Unit labor cost (ULC)

economic-dictionary

The unit labor cost (ULC) is a measure that indicates what it costs to employ a worker based on the productivity of the company. In other words, it is the fraction of productivity that the employer has to divert to the remuneration of the salaried work that it hires. They are the wage costs necessary to produce each unit.

To calculate the CLU, compensation per employee (RAU) is related to productivity (PT). The formula defines the unit labor cost such that:

So the unit labor cost is made up of the quotient between two variables. The first, the compensation per employee, which is calculated as the sum of all wages (RA) in a territory divided by the number of employees (As). The result that it shows would be something like the average salary.

The second part of the equation, productivity, is calculated as the quotient between gross domestic product (GDP) and the employed population (PO).

Unit cost

Interpretation of Unit Labor Cost

An increase in the unit labor cost is interpreted as an increase in the cost of labor. And, therefore, it is an obstacle to ensuring the return on invested capital. On the contrary, a reduction in the unit labor cost reflects a lower cost of labor, which is a facility to ensure the return on invested capital.

The Unit Labor Cost can be reduced due to the following situations:

  • If the average salary (RAU) falls and productivity (PT) remains constant, the ULC is reduced.
  • If the average salary (RAU) remains constant and productivity (PT) increases, the CLU is reduced.
  • If the average salary (RAU) falls and productivity (PT) increases, the ULC is reduced.
  • If the average salary (RAU) falls in greater proportion than productivity (PT), the ULC is reduced.
  • If the average salary (RAU) increases to a lesser extent than productivity (PT), the ULC is reduced.

The Unit Labor Cost may increase if:

  • Average salary (RAU) increases and productivity (PT) remains constant. CLU increases
  • Average salary (RAU) remains constant and productivity (PT) falls. CLU increases
  • Average salary (RAU) increases and productivity (PT) falls. CLU increases
  • Average salary (RAU) falls less than productivity (PT). CLU increases
  • Average salary (RAU) increases in greater proportion than productivity (PT). CLU increases

Finally, the unit labor cost remains constant as long as:

  • Average salary (RAU) increases in the same proportion as productivity (PT).
  • Average salary (RAU) is reduced in the same proportion as productivity (PT).
  • Average salary (RAU) remains constant and productivity (PT) also.

Example of calculating the unit labor cost

After the previous explanation, we are going to see a practical example that helps us understand how to calculate the unit labor cost in Spain.

  • Compensation of employees (RA): 550,000,000,000
  • Number of employees (As): 15,700,000
  • Employed population (PO): 18,800,000
  • Gross domestic product (GDP): 1,232,000,000,000

First we will calculate the numerator (top) of the ULC quotient:

Next, we will calculate the denominator (bottom) of the ULC quotient:

Once we have the two results, we substitute in the initial formula:

The result reflects that of the total earnings that an entrepreneur in Spain has, on average, he must allocate 53.4% ​​to pay salaries.

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