PARIS (MNI) – Unit labor costs in the Eurozone rose by 0.8% in 2Q,
the fastest pace in over two years, the result of a dip in labor
productivity, the OECD estimated Wednesday.

A key component of international competitiveness, the cost of labor
per unit of production increased at a comparable rate in the United
States and Canada in 2Q, but much less in Japan (+0.1%), where a sharp
rise in labor costs alone was almost completely offset by strong
productivity growth.

Indeed, labor productivity in the advanced economies of the OECD
zone increased by 0.5% on average in 2Q on the back of strong gains in
Japan (+3.1%) and a more modest recovery in the US (+0.2%). In the
Eurozone, by contrast, productivity declined by 0.2% in 2Q, when GDP
growth slowed markedly to 0.2% from 0.8% in 1Q.

Productivity tends to grow fastest at the start of an economic
upswing, when staff on hand is concentrated on production to keep up
with rising demand. As adjustments in staff tend to lag fluctuations in
output, productivity growth slows or turns negative when demand slows
abruptly.

The outlook for sluggish Eurozone growth in the near term suggests
that labor productivity gains will be modest. At the same time, rising
unemployment should limit wage gains.

Among reporting Eurozone countries, 2Q unit labor costs grew
fastest in Germany (+1.4%), reflecting both above-average wage gains and
a decline in productivity. At the other extreme, unit labor costs
declined slightly in Spain (-0.1%), as labor costs fell faster than
productivity. This is an encouraging signal for Spanish competitiveness,
even if the pain in Spain was mainly in the wage gain.

Looking ahead, the ECB expects a slowdown in productivity growth
and a gradual acceleration in wage gains. This would contribute to “a
slight rebound in unit labor cost growth for euro area firms,” the
central bank predicted in its latest Monthly Bulletin.

“Labor cost pressures are nevertheless likely to remain contained
in the medium term in the light of only gradual labor market
improvements,” the ECB said.

–Paris newsroom +331 42 71 55 40; e-mail: ssandelius@marketnews.com

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