
The U.S. share of exports from 15 major
industrial countries
declined from 20.3 percent in 1967 to 15.5 percent in 1979 (see
table 3). In the same period, France, West
Germany, Italy, and Japan all increased their
market shares, despite their disadvantages of
substantially
greater increases in unit·labor
costs and unit values of exports. Adding to
the mystery, Canada also lost market share
despite
enhanced
price
competitiveness.
Perhaps the composition
of U.S. export goods
and U.S. market
areas played important
roles in the loss of market share. It may be
that demand for particular U.S. goods or the
demand from particular
market areas grew
less rapidly than the average experienced
by other
major exporting
nations.
The
United States experienced
a sharp reduction
of market share-from
20.3 percent to 15.7
percent- in the six years from 1967 to 1973,
but little net change in the following six
years.
Price competitiveness
improved
in
both periods,
but the improvement
was
greater in the earlier period, prior to the
time that the market
share decline
was
arrested. Perhaps the earlier period's increase
in price competitiveness,
acting with a lag,
stanched the decline of market share.
U.S. Economic
Performance
There is ample reason for dissatisfaction
with U.S. international
economic
performance.
Improved
price
competitiveness
failed to yield an increased market share; at
best, it can be argued that the sharp decl ine
in market share prior to 1973 was arrested.
Moreover,
the improvement
in price competitiveness was achieved in two undesirable
ways.
First, U.S. unit-labor
costs rose more
slowly than foreign costs because of slow increases in nominal compensation
rather than
the preferred
avenue of rapid increases in
labor productivity.
Faster increase in labor
productivity
would
have been a better
avenue, as it would have been more likely
also to lead to faster gains in real compensation, which is a rough proxy for worker
real income. But because the United States
had the smallest increase in labor productivity in the period, it also had the smallest
gain in real (inflation-adjusted)
compensa-
the international
terms of trade in the sense
that a depreciated
dollar means the United
States must export more to pay for an unchanged amount of imported goods.
Shares of World Exports
United
States
Period
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
16.8
15.8
15.7
16.7
17.2
16.8
15.3
15.0
15.5
are defined
to the United
SOURCE:
West
Germany
8.1
7.8
7.8
8.3
8.4
8.9
9.1
8.7
9.7
9.2
9.3
9.3
10.0
20.3
20.1
19.3
18.4
a. World exports
exports
France
of Manufactures,
Conclusion
tion (see table 1, columns 2 and 7).
Dollar depreciation
was the second avenue
that led the United States to enhanced price
competitiveness.
The U.S. dollar fell in value
relative to the currencies of Japan, France,
The fact that
productivity
in manufacturing
has been growing slower in the
United States than abroad could be expected
to give a price advantage to foreign firms.
However, that has not been the case. Relatively slow increases in U.S. labor compensation and depreciation
of the U.S. dollar
against some currencies
improved the price
competitiveness
of the United States
in
manufactured
goods.
Improved price competitiveness
notwithstanding, the United States has seen its share
of the world market for manufactured
goods
shrink. This surprisingly dismal performance
compounds
one injury with another.
Increased price competitiveness
was obtained
in undesirable
ways, but the hard-won ad-
and West Germany between 1967 and 1979.
Currency depreciation
is undesirable in that
it exacerbates
inflation by making imported
goods more expensive. Moreover, it worsens
vantage failed to lead to a larger market
share. The cause for this failure to exploit
the improved
relative
price position
remains a puzzle.
18.7
18.6
18.7
19.0
19.3
Italy
19.6
21.0
6.7
7.0
7.0
6.9
7.0
7.3
6.5
20.6
19.4
6.5
7.1
19.7
6.8
7.3
7.3
8.0
19.9
19.8
19.9
as the sum of the exports
from
Japan
9.4
11.6
10.8
10.7
10.1
10.5
9.6
9.0
8.4
10.2
10.7
11.2
12.5
12.8
12.3
13.8
13.0
14.1
14.8
14.9
13.1
8.9
8.4
8.9
9.1
9.3
15 major
Federal Reserve Bank of Cleveland
industrial
countries,
Canada
5.7
6.1
6.0
6.0
5.8
5.5
4.8
4.3
4.1
4.5
4.4
4.3
4.0
Research
BULK RATE
U.S. Postage Paid
Cleveland,OH
Department
P.O. Box 6387
Cleveland,OH
44101
Address correction
Permit No. 385
requested
u.s. and
of Commerce.
Foreign Productivity and Competitiveness
by Gerald H. Anderson
Although
the level of productivity
is very
high in the United
States,
productivity
growth has slowed sharply in recent years.
Moreover, growth of productivity
is significantly slower in the United States than in
the other major industrialized
nations. For
example, annual real growth in gross national
product per employed worker in the United
States slowed from 1.9 percent in 1963-73
to only 0.1 percent in 1973-79. In the latter
period, Japan's productivity
growth was 3.4
per
and
year, West Germany's,
3.2
France's,
2.7 oercent."
This
Economic Commentary compares U.S. and
foreign productivity
growth rates, explores
the relationship
between productivity growth
and changes
in international
price competitiveness,
and examines
the impact on
the
U.S. share
of world
manufactured
goods exports.
This study yields some surprising results.
With productivity
growth being slower in
the United States than abroad, one might expect that costs and prices of U.S. export
goods would rise faster than the costs and
1. See Economic Report of the President, Jan uary
1980, p, 85, Table 15.
Address Change
Correct as shown
Remove from mailing list
o
o
including
Please send mailing label to the Research
States.
U.S. Department
1967-79a
United
Kingdom
March 9, 1981
~£QI)omicCommentary
percent
percent,
Table 3
Reserve Bank of Cleveland
Federal
Reserve Bank of Cleveland,
Department,
P.O. Box 6387, Cleveland,
OH 44101.
Gerald Anderson is an economic advisor, Federal
ReserveBank of Cleveland.
The views stated herein are those of the author
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors of
the Federal ReserveSystem.
prices
of
foreign
goods,
with
the
result
that American goods would lose price competitiveness. However, exchange-rate
changes
and a slower increase in wages have offset
the slower growth in U.S. productivity,
so
that prices of U.S. goods are rising less
rapidly than those of foreign goods. The improvement in U.S. competitiveness
has helped
arrest the sharp decline in the share of U.S.
manufactured
goods in world markets. However, U.S. manufactured
goods have not regained their earlier position of relative importance in world export markets.
Slowdown
in Productivity
Growth
Productivity
is a ratio of outputs to inputs, and it reflects the quality of inputs
to production
and the skill with which they
are combined.
Total factor productivity
is
the ratio of outputs
to inputs of all the
factors of production-labor,
capital equipment,
and land. Instead of total factor
productivity,
this study examines
the productivity,
and particularly
the increases
in productivity,
of just one factor-labor.
Labor productivity-output
per man-hour
or GNP per employed worker-is
used here
because labor productivity
data are readily
available for several countries
and because
labor costs are a high proportion
of total
costs in manufacturing.
Growth
in labor productivity
in the
U.S. private
business
sector
has slowed
sharply since 1968 from the average rate
Federal
The three
countries
(Canada,
United
States, and France) with smaller increases
in unit-labor
costs experienced
unit-value
increases somewhat
larger than their unitlabor-cost
increases;
the four
countries
(Italy, United
Kingdom,
Japan, and West
Germany)
with larger unit-labor-cost
increases experienced
unit-value increases that
were smaller than their unit-labor-cost
increases. This rather puzzling phenomenon
might have been caused by changes in raw
materials
prices,
interest
rates, or other
producer
costs or by changes
in profit
margins. The profit margin explanation
is
consistent with reasoning that manufacturers
experiencing
relatively
small increases
in
unit-labor
costs may have been able to
increase their profit margins, while those
burdened
with relatively large increases in
unit-labor costs may have been compelled to
reduce profit margins to remain competitive.
Despite
its enhanced
price-competitive
position, the United States lost market share.
The U.S. share of exports from 15 major
industrial countries
declined from 20.3 percent in 1967 to 15.5 percent in 1979 (see
table 3). In the same period, France, West
Germany, Italy, and Japan all increased their
market shares, despite their disadvantages of
substantially
greater increases in unit·labor
costs and unit values of exports. Adding to
the mystery, Canada also lost market share
despite
enhanced
price
competitiveness.
Perhaps the composition
of U.S. export goods
and U.S. market
areas played important
roles in the loss of market share. It may be
that demand for particular U.S. goods or the
demand from particular
market areas grew
less rapidly than the average experienced
by other
major exporting
nations.
The
United States experienced
a sharp reduction
of market share-from
20.3 percent to 15.7
percent- in the six years from 1967 to 1973,
but little net change in the following six
years.
Price competitiveness
improved
in
both periods,
but the improvement
was
greater in the earlier period, prior to the
time that the market
share decline
was
arrested. Perhaps the earlier period's increase
in price competitiveness,
acting with a lag,
stanched the decline of market share.
U.S. Economic
Performance
There is ample reason for dissatisfaction
with U.S. international
economic
performance.
Improved
price
competitiveness
failed to yield an increased market share; at
best, it can be argued that the sharp decl ine
in market share prior to 1973 was arrested.
Moreover,
the improvement
in price competitiveness was achieved in two undesirable
ways.
First, U.S. unit-labor
costs rose more
slowly than foreign costs because of slow increases in nominal compensation
rather than
the preferred
avenue of rapid increases in
labor productivity.
Faster increase in labor
productivity
would
have been a better
avenue, as it would have been more likely
also to lead to faster gains in real compensation, which is a rough proxy for worker
real income. But because the United States
had the smallest increase in labor productivity in the period, it also had the smallest
gain in real (inflation-adjusted)
compensa-
the international
terms of trade in the sense
that a depreciated
dollar means the United
States must export more to pay for an unchanged amount of imported goods.
Shares of World Exports
United
States
Period
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
16.8
15.8
15.7
16.7
17.2
16.8
15.3
15.0
15.5
are defined
to the United
SOURCE:
West
Germany
8.1
7.8
7.8
8.3
8.4
8.9
9.1
8.7
9.7
9.2
9.3
9.3
10.0
20.3
20.1
19.3
18.4
a. World exports
exports
France
of Manufactures,
Conclusion
tion (see table 1, columns 2 and 7).
Dollar depreciation
was the second avenue
that led the United States to enhanced price
competitiveness.
The U.S. dollar fell in value
relative to the currencies of Japan, France,
The fact that
productivity
in manufacturing
has been growing slower in the
United States than abroad could be expected
to give a price advantage to foreign firms.
However, that has not been the case. Relatively slow increases in U.S. labor compensation and depreciation
of the U.S. dollar
against some currencies
improved the price
competitiveness
of the United States
in
manufactured
goods.
Improved price competitiveness
notwithstanding, the United States has seen its share
of the world market for manufactured
goods
shrink. This surprisingly dismal performance
compounds
one injury with another.
Increased price competitiveness
was obtained
in undesirable
ways, but the hard-won ad-
and West Germany between 1967 and 1979.
Currency depreciation
is undesirable in that
it exacerbates
inflation by making imported
goods more expensive. Moreover, it worsens
vantage failed to lead to a larger market
share. The cause for this failure to exploit
the improved
relative
price position
remains a puzzle.
18.7
18.6
18.7
19.0
19.3
Italy
19.6
21.0
6.7
7.0
7.0
6.9
7.0
7.3
6.5
20.6
19.4
6.5
7.1
19.7
6.8
7.3
7.3
8.0
19.9
19.8
19.9
as the sum of the exports
from
Japan
9.4
11.6
10.8
10.7
10.1
10.5
9.6
9.0
8.4
10.2
10.7
11.2
12.5
12.8
12.3
13.8
13.0
14.1
14.8
14.9
13.1
8.9
8.4
8.9
9.1
9.3
15 major
Federal Reserve Bank of Cleveland
industrial
countries,
Canada
5.7
6.1
6.0
6.0
5.8
5.5
4.8
4.3
4.1
4.5
4.4
4.3
4.0
Research
BULK RATE
U.S. Postage Paid
Cleveland,OH
Department
P.O. Box 6387
Cleveland,OH
44101
Address correction
Permit No. 385
requested
u.s. and
of Commerce.
Foreign Productivity and Competitiveness
by Gerald H. Anderson
Although
the level of productivity
is very
high in the United
States,
productivity
growth has slowed sharply in recent years.
Moreover, growth of productivity
is significantly slower in the United States than in
the other major industrialized
nations. For
example, annual real growth in gross national
product per employed worker in the United
States slowed from 1.9 percent in 1963-73
to only 0.1 percent in 1973-79. In the latter
period, Japan's productivity
growth was 3.4
per
and
year, West Germany's,
3.2
France's,
2.7 oercent."
This
Economic Commentary compares U.S. and
foreign productivity
growth rates, explores
the relationship
between productivity growth
and changes
in international
price competitiveness,
and examines
the impact on
the
U.S. share
of world
manufactured
goods exports.
This study yields some surprising results.
With productivity
growth being slower in
the United States than abroad, one might expect that costs and prices of U.S. export
goods would rise faster than the costs and
1. See Economic Report of the President, Jan uary
1980, p, 85, Table 15.
Address Change
Correct as shown
Remove from mailing list
o
o
including
Please send mailing label to the Research
States.
U.S. Department
1967-79a
United
Kingdom
March 9, 1981
~£QI)omicCommentary
percent
percent,
Table 3
Reserve Bank of Cleveland
Federal
Reserve Bank of Cleveland,
Department,
P.O. Box 6387, Cleveland,
OH 44101.
Gerald Anderson is an economic advisor, Federal
ReserveBank of Cleveland.
The views stated herein are those of the author
and not necessarily those of the Federal Reserve
Bank of Cleveland or of the Board of Governors of
the Federal ReserveSystem.
prices
of
foreign
goods,
with
the
result
that American goods would lose price competitiveness. However, exchange-rate
changes
and a slower increase in wages have offset
the slower growth in U.S. productivity,
so
that prices of U.S. goods are rising less
rapidly than those of foreign goods. The improvement in U.S. competitiveness
has helped
arrest the sharp decline in the share of U.S.
manufactured
goods in world markets. However, U.S. manufactured
goods have not regained their earlier position of relative importance in world export markets.
Slowdown
in Productivity
Growth
Productivity
is a ratio of outputs to inputs, and it reflects the quality of inputs
to production
and the skill with which they
are combined.
Total factor productivity
is
the ratio of outputs
to inputs of all the
factors of production-labor,
capital equipment,
and land. Instead of total factor
productivity,
this study examines
the productivity,
and particularly
the increases
in productivity,
of just one factor-labor.
Labor productivity-output
per man-hour
or GNP per employed worker-is
used here
because labor productivity
data are readily
available for several countries
and because
labor costs are a high proportion
of total
costs in manufacturing.
Growth
in labor productivity
in the
U.S. private
business
sector
has slowed
sharply since 1968 from the average rate
