Indicator description: Labour cost

Introduction

Labour cost provides 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 wages 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.

Recommended 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 use of the indicator

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.

Table of contents

Statistical standards
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