Kash opened this discussion with the following statement:
average hourly labor costs in manufacturing in Korea were fully 57% of US labor costs in 2005
He has continued to contribute to it in his comment to my post where I noted:
Let me turn Ricardian for a moment and note that wage differentials are not exactly the same thing as differences in unit labor costs.
The series on average labor costs from the BLS is an index showing the ratio of Korean hourly compensation costs for production workers in manufacturing relative to compensation for U.S. production worker in manufacturing. From 1990 to 1995, this index rose from 25% to 42%. By 2002, it had declined to 41%. This does not mean Korean wages fell. Rather this was a period where U.S. workers enjoyed significant increases in real compensation. From 2002 to 2005, this index rose from 41% to 57% as Korean workers continued to enjoy significant increases in real compensation, while U.S. workers were less fortunate.
When Kash came through with this series on unit labor costs for Korea and the U.S. over time, which we have graphed, Spencer had to remind us that these were indices. In other words, all we can infer from this graph is that both nations have seen their unit labor costs decline by about 13% from 1992 to 2005. But without some comparison in unit labor costs between the two nations at some point in time during this period, we cannot infer more than that.
But then Kash let us know about this paper by Stephen Golub entitled Does Trade with Low-Wage Countries Hurt American Workers. Golub also goes Ricardian with:
differences in wage rates between countries largely reflect differences in labor productivity (output per hour worked). For example, wages are low in India because productivity is low. Thus, the costs of producing goods are not as different across countries as wage rates suggest. Indeed, the United States as a whole benefits from international trade, irrespective of the wage levels of its trading partners, by specializing in what we do well and importing goods that are most efficiently produced elsewhere … Wages and labor productivity are related (Figure 2). For example, in 1990 wages in Malaysia were 10 percent of wages in the United States. But Malaysian labor productivity was also about 10 percent of the U.S. level in 1990. This means that unit labor costs (the ratio of wages to productivity) were approximately the same in Malaysia and the United States because the difference in productivity almost exactly offset the difference in wages between the two countries.
But what about Korea? Figure 1 of Golub’s paper shows hourly compensation in the U.S. versus Korea documenting the fact that the differential has between U.S. wages and Korean wages has been closing since 1975 as Korean wages have risen faster than U.S. wages. Figure 2 compares productivity and wages in Korea as compared to the U.S as of 1995. Golub writes:
Wages and labor productivity also move together over time for individual countries. For example, Korea experienced both high wage growth and high productivity growth in manufacturing over 1970-95, compared with the United States (Figure 3). In 1970, Korean wages were 8 percent of U.S. wages, while Korean productivity was 14 percent of U.S. productivity. By 1995, Korean productivity had reached 69 percent of the U.S. level, while Korean wages grew to 48 percent of American wages. Note that U.S. manufacturing productivity and wages grew steadily over this period, so Figure 3 indicates very strong growth in Korean wages and productivity. Korean workers have greatly benefited from Korea’s phenomenal economic growth.
In other words, unit labor costs in Korea were only 57% of unit labor costs for the U.S. in 1970 but had risen to 70% of unit labor costs for the U.S. by 1995. Golub notes that Korea’s wages had risen in line with its productivity increases over the 1970 to 1995 period. Korea’s productivity continued to grow faster than that of the U.S. from 1995 to 2005 but the differential in unit labor costs did not change as Korean workers benefited from faster wage growth.
Update: Since several readers have noted that swings in the exchange rate can impact relative unit labor costs, we show the sharp devaluation of the won and subsequent appreciation – which likely is one reason the Korean unit labor cost series displays its swings over this period.