Unit Labor Cost Calculation - Provided by Economy.com

The wage and output data for both the states and metropolitan areas come from the U.S. Bureau of Economic Analysis (BEA) and the U.S. Bureau of the Census, with missing data estimated by Economy.com. The labor compensation measure used is total wages and salaries by place of work, divided by total employment in each industry. Productivity per worker for metropolitan areas is estimated by applying the 1992 ratio of metropolitan to state level productivity to the gross state product release of the BEA. This ratio is calculated using data on revenues and costs obtained from the 1992 Economic Census.

Since relative regional economic growth is most influenced by enhancing local production of exportable goods and services, industries predominantly driven by local demand have been excluded from the analysis. These industries are primarily retail trade, construction, real estate, many service industries, and the government sector. In order to compare different regions properly, Economy.com constructed separate indices of worker productivity and earnings per worker for each metropolitan area, covering employment for each export industry at the three-digit Standard Industrial Classification level. However, a measure that used the aggregate output and earnings per worker would be biased by the region's industrial composition. Thus, the index of unit labor costs re-aggregates productivity and compensation per employee, using the national share of employment in each industry as the weights. This adjustment is necessary because certain industries have higher output per earnings ratios, due to the occupational mix of its employment and the capital structure of its operations. For example, productivity in the automotive industry is extremely high compared to other industries, whereas in the textile industry it is relatively low. As a result of these industry differences, a region with a high proportion of automotive manufacturing will appear to have lower unit labor cost than a region concentrated in textiles. However, by using the national share of employment in each industry to weight the productivity for each region, the index avoids this industry composition bias.

Employment composition is based upon SIC employment classifications. Economy.com uses three-digit SIC data in order to gauge the regional industry mix properly. However, since data in industries with a particularly small number of employees are subject to a higher degree of inaccuracy, a minimum size of 100 employees was imposed on the index. If the industry had fewer than the necessary 100 employees in the metropolitan area, then the relevant state labor cost measure was used.

The formula below is used to calculate Economy.com's wages and salary and productivity index for any level of aggregation, which weights each three-digit SIC equally for each area, with national employment share for each year serving as weights. This composition-adjusted aggregate is then indexed by the appropriate state earning or productivity measure. Labor costs are then calculated by dividing the earnings index by the analogous productivity index. The unit labor cost index was created for each year by dividing the region's unit labor cost index by the national unit labor cost index.

Definition of Relative Earnings or Productivity Indexes

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Where:
Y = Output or Earnings
St = State or Region
K = Total for all industries
k = Three-digit SIC industry