<p>First of all it is a unit labor index. Second of all it is not 100%. It is an index, so when you see 100 there in the graph it literally means index is 100 not 100%.</p>
<p>As explained by the information provided by the Euro Area Statistics:</p>
<blockquote>
<p>Harmonised competitiveness indicators based on unit labour cost indices for the total economy (period averages; index: Q1 1999=100). Unit labour costs for the total economy are calculated as the ratio of compensation per employee to labour productivity. Labour productivity is measured as GDP at constant prices divided by the total number of persons employed using quarterly national accounts as published by Eurostat (period averages; index: Q1 1999=100).</p>
</blockquote>
<p>Regarding your question:</p>
<blockquote>
<p>can Unit Labour Cost &gt; 100%?</p>
</blockquote>
<p>Unit labor cost <em>index</em> can be above 100 (although this is index number not %).</p>
<p>Consequently, what the index measures is labor compensation <span class="math-container">$(w)$</span> divided by productivity which is in turn given by real GDP (<span class="math-container">$Y$</span>) divided by the number of employees (<span class="math-container">$L$</span>) thus <span class="math-container">$Y/L$</span>, so they measure <span class="math-container">$\frac{w}{Y/L}$</span>.</p>
<p>Next they index the number by dividing all values by the 1999Q1 value of <span class="math-container">$\frac{w}{Y/L}$</span> (so for example for 2002Q2 you have <span class="math-container">$\frac{\frac{w}{Y/L}_{2002Q2}}{\frac{w}{Y/L}_{1999Q1}} \cdot 100$</span>).</p>
<p>Such index can be trivially higher than 100. Compensation to employees is part of <span class="math-container">$w$</span> so <span class="math-container">$w&lt;Y$</span> but regardless of this you can easily have index much higher than 100.</p>
<p>For example, let us assume that in 1999Q1 the parameters of the economy are:</p>
<p><span class="math-container">$Y=100$</span>, <span class="math-container">$w=20$</span>, <span class="math-container">$L=20$</span>,</p>
<p>so we have <span class="math-container">$\left(\frac{w}{Y/L}\right)_{1999Q1}=4$</span>.</p>
<p>Afterwards let us suppose that in 2002Q2 we have:</p>
<p><span class="math-container">$Y=110$</span>, <span class="math-container">$w=70$</span> and <span class="math-container">$L=30$</span></p>
<p>this will gives us <span class="math-container">$\left(\frac{w}{Y/L}\right)_{2002Q2} \approx 19.1$</span></p>
<p>This would give us index value for 2002Q2 of <span class="math-container">$19.1/4 \cdot 100 = 477.5$</span> which is completely plausible scenario that does not violate any economic identities or hard constraints, and cost of labor is still smaller than the output <span class="math-container">$(w&lt;Y)$</span>. Nor does it imply that companies are loosing money.</p>

CC BY-SA 4.0
2021-08-02T19:33:12.247Z
"*it is not 100%. It is an index, so when you see 100 there in the graph it literally means index is 100 not 100%.*" One could argue X is X% times the 1999 Q1 value.
Giskard
CC BY-SA 4.0
2021-08-02T20:10:49.417Z
@Giskard well yes, but I think one should be rigorous here, because even though you are correct interpreting index number directly as a percentage value for what is measured would be incorrect, and people often have problem properly interpreting indexes so I think its appropriate to be careful with language
1muflon1
CC BY-SA 4.0
2021-08-02T19:15:29.207Z
2021-08-02T19:21:23.887Z
2021-08-02T19:21:23.887Z
1muflon1
<p>I struggle to interpret this ECB chart:</p>
<p><a href="https://www.euro-area-statistics.org/competitiveness-indicators?cr=eur&amp;lg=en&amp;page=0&amp;charts=EXR.Q.H11..NRU1.A%20EXR.Q.H11..NRU1.A%20EXR.Q.H11..NRU1.A&amp;template=1" rel="nofollow noreferrer">click here for the chart</a></p>
<p>Several countries show consistently <span class="math-container">$Unit Labour Cost \gg 100%$</span>. For example, <em>Lithuania</em>.</p>
<p>Cost of labour <span class="math-container">$\gg$</span> Total Output, doesn't that mean than all companies are losing money?</p>

<productivity><labor-cost>
can Unit Labour Cost > 100%?
elemolotiv
# can Unit Labour Cost > 100%?

(Asked by: username_0 on 2021-08-02)

I struggle to interpret this ECB chart:

[click here for the chart](https://www.euro-area-statistics.org/competitiveness-indicators?cr=eur&lg=en&page=0&charts=EXR.Q.H11..NRU1.A%20EXR.Q.H11..NRU1.A%20EXR.Q.H11..NRU1.A&template=1)

Several countries show consistently $Unit Labour Cost \gg 100%$. For example, *Lithuania*.

Cost of labour $\gg$ Total Output, doesn't that mean than all companies are losing money?

**Tags:** productivity, labor-cost


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## 1 answers

### Answer by username_1 on 2021-08-02. Score: 1

First of all it is a unit labor index. Second of all it is not 100%. It is an index, so when you see 100 there in the graph it literally means index is 100 not 100%.

As explained by the information provided by the Euro Area Statistics:

> Harmonised competitiveness indicators based on unit labour cost indices for the total economy (period averages; index: Q1 1999=100). Unit labour costs for the total economy are calculated as the ratio of compensation per employee to labour productivity. Labour productivity is measured as GDP at constant prices divided by the total number of persons employed using quarterly national accounts as published by Eurostat (period averages; index: Q1 1999=100).

Regarding your question:

> can Unit Labour Cost > 100%?

Unit labor cost *index* can be above 100 (although this is index number not %).

Consequently, what the index measures is labor compensation $(w)$ divided by productivity which is in turn given by real GDP ($Y$) divided by the number of employees ($L$) thus $Y/L$, so they measure $\frac{w}{Y/L}$.

Next they index the number by dividing all values by the 1999Q1 value of $\frac{w}{Y/L}$ (so for example for 2002Q2 you have $\frac{\frac{w}{Y/L}\_{2002Q2}}{\frac{w}{Y/L}\_{1999Q1}} \cdot 100$).

Such index can be trivially higher than 100. Compensation to employees is part of $w$ so $w but regardless of this you can easily have index much higher than 100.

For example, let us assume that in 1999Q1 the parameters of the economy are:

$Y=100$, $w=20$, $L=20$,

so we have $\left(\frac{w}{Y/L}\right)\_{1999Q1}=4$.

Afterwards let us suppose that in 2002Q2 we have:

$Y=110$, $w=70$ and $L=30$

this will gives us $\left(\frac{w}{Y/L}\right)\_{2002Q2} \approx 19.1$

This would give us index value for 2002Q2 of $19.1/4 \cdot 100 = 477.5$ which is completely plausible scenario that does not violate any economic identities or hard constraints, and cost of labor is still smaller than the output $(w. Nor does it imply that companies are loosing money.

> **Comments:**
> **username_2**: "*it is not 100%. It is an index, so when you see 100 there in the graph it literally means index is 100 not 100%.*" One could argue X is X% times the 1999 Q1 value.  
> **username_1**: @username_2 well yes, but I think one should be rigorous here, because even though you are correct interpreting index number directly as a percentage value for what is measured would be incorrect, and people often have problem properly interpreting indexes so I think its appropriate to be careful with language  

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