Technical Notes for Hourly Compensation Costs

TECHNICAL NOTES

The tables in this news release present international comparisons of hourly compensation costs for production workers in manufacturing in selected countries or areas. The total compensation measures are prepared by the Bureau of Labor Statistics in order to assess international differences in employer labor costs. Comparisons based on the more readily available average earnings statistics published by many countries can be very misleading. National definitions of average earnings differ considerably; average earnings do not include all items of labor compensation; and the omitted items of compensation frequently represent a large proportion of total compensation.

The compensation measures are computed in national currency units and are converted into U.S. dollars at prevailing commercial market currency exchange rates. The foreign currency exchange rates used in the calculations are the average daily exchange rates for the reference period. They are appropriate measures for comparing levels of employer labor costs. They do not indicate relative living standards of workers or the purchasing power of their income. Prices of goods and services vary greatly among countries, and commercial market exchange rates are not reliable indicators of relative differences in prices.

Definitions

Hourly compensation costs include (1) hourly direct pay and (2) employer social insurance expenditures and other labor taxes. Hourly direct pay includes all payments made directly to the worker, before payroll deductions of any kind, consisting of (a) pay for time worked (basic time and piece rates plus overtime premiums, shift differentials, other premiums and bonuses paid regularly each pay period, and cost-of-living adjustments) and (b) other direct pay (pay for time not worked (vacations, holidays, and other leave, except sick leave), seasonal or irregular bonuses and other special payments, selected social allowances, and the cost of payments in kind). Social insurance expenditures and other labor taxes include (c) employer expenditures for legally required insurance programs and contractual and private benefit plans (retirement and disability pensions, health insurance, income guarantee insurance and sick leave, life and accident insurance, occupational injury and illness compensation, unemployment insurance, and family allowances) and, for some countries, (d) other labor taxes (other taxes on payrolls or employment (or reductions to reflect subsidies), even if they do not finance programs that directly benefit workers, because such taxes are regarded as labor costs). For consistency, compensation is measured on an hours-worked basis for every country.

The BLS definition of hourly compensation costs is not the same as the International Labour Office (ILO) definition of total labor costs. Hourly compensation costs do not include all items of labor costs. The costs of recruitment, employee training, and plant facilities and services -- such as cafeterias and medical clinics -- are not included because data are not available for most countries. The labor costs not included account for no more than 4 percent of total labor costs in any country for which the data are available.

Production workers generally include those employees who are engaged in fabricating, assembly, and related activities; material handling, warehousing, and shipping; maintenance and repair; janitorial and guard services; auxiliary production (for example, powerplants); and other services closely related to the above activities. Working supervisors are generally included; apprentices and other trainees are generally excluded.

Methods

Total compensation is computed by adjusting each country's average earnings series for items of direct pay not included in earnings and for employer expenditures for legally required insurance, contractual and private benefit plans, and other labor taxes. For the United States and other countries that measure earnings on an hours-paid basis, the figures are also adjusted in order to approximate compensation per hour worked.

Earnings statistics are obtained from surveys of employment, hours, and earnings or from surveys or censuses of manufactures.

Adjustment factors are obtained from periodic labor cost surveys and interpolated or projected to nonsurvey years on the basis of other information for most countries. The information used includes annual tabulations of employer social security contribution rates provided by the International Studies Staff of the U.S. Social Security Administration, information on contractual and legislated fringe benefit changes from ILO and national labor bulletins, and statistical series on indirect labor costs. For other countries, adjustment factors are obtained from surveys or censuses of manufactures or from reports on fringe-benefit systems and social security. For the United States, the adjustment factors are special calculations for international comparisons based on data from several surveys.

The statistics are also adjusted, where necessary, to account for major differences in worker coverage; differences in industrial classification systems; and changes over time in survey coverage, sample benchmarks, or frequency of surveys. Nevertheless, some differences in industrial coverage remain and, with the exception of the United States, Canada, and several other countries, the data exclude very small establishments (less than 5 employees in Japan and less than 10 employees in most European and some other countries). For the United States, the methods used, as well as the results, differ somewhat from those for other BLS series on U.S. compensation costs.

Hourly compensation costs are converted to U.S. dollars using the average daily exchange rate for the reference period. The exchange rates used are prevailing commercial market exchange rates as published by either the U.S. Federal Reserve Board or the International Monetary Fund.

For further details on survey sources and on special estimation procedures for some countries because of incomplete data, see International Comparisons of Hourly Compensation Costs for Production Workers in Manufacturing, 1995 (Report 909, Bureau of Labor Statistics, September 1996).

Country notes

The following are exceptions to the standard coverage and definitions explained above:

Australia. Compensation relates to production workers and nonproduction workers other than those in managerial, executive, professional, and higher supervisory positions.

Hong Kong SAR. Average of selected manufacturing industries. The industries covered accounted for about 70 percent of all persons employed in manufacturing in 1988. Compensation excludes overtime pay. Hong Kong became a Special Administrative Region (SAR) of China in July 1997.

Austria. Excludes workers in establishments considered handicraft manufacturers. (All printing and publishing and miscellaneous manufacturing establishments are classified in handicrafts.) In 1986, handicraft employment was about 35 percent of all manufacturing employment. Average compensation per employee was about 10 percent lower in manufacturing including handicrafts than in manufacturing excluding handicrafts.

Finland. Includes workers in mining and electrical power plants. For comparability with other countries, compensation excludes some obligatory training and plant facilities costs; these costs would add 1.6 percent to average hourly compensation costs in 1994.

Germany. Refers to former West Germany. Excludes workers in establishments considered handicraft manufacturers. In 1990, handicraft employment was about 25 percent of all manufacturing employment. Average hourly earnings of production workers were about 3 percent lower in manufacturing including handicrafts than in manufacturing excluding handicrafts.

Ireland. Data refer to September for 1975.

Norway. For comparability with other countries, compensation excludes some obligatory training and plant facilities costs; these costs would add 2.2 percent to average hourly compensation costs in 1994.

Trade-weighted measures

The trade weights used to compute the average compensation cost measures for selected country or economic groups are the sum of U.S. imports of manufactured products for consumption (customs value) and U.S. exports of domestic manufactured products (free along side {f.a.s.} value) in 1992 for each country or area and each economic group. See table A.

The trade data used to compute the weights are U.S. Bureau of the Census statistics of U.S. imports and exports converted to an industrial classification basis from data initially collected under the Harmonized Tariff Schedule commodity classification system.

The Organization for Economic Cooperation and Development (OECD) includes Canada, Mexico, Australia, Japan, Korea, New Zealand, and all European countries. The European Union (EU) consists of Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the United Kingdom. Europe includes the EU countries plus Norway and Switzerland. The group labeled "Asian NIEs" consists of the four newly industrializing economies of Hong Kong SAR, Korea, Singapore, and Taiwan.

The trade weighted measures relate to all the countries or areas covered in the series. Estimates are computed for missing country data using the average trend in other economies to estimate the missing data. Trade weighted average percent changes for the 28 foreign economies are computed both including and excluding Mexico and Israel because their rapid rates of inflation and currency changes in several years distort the trade-weighted averages.

Table A.  Share of total U.S. imports and exports 
of manufactured products in 1992     (in percent)


Country or area      1992       Country or area        1992
      and           trade             and             trade
economic group      share       economic group        share


Canada              19.2        Greece                  .1

Mexico               7.6        Ireland                 .6
 
                               Italy                  2.3

Australia            1.4        Luxembourg              .1

Hong Kong SAR 1      2.0        Netherlands            1.9

Israel                .8        Norway                  .3

Japan               15.8

                                Portugal                .2

Korea                3.4        Spain                   .8

New Zealand           .3        Sweden                  .8

Singapore            2.4        Switzerland            1.0

Sri Lanka             .1        United Kingdom         4.4

Taiwan               4.4

                                Economic groups:

Austria               .3        28 foreign

Belgium              1.5          economies           80.8

Denmark               .3        OECD 3                71.1

Finland               .2        Europe                23.4

France               3.2        European Union        22.1

Germany 2            5.4        Asian NIEs            12.2





1 Hong Kong Special Administrative Region of China.
2 Former West Germany.
3 Organization for Economic Cooperation and Development.

Data limitations

Because compensation is partly estimated, the statistics should not be considered as precise measures of comparative compensation costs. In addition, the figures are subject to revision as the results of new labor cost surveys or other data used to estimate compensation costs become available.

The comparative level figures in this report are averages for all manufacturing industries and are not necessarily representative of all component industries. In the United States and some other countries, such as Japan, differentials in hourly compensation cost levels by industry are quite wide. In contrast, other countries, such as Germany and Sweden, have narrow differentials.

Labor costs versus labor income

The hourly compensation figures in U.S. dollars shown in the tables provide comparative measures of employer labor costs; they do not provide intercountry comparisons of the purchasing power of worker incomes. Prices of goods and services vary greatly among countries, and the commercial market exchange rates used to compare employer labor costs do not reliably indicate relative differences in prices. Purchasing power parities –- that is, the number of foreign currency units required to buy goods and services equivalent to what can be purchased with one unit of U.S. or other base-country currency –- must be used for meaningful international comparisons of the relative purchasing power of worker incomes.

Total compensation converted to U.S. dollars at purchasing power parities would provide one measure for comparing relative real levels of labor income. It should be noted, however, that total compensation includes employer payments to funds for the benefit of workers in addition to payments made directly to workers. (For a few countries, the compensation measures also include taxes or subsidies on payrolls or employment even if they do not finance programs which directly benefit workers.) Payments into these funds provide either deferred income (for example, payments to retirement funds), a type of insurance (for example, payments to unemployment or health benefit funds), or current social benefits (for example, family allowances), and the relationship between employer payments and current or future worker benefits is indirect. On the other hand, excluding these payments would understate the total value of income derived from work because they substitute for worker savings or self-insurance to cover retirement, medical costs, etc.

Total compensation, because it takes account of employer payments into funds for the benefit of workers, is a broader income concept than either total direct earnings or direct spendable earnings. An even broader concept would take account of all social benefits available to workers, including those financed out of general revenues as well as those financed through employment or payroll taxes.

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