Higher unit labour costs and productivity per hour worked in the second quarter

In the second quarter of 2009, the indicators of unit labour costs and labour productivity per hour worked, two major labour cost measures, improved. Dropping of unit labour costs has been observed since the beginning of 2009, while the rise in labour productivity per man-hour worked is a novel trend over the last five consecutive quarters. These results suggest a gradual improvement in the ability to compete in the global markets and are a tentative sign pointing to the beginning of economic recovery, initially with the GDP decline easing, to rebound and approach a sustainable economic growth rate afterwards.

Labour productivity has improved both year-on-year and, according to seasonally adjusted data, quarter-on-quarter. Higher labour productivity per man-hour worked was in part fuelled by the employment structure changing in favour of highly-qualified labour as the lay-offs primarily affected low-skilled labour. This effect, however, cannot be explained solely by the indicator improving exactly in the second quarter as employment structure was subject to modification also in the previous quarters. Consequently, human resources have been used more effectively and it is a precondition for the economic recovery.

The dynamics of unit labour costs demonstrate how unit labour costs change to produce a GDP unit. In the past, when real wages and salaries increased at a much higher pace than labour productivity, the production of one unit required an ever increasing amount of resources and reduced competitiveness of exports from Latvia and its overall economy.

The increase in labour productivity per hour worked is among the GDP leading indicators. This implies that the changes in labour productivity trends help in forecasting the GDP dynamics. An increase in labour productivity per hour worked was last registered in the first quarter of 2008, and it was the last record of positive annual GDP developments.