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Focus on labor market and education Labour Cost Index

Labour Cost Index

Jenny Karlsson25
Kristian Söderholm25

As a member state of the EU, Sweden, like other member states, is obliged to
deliver a labor cost index (LCI) to Eurostat for each quarter. Until 2005, the index
has been delivered according to a so-called
"Gentlemen's agreement", which means that the information is provided to the best
of our ability and without any formal requirement. However, the Council and
Commission Regulation adopted in 2003 means that, from the first quarter of 2005,
countries are required by law to deliver an index that meets the set requirements.

Background
For the European Central Bank (ECB), the lack of comparable statistics on labor
costs has been considered one of the major weaknesses of the statistical
system, which must underpin the implementation and operation of a European
monetary system. Labor costs are considered to be one of the main sources of
inflation and are also an important indicator of competitiveness.

In order to meet the ECB's demand, the EU member states agreed in 1997 to
supply a quarterly index of labor costs to the EU statistical office Eurostat in
accordance with the Gentlemen's Agreement.
However, reliability has been low, as Member States have used different methods
to calculate the index. In addition, several counties have found it difficult to provide
an index with reasonable timeliness. There were therefore demands from the
outset for the statistics to be harmonized and for this to require legislation. In 2000,
the Commission, in cooperation with the ECB, proposed that the Labor Cost Index
be regulated by legislation in order to harmonize statistics. In March

25
The authors are investigators at the unit for wage and labor cost statistics at Statistics Sweden.
Inquiries can be made directly to the authors via e-mail with address
fornamn.efternamn@scb.se.

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In 2003, the LCI Council Regulation was published in the Official Journal26 .
The Commission Regulation was published in July 200327 .

The requirements for the content of the new index mean greater information
for companies, organizations and authorities. Therefore, in order to minimize
the reporting burden, according to the Council Regulation, Member States are
given the opportunity to obtain information from other surveys, administrative
registers and to make model estimates as long as the index meets the
requirements of the Council and Commission Regulation.

The new index The new

index is an, on an annual basis, chained Laspeyres index compiled from quarterly
data on labor costs per hour actually worked. Labor costs28 include wages,
social costs and taxes. Any subsidies and subsidies that the companies receive
for the workforce must be deducted from the labor costs. Variable content and
variable definitions are based on the definitions in the Labor Cost Survey (LCS).

LCI and AKI - some similarities and several differences In Sweden, a

monthly labor cost index (AKI) is published for workers and salaried employees
in the private sector. Both AKI and LCI are based on the monthly survey
Business Statistics, Wages for the Private Sector (KLP), which is produced by
Statistics Sweden on behalf of the Mediation Institute (MI). For workers, AKI is
based on labor cost per hour worked, while AKI for salaried employees is based
on labor cost per month.

However, LCI differs from AKI in several ways. Apart from the fact that LCI is
published as a quarterly index, no division is made between workers and
salaried employees. LCI is based solely on the labor cost per hour worked - which
requires that monthly wages be converted to hourly wages. In AKI, the base
period (index = 100) is the first quarter of 1994, while the base period for LCI is
the year 2000. LCI shall refer to the entire economy, while AKI only refers to the
private sector.

26
Official Journal of European Union, L 69/1, 2003-03-13.
27
Official Journal of European Union, L 169/37, 2003-07-08.
28
Labor costs are defined in accordance with Commission Regulation (EC) No 1726/1999
of 27 July 1999 (Labour Cost Survey).

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KLP does not survey companies with fewer than five employees, which means that
these companies are not included in AKI either. One of the requirements of LCI is
that all companies, regardless of size, must be represented. For this model, this
business population is calculated in LCI.

LCI must currently be reported in accordance with NACE Rev 1.1 at department
level for the industries CK. From 2007, the industries LO will also be included.

LCI must be delivered to Eurostat no later than 70 days after the reference period,
which means that LCI is published approximately two weeks after AKI.

The public sector

Traditionally, the Swedish wage and labor cost statistics are reported by sector.
However, Eurostat does not request this breakdown, but wants to report the statistics
for the entire labor market by industry. One explanation for this may be that the size
and activities of the various sectors vary between countries. This means that the
industries LO, where the majority of the public sector is located, must also be included
in the index. Many countries have found it difficult to include these industries in LCI and
have been postponed until 2007 to find out how to include them. Statistics Sweden is
currently investigating, on behalf of MI, how the Swedish cyclical wage statistics
regarding municipalities and county councils can be included in LCI as of 2007. This
may mean that these surveys will change in the future.

ras.

The development of labor costs in the EU Sweden for the first

time delivered data produced according to the new method to Eurostat on 10 June
2005. Since then, another quarter has been delivered. At the time of publication of Q2
2005, Belgium, Ireland and Greece have still not provided data under the new approach.
For Luxembourg and Cyprus, data are completely missing for the second quarter of
2005. For Italy, the data are confidential. In addition to publishing data by country,
Eurostat calculates the development of labor costs for the current 25 member states
(EU25), for the Euro countries (Euro-zone) and for the 15 countries that the EU
consisted of before the 2004 enlargement (EU15). This is done by weighing the
incoming countries together with the help of each country's wage sum from the National
Accounts in 2000.

The total nominal labor cost per hour increased for EU member states by 2.6
percent for the second quarter of 2005 compared to

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with the second quarter of 2004. The development figure for EU15 differs very
little from the development figure for EU25, which can be explained by the fact
that many of the new countries weigh relatively little. For the countries that are
part of the monetary union, the corresponding figure was 2.3 percent. The
deviation of the currency union from the EU15 is explained by the fact that
Sweden, Denmark and the United Kingdom are all above the EU average.

Sweden's labor costs per hour increased by 2.7 percent. Table 5 below shows
the member countries' change figures for the period quarter 1 2003 - quarter 2
2005.

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Table 5
Total nominal labor cost per hour, industry C - K29.
Percentage change compared with the same quarter last year, not
seasonally adjusted

2003 2004 2005

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

Euro-zone 3,1 3,6 3,0 2,6 3,0 2,5 2,4 2,3 3,0 2,3
EU25 3,5 3,5 3,4 3,1 3,9 3,2 3,4 3,3 3,4 2,6
EU15 3,4 3,5 3,4 3,0 3,9 3,2 3,4 3,3 3,3 2,5

– – – – – – – – – –
Belgium
–
Cyprus 5,6 5,7 6,2 6,1 5,3 4,0 2,4 5,2 6,0
Denmark 3,5 2,9 4,1 3,6 3,4 3,8 2,8 2,8 3,1 3,1
Estonia 9,6 9,2 9,5 8,3 4,9 5,9 8,0 7,1 9,6 10,4
Finland 4,5 4,5 4,4 4,3 4,1 3,9 4,0 4,0 4,2 3,3

France 2,6 2,3 2,5 2,3 3,2 3,0 2,9 2,8 3,3 2,7
Greece – – – – – – – – – –

Ireland – – – – – – – – – –

Italy c C c c c c c c c c

Latvia 8,5 10,1 9,7 10,2 11,3 10,0 10,8 12,8 16,4 14,2

Lithuania 2,1 4,7 4,5 4,1 2,3 4,0 5,5 6,2 12,0 7,0
–
Luxemburg 5,5 3,5 3,3 4,5 3,2 2,0 1,3 2,4 2,4
Malta 4,6 5,0 2,3 3,2 4,4 3,8 6,2 4,9 1,5 1,1
Netherlands 3,4 5,4 3,5 4,0 2,4 3,7 3,9 3,8 3,1 2,9
Poland 5,7 -0,5 3,5 5,6 3,2 5,8 1,4 3,0 4,0 1,8

Portugal 3,2 2,4 2,1 2,2 2,6 4,5 4,0 2,4 1,9 2,5
Slovakia 12,9 10,8 10,8 6,8 6,7 3,8 3,4 6,5 7,4 7,6
Slovenia 10,0 6,4 9,5 11,4 3,8 7,6 7,4 8,7 0,8 8,7 7,2

Spain 5,8 5,3 4,4 4,8 3,8 3,4 4,4 4,3 4,5
UK 3,9 3,0 4,2 4,4 6,9 5,6 7,2 7,5 4,6 3,4

Sweden 5,0 5,0 4,7 4,7 3,4 3,2 2,6 3,8 3,4 3,0 2,7

Czech Republic 7,1 5,5 4,7 6,0 6,9 10,2 3,8 3,8 3,5

Germany 2,7 3,3 2,5 1,5 2,1 1,3 5,1 10,1 7,6 0,9 0,5 1,2 0,8

Hungary 6,1 6,3 6,2 2,2 -0,3 -0,3 8,3 7,4 9,4 6,5
Austria 1,7 2,5 0,8 0,1 1,5 3,1 3,8

29
Mining of minerals; manufacturing; electricity, gas, heating and water supply; barley
Operation; wholesale and retail, etc .; hotel and restaurant operations; transport and
communications; financial activities and business services etc.

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The change figures show very large variations between with the member
countries. For the second quarter of 2005, Germany reports the lowest increase
in labor costs, 0.8 percent. Latvia accounts for the highest increase, 14.2 percent.
This is illustrated in Figure 27 below.

Figure
27 Total nominal labor cost per hour, industry C - K.
Percentage change compared with the same quarter last year, not
seasonally adjusted
Latvia
Estonia
Slovakia
Slovenia
Lithuania
Hungary
Spain
Austria
Czech Republic
UK
Finland
Denmark
Netherlands
Sweden
France
EU25
EU15
Portugal
Euro-zone
Poland
Malta
Germany

0 2 4 6 8 10 12 14 16

Several of the newly added member countries report relatively high development
of labor costs. The six countries with the highest development are all new
members as of 2004 and all have a relatively low level of labor costs. Of the
newcomer countries, only Poland and Malta are below the EU average.

As can be seen, Sweden is well in line with developments in the EU25 and the
Eurozone countries.

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