Introduction
The Prices, Costs, and Currency Conversions (PCCC) database includes statistics on consumer prices, labour costs, and currency conversion factors, namely purchasing power parities (PPPs) and exchange rates.
Labour productivity
Introduction
Labour productivity is an important economic indicator that is closely linked to economic growth, competitiveness, and living standards. Labour productivity represents the total volume of output (measured in terms of Gross Domestic Product, GDP) produced per unit of labour (measured in terms of the number of employed persons or hours worked) during a given time reference period. The indicator allows data users to assess GDP-to-labour input levels and growth rates over time, thus providing general information about the efficiency and quality of human capital in the production process for a given economic and social context.
Given its usefulness in conveying valuable information on a country’s labour market situation, labour productivity growth was one of the indicators selected to measure progress towards the achievement of the Millennium Development Goals (MDGs), under Goal 1 (Eradicate poverty and hunger), and it is included as one of the indicators to measure progress towards the achievement of the Sustainable Development Goals (SDG), under Goal 8 (Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all).1SDG indicator 8.2.1 refers to the annual growth rate of real GDP per employed person. For the official list of SDG indicators, see here
ILOSTAT presents ILO modelled estimates and projections of labour productivity, both in terms of GDP per worker and GDP per hour worked. The measures are converted to U.S. dollars using exchange rates or at purchasing power parities (PPPs).
Method of computation
The indicators on labour productivity are calculated as follows:
GDP per worker = GDP at constant prices
Number of employed persons
GDP per hour worked = GDP at constant prices
Total hours worked of employed persons
Data sources
Information on output, measured as GDP, is best derived from a country’s national accounts. Labour force surveys are typically the preferred source of information on employment (to use in the denominator of the labour productivity indicator). Such surveys can be designed to cover virtually the entire non-institutional population of a given country, all branches of economic activity, all sectors of the economy and all categories of workers, including the self-employed, contributing family workers, casual workers and multiple jobholders. In addition, such surveys generally provide an opportunity for the simultaneous measurement of the employed, the unemployed and persons outside the labour force (and thus the working-age population) in a coherent framework.
Other types of household surveys and population censuses could also be used as sources of employment. The information obtained from such sources may however be less reliable since they do not typically allow for detailed probing on the labour market activities of the respondents.
Interpretation and uses
The economic growth in a country can be ascribed either to increased employment or to more effective work by those who are employed. The latter effect can be described through statistics on labour productivity. Labour productivity therefore is a key measure of economic performance. The understanding of the driving forces behind it, in particular the accumulation of machinery and equipment, improvements in organization as well as physical and institutional infrastructure, improved health and skills of workers (“human capital”) and the generation and adoption of new technologies, is important for formulating policies to support economic growth. Such policies may focus on regulations on industries and trade, institutional innovations, government investment programmes in infrastructure as well as human capital, technology or any combination of these.
Labour productivity estimates can support the formulation of labour market policies and monitor their effects. For example, high labour productivity is often associated with high levels or particular types of human capital, indicating priorities for specific education and training policies. Likewise, productivity trends can be used to understand the effects of wage settlements on rates of inflation or to ensure that such settlements will compensate workers for productivity improvements. Finally, productivity measures can contribute to the understanding of how labour market performance affects living standards.
Limitations
National output measures are obtained from national accounts and represent, as much as possible, GDP at market prices for the aggregate economy. However, despite common principles that are mostly based on the United Nations System of National Accounts, there are still significant problems in international consistency of national accounts estimates, in particular for economies outside the OECD. The factors affecting the comparability of the data across countries include differences in the treatment of output in services sectors, differences in the procedures used to correct output measures for price changes, and differences in the degree of coverage of informal economic activities and of the underground economy in national accounts.
Estimates of employment correspond, as much as possible, to the average number of persons with one or more paid jobs during the year. In many countries, statistics on the number of self-employed and family workers in agricultural and informal manufacturing activities are less reliable than those for employees. As in the case of output estimates, the employment estimates are sensitive to under-coverage of informal or underground activities.
Consumer prices
Introduction
Consumer price indices (CPIs) measure changes over time in the level of prices of goods and services that households consume. In many countries, they were originally introduced to provide a measure of the changes in the living costs faced by workers, so that wage increases could be related to the changing levels of prices. However, over the years, CPIs have widened their scope. Nowadays, they are widely used as a macroeconomic indicator of inflation, a key statistic for governments and central banks for inflation targeting and for monitoring price stability. They are also used as deflators in national accounts. With the globalisation of trade and production and the liberalisation of markets, national governments, central banks and international organisations place great importance on the quality and accuracy of national CPIs, and in their international comparability.
Concepts and definitions
The consumer price index (CPI) measures the average change over time in the prices of goods and services that a typical household consumes, such as food, beverages, tobacco, clothing, housing, fuels, household appliances, transport, health and telecommunications. This may be done by measuring the cost of purchasing a fixed basket of consumer goods and services of constant quality and similar characteristics, with the products in the basket being selected to be representative of households’ expenditure during a year or other specified period. Such an index is called a fixed-basket price index.
The index may also aim to measure the effects of price changes on the cost of achieving a constant standard of living (i.e. level of utility or welfare). This concept is called a cost-of-living index (COLI). A fixed basket price index, or another appropriate design, may be employed as an approximation to a COLI.
The index reference period is the period for which the value of the index is set equal to 100
The price reference period is the period whose prices are compared with the prices in the current period. It is the period whose prices appear in the denominators of the price relatives.
The weight reference period is the period, usually one or more years, of which the expenditures serve as weights for the index. When the expenditures are hybrid (i.e., the quantities of one period are valued at the prices of some other period), the weight reference period is the period to which the quantities refer.
The CPI data in ILOSTAT are disaggregated by the Classification of Individual Consumption According to Purpose (COICOP).
The statistical standards related to CPI are described in the Resolution concerning consumer price indices. For further details, also refer to the CPI manual.
Method of computation
The CPI is constructed as a weighted average of a large number of elementary aggregate indices. Each of the elementary aggregate indices is estimated using a sample of prices for a defined set of goods and services obtained in, or by residents of, a specific region from a given set of outlets or other sources of consumption goods and services. Given the multiple uses of the CPI, there are various ways of constructing it.
The CPI can be constructed as a fixed-basket price index where the change in the price of a basket of goods and services, representative of a household’s consumption pattern for a reference period, is monitored.
The CPI can also take the form of a cost-of-living-index (COLI) where the “effects of price changes on the cost of achieving a constant standard of living (i.e. level of utility or welfare)” are measured. As the prices of different goods and services do not all change at the same rate, a price index is designed to reflect their average movements. A price index is typically assigned a value of 100 in a selected index base period, and the values of the index for other periods of time are intended to provide an estimate of the average percentage change in prices compared with the base period.
In addition to the index level showing the change from the index reference period, it is also useful to present derived indices, such as the one that shows changes in the major aggregates between: (i) the current month and the previous month; (ii) the current month and the same month of the previous year; and (iii) the average of the latest 12 months and the average of the previous 12 months.
The indices should be presented in both seasonally adjusted and unadjusted terms.
As significant differences in the expenditure patterns and/or price movements between specific population groups or regions may exist, especially in the developing countries, separate indices for these population groups or regions may be computed.
Interpretation and uses
A CPI can be used for a variety of purposes, the most common ones being: the indexation of wages, rents, contracts, and social security payments; the deflation of household final consumption expenditure in the national accounts; and the use as a general macroeconomic indicator, especially for inflation targeting and for setting interest rates. Elements of a CPI are also often used in the calculation of purchasing power parities and extrapolating purchasing power parities between benchmark years as required in the International Comparison Program (ICP). The three main uses of CPIs are described in further detail below.
Indexation
A CPI may be used for wage or contract indexation of any specific group, whether of a population acquiring products, or of a subset of products themselves. In either case, it should represent the coverage of the group concerned. For instance, it can be argued that the weights of a CPI used for indexation of pensions should cover only the expenditure of the pensioner population. The product and outlet list could also be more appropriately targeted, if the data exist. This means, for example, that a CPI used for indexing pensions may use weights relating to pensioner households and may exclude products which may be thought largely irrelevant to this group of households such as educational items. Similarly, for domestic indexation, the CPI should cover only expenditure of the resident population. More generally, it must be decided whether the CPI should be, in principle, a cost of living index (COLI) or a cost of goods index since these two are very different concepts.
For certain specific types of indexation, such as for rents, users may prefer to use just the subindex for rents. In such cases, the subindex should be of a statistical quality sufficient for that purpose.
National accounts deflation
This use requires consistency between the price data used for the CPI and the expenditure data used in the national accounts. Both data sets should cover the same set of goods and services and use the same concepts and same classification, in principle the Classification of Individual Consumption According to Purpose (COICOP). For example, the national accounts require the valuation of goods produced for own consumption, whereas this is sometimes excluded from the CPI either as a matter of principle or for pragmatic reasons. This applies mainly to the valuation of the services of owner-occupied housing and the consumption of own-produced food.
Inflation measurement
It can be argued that central banks ideally need a timely index relating to total inflation, not just consumer inflation. But NSOs generally are unable to construct such indices, in part because of the measurement issues relating to government consumption. In the absence of such an index, most central banks rely on a CPI, using the domestic concept, but measured on as wide a basis as possible, with regard to both products and geographical coverage. The same applies to the use of the CPI as a general macroeconomic indicator.
Limitations
The CPI measures price movements (i.e. relative changes) and not absolute price levels. The CPI is not a complete measure reflecting all price changes in an economy.
Regional CPIs cannot be used to compare differences in price levels or living costs between one place and another, they measure only the changes that take place in each place over time.
The CPI does not measure the “cost of living” as understood with reference to economic theory on consumers’ behaviour.
The CPI, like all other statistics, may be subject to general error that may occur during any stage of the estimation process but also errors that are unique to the CPI (for example, substitution bias and quality change bias).
Labour costs
Introduction
Labour costs provide an estimate of employers’ expenditure toward the employment of its workforce. It complements statistics on earnings because they reflect the two main facets of existing employment-related income measures: earnings aims to measure the income of employees, while labour cost show the costs incurred by employers for employing them.
ILOSTAT contains a harmonized series of labour cost, with local currency units converted to a common currency. Data are disaggregated by economic activity. ILOSTAT also includes closely related statistics: harmonized series on earnings and ILO modelled estimates on labour income share.
Concepts and definitions
Labour cost is the cost incurred by the employer in the employment of labour in a specified reference period. The statistical concept of labour cost comprises remuneration for work performed, payments in respect of time paid for but not worked, bonuses and gratuities, the cost of food, drink and other payments in kind, cost of workers’ housing borne by employers, employers’ social security expenditures, cost to the employer for vocational training, welfare services and miscellaneous items, such as transport of workers, work clothes and recruitment, together with taxes regarded as labour cost.
Labour cost and compensation of employees are closely related concepts, with many common elements. In some cases, where data on labour cost are not available, ILOSTAT presents data on the compensation of employees, a concept defined in the United Nations System of National Accounts as the total remuneration, in cash or in kind, payable by an enterprise to an employee in return for work done by the latter during the accounting period. The compensation of employees has two main components: a) wages and salaries payable in cash or in kind and b) social insurance contributions payable by employers, which include contributions to social security schemes; actual social contributions to other employment-related social insurance schemes and imputed social contributions to other employment-related social insurance schemes. This concept views compensation of employees as a cost to employer, thus compensation equals zero for unpaid work undertaken voluntarily. However, it does not include taxes payable by employers on the wage and salary bill, such as payroll tax.
The harmonized series present data in local currency next to those converted to a common currency. Local currency units are converted to US dollars using market exchange rates and also using the latest available purchasing power parities (PPPs). PPPs are the rates of currency conversion that equalize the purchasing power of different currencies by eliminating the differences in price levels between countries.
Data sources
The preferred sources of information on labour cost are establishment and labour cost surveys, but in their absence, administrative data can be used.
Interpretation and uses
Information on hourly compensation costs, like total labour cost, is valuable for many purposes. The level and structure of the cost of employing labour and the way costs change over time can play a central role in every country, not only for wage negotiations but also for defining, implementing and assessing employment, wage and other social and fiscal policies that target the distribution and redistribution of income. At both the national and international levels, labour costs are a crucial factor in the abilities of enterprises and countries to compete. When specific to the manufacturing sector, labour costs serve as an indicator of competitiveness of manufactured goods in world trade. This is why governments and the social partners, as well as researchers and national and international institutions, are interested in labour cost information that can be compared between countries and industries. Also, the measurement and analysis of non-wage labour costs have become an important issue in debates on labour market flexibility, employment policies, analyses of cost disparities, and comparisons of productivity levels among countries.
Limitations
Care should be taken not to interpret hourly compensation costs as the equivalent of the purchasing power of worker incomes, for two reasons. The first relates to the components and nature of labour costs. In addition to the payments made directly to workers, labour cost also includes other costs borne by the employer. The second reason for differentiating hourly labour costs from the concept of workers’ purchasing power lies in the fact that the prices of goods and services vary greatly among countries, and the commercial exchange rates used to convert national figures into a single currency do not indicate relative differences in prices.
Purchasing power parities
Introduction
A purchasing power parity (PPP) conversion factor is a spatial price deflator and currency converter that controls for price level differences between countries, thereby allowing volume comparisons of gross domestic product (GDP) and its expenditure components. The conversion factor presented on ILOSTAT is for household final consumption expenditure. It is applied to earnings and labour costs to convert national figures in national currency to a common currency.
Concepts and definitions
PPPs are both currency conversion factors and spatial price indexes. PPPs convert different currencies to a common currency and, in the process of conversion, equalize their purchasing power by controlling differences in price levels between countries. Typically, higher income countries have higher price levels, while lower income countries have lower price levels (Balassa-Samuelson effect). Market exchange rate-based cross-country comparisons of GDP at its expenditure components reflect both differences in economic outputs (volumes) and prices. Given the differences in price levels, the size of higher income countries is inflated, while the size of lower income countries is depressed in the comparison. PPP-based cross-country comparisons of GDP at its expenditure components only reflect differences in economic outputs (volume), as PPPs control for price level differences between the countries. Hence, the comparison reflects the real size of the countries.
A description of the extrapolation approach is available at datahelpdesk.worldbank.org/knowledgebase/articles/665452-how-do-you-extrapolate-the-ppp-conversion-factors.
For more information on PPPs, refer to worldbank.org/en/programs/icp.
Data sources
The International Comparison Program (ICP) of the World Bank estimates PPPs for the world’s countries. The ICP is conducted as a global partnership of countries, multilateral agencies, and academia. The most recent 2021 ICP comparison covered 176 countries, including 47 Eurostat-OECD countries. For countries that have not participated in ICP comparisons, the PPPs are imputed based on a regression model.
Interpretation and uses
PPP can be used to convert national accounts data, like GDP and its expenditure components, into a common currency, while also eliminating the effect of price level differences between countries. They can also be used to derive price level indexes (PLIs), the ratio of a country’s PPP to its market exchange rate, to directly compare price levels across countries. PPPs and the PLIs and real (or PPP-adjusted) expenditures to which they give rise allow for many use-cases, but they are particularly valuable for empirical work involving comparisons of per capita consumption or levels of GDP (or other GDP aggregates) across countries and for the measurement of global poverty and global income inequality.
The breadth and depth of ICP data allows its use-cases to cover other areas of economics, including empirical analyses of economic growth, productivity and trade, and even beyond, for instance, to help track global targets such as the UN Sustainable Development Goals related to health, education, energy and emissions and labor. Other applications of ICP data include their use in the construction of indexes, for example cost-of-living measures. Uses-cases can even be extended into the policymaking domain at all levels (global, regional and national) given the increased importance of cross-country benchmarking, among other possibilities.
Recommended uses of PPPs include:
- To make spatial comparisons of GDP and its expenditure components,
- To make spatial comparisons of price levels, and
- To group countries by their per capita volume indexes and price level indexes.
Recommended uses of PPPs with limitations include:
- To analyze changes over time in relative GDP per capita and relative prices,
- To analyze price convergence,
- To make spatial comparisons of the cost of living, and
- To use PPPs calculated for GDP and its expenditure components as deflators for other values.
Limitations
Global PPP estimates provided by ICP are produced by the ICP Global Office and regional implementing agencies, based on data supplied by participating countries, and in accordance with the methodology recommended by the ICP Technical Advisory Group and approved by the ICP Governing Board. As such, these results are not produced by participating countries as part of their national official statistics.
PPPs are not recommended for use:
- As a precise measure to establish strict rankings of countries,
- As a means of constructing national growth rates,
- As a measure to generate output and productivity comparisons by industry, as an indicator of the undervaluation or overvaluation of currencies, or
- As an equilibrium exchange rate.
Exchange rates
Introduction
The official exchange rate refers to the exchange rate determined by national authorities or to the rate determined in the legally sanctioned exchange market. It is calculated as an annual average based on monthly averages (local currency units relative to the U.S. dollar).
Concepts and definitions
The exchange rate is the price of one currency in terms of another. Official exchange rates and exchange rate arrangements are established by governments. Other exchange rates recognized by governments include market rates, which are determined largely by legal market forces, and for countries with multiple exchange arrangements, principal rates, secondary rates, and tertiary rates.
Data sources
Exchange rates are from International Financial Statistics (IFS) database of the International Monetary Fund (IMF).
Interpretation and uses
In a market-based economy, household, producer, and government choices about resource allocation are influenced by relative prices, including the real exchange rate, real wages, real interest rates, and other prices in the economy. Relative prices also largely reflect these agents’ choices. Thus relative prices convey vital information about the interaction of economic agents in an economy and with the rest of the world.
Limitations
Official or market exchange rates are often used to convert economic statistics in local currencies to a common currency in order to make comparisons across countries. Since market rates reflect at best the relative prices of tradable goods, the volume of goods and services that a U.S. dollar buys in the United States may not correspond to what a U.S. dollar converted to another country’s currency at the official exchange rate would buy in that country, particularly when nontradable goods and services account for a significant share of a country’s output. An alternative exchange rate – the PPP conversion factor – is preferred because it reflects differences in price levels for both tradable and nontradable goods and services and therefore provides a more meaningful comparison of real output.
Publications
Note: Many publications are available only in English. If available in other languages, a new page will open displaying these options.
Consumer Price Index Manual: Concepts and Methods | 2020
The manual provides an overview of the methods and practices national statistical offices should consider when making decisions on how to deal with the various problems in the compilation of a consumer price index (CPI). It is an update of the 2004 CPI manual.
COVID-19 Guidance for labour statistics data collection: Consumer Price Indexes
The COVID-19 crisis is affecting data collection activities of national statistical offices (NSOs) around the world, including for consumer price indexes (CPI).
Consumer Price Index Manual. Theory and Practice.
This comprehensive manual provides guidelines for statistical offices and other agencies responsible for constructing CPIs and explains in-depth the methods that are used to calculate a CPI. It also examines the underlying economic and statistical concepts and principles needed for making choices in efficient and cost effective ways and for appreciating the full implications of those choices.
Handbook on Residential Property Prices Indices (RPPIs). 2013 edition
This handbook provides comprehensive guidelines for the compilation of RPPIs and explains in depth the methods and best practices used to calculate an RPPI. It also examines the underlying economic and statistical concepts and principles guiding the methodological choices on which the indices are based. The handbook primarily addresses official statisticians in charge of producing RPPIs, and provides a harmonized methodological and practical framework for all parties interested in their compilation. Written by leading academics in index number theory and by recognized experts in RPPIs compilation, this handbook was co-ordinated by Eurostat, with the collaboration of the ILO, the IMF, OECD, UNECE and the World Bank.
Sources and Methods Volume 1: Consumer price indices (2013)
Volume 1 of Sources and Methods: Labour Statistics presents methodological descriptions of the main characteristics of national series of consumer price indices. The 2003 edition is a revised, enlarged and updated version of the 1992 edition and contains descriptions for 169 countries, areas and territories.
