Technical Notes for International Comparisons of Hourly Compensation Costs in Manufacturing, 2009 The international comparisons of hourly compensation costs in manufacturing are prepared to assess differences in employer labor costs among countries. BLS compensation data permit more meaningful comparisons of employer labor costs than data based solely on average earnings. Definitions of average earnings differ considerably by country and do not include many items of labor cost that frequently make up a large portion of total cost. BLS compensation data include nearly all labor costs incurred by employers, but some costs included in the International Labor Office (ILO) definition of total labor costs, such as recruitment, vocational training and maintenance of company-provided facilities, are not included in the BLS data. The excluded costs amount to no more than 2 percent of total costs in countries for which data are available. Definitions Hourly compensation costs include (1) total hourly direct pay, (2) employer social insurance expenditures and (3) labor-related taxes. (see table 1) Total hourly direct pay includes all payments made directly to the worker, before payroll deductions of any kind, consisting of pay for time worked and directly-paid benefits. Social insurance expenditures refer to the value of social contributions (legally required as well as private and contractual) incurred by employers in order to secure entitlement to social benefits for their employees; these contributions often provide delayed, future income and benefits to employees. Labor-related taxes refer to taxes on payrolls or employment (or reductions to reflect subsidies), even if they do not finance programs that directly benefit workers. Table 1. Components of hourly compensation costs Hourly Compensation Costs Pay for Time Worked * Basic wages * Piece rate * Overtime premiums * Shift, holiday, or night work premiums * Cost-of-living adjustments * Bonuses and premiums paid each pay period Directly-Paid Benefits * Pay for time not worked (vacations, holidays, and other leave, except sick leave) * Seasonal and irregular bonuses * Allowances for family events, commuting, etc. * Payments in kind * Severance pay explicitly not linked to a collective agreement Employer Social Insurance Expenditures and Labor-related Taxes * Retirement and disability pensions * Health insurance * Income guarantee insurance and sick leave * Life and accident insurance * Occupational injury and illness compensation * Unemployment insurance * Severance pay linked to a collective agreement * Other social insurance expenditures * Taxes (net of subsidies) on payrolls or employment All employees include all persons employed full or part time in an establishment during a specified payroll period. Temporary employees are included. Persons are considered employed if they receive pay for any part of the specified pay period. The self-employed, unpaid family workers, contract workers, and workers in private households are excluded. Production workers generally include only those employees who are engaged in activities directly or closely related to the production process. Working supervisors are generally included; apprentices and other trainees are generally excluded. Methods In general, total compensation for each economy is calculated by adjusting earnings series for items of total hourly direct pay, social insurance, and labor-related taxes and subsidies not included in earnings. For economies for which earnings data are not available on a per hour worked basis, BLS makes adjustments in order to approximate compensation per hour worked. Earnings statistics are typically obtained from establishment surveys or from administrative data sources. The surveys used in the BLS series typically cover firms with a minimum of five or ten employees. Average earnings are generally adjusted to total compensation using data from periodic labor cost surveys or censuses of manufacturers. Other sources include tabulations of employer social security contribution rates provided by the International Social Security Association, information on contractual and legislated changes in social insurance benefits, and statistical series on indirect labor costs. Typically, these data cover all employees in the establishment, and no separate data for production workers are available. The compensation measures relate to manufacturing as defined by the North American Industry Classification System (NAICS). For some countries which use different classification systems, BLS makes small adjustments to make the data more comparable to a NAICS basis. The statistics are also adjusted, where possible, to account for major differences in worker coverage and changes over time in survey coverage, sample benchmarks, or frequency of surveys. Exceptions to these methods, as well as data sources used, can be found in “Country Notes and Sources” located at www.bls.gov/ilc/#compensation. For the United States, the results differ somewhat from other BLS series on compensation costs. Exchange Rates and Currencies Hourly compensation costs are converted to U.S. dollars using the average daily exchange rate for the reference year. 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 Euro Area countries in this report, data are converted to U.S. dollars using the euro to dollar exchange rate only for years in which the euro was the official currency in the country. For years prior to adoption of the euro as the official currency, the data in the old national currency for all years are converted to U.S. dollars using historical U.S. dollar to national currency exchange rates or fixed exchange rates established at the time of the country’s conversion to the euro. Trade-weighted measures Trade-weighted averages for selected economic groups are calculated based on each country’s relative importance to U.S. trade. The weights are calculated using the relative dollar value of U.S. trade (exports plus imports) in manufactured commodities with each country or area in 2007. The trade data are compiled by the U.S. Census Bureau. See table 2 for a list of economic groups and trade weights for each country. Table 2. Trade weight shares and economic groups Country/Area/ 2007 Trade OECD Europe Euro Area Eastern East Asia Econ. Group Wgt Share Europe ex Japan Argentina* 0.3% Australia 1.0 x Austria 0.5 x x x Belgium 1.4 x x x Brazil 1.6 Canada 17.0 x Czech Republic 0.1 x x x Denmark 0.3 x x Estonia* 0.02 x x x x Finland 0.3 x x x France 2.4 x x x Germany 5.1 x x x Greece* 0.1 x x x Hong Kong** 0.9 x Hungary 0.1 x x x Ireland 1.5 x x x Israel 1.2 x Italy 1.7 x x x Japan 7.3 x Korea 2.9 x x Luxembourg** 0.1 x x x Mexico 11.0 x Netherlands 1.7 x x x New Zealand 0.2 x Norway 0.3 x x Philippines 0.6 x Poland 0.2 x x x Portugal 0.2 x x x Singapore 1.6 x Slovakia* 0.1 x x x x Spain 0.7 x x x Sri Lanka** 0.1 Sweden 0.6 x x Switzerland 1.1 x x Taiwan 2.2 x United Kingdom 3.5 x x Economic Groups AE PW Foreign Economies 69.2% 69.7% OECD 62.7 62.6 Europe 22.0 21.9 Euro Area 15.7 15.6 Eastern Europe 0.6 0.5 East Asia ex. Japan 7.4 8.3 *All employees only. **Production workers only. Labor costs versus labor income The comparative hourly compensation data are measures of the cost of labor to an employer, not worker income, because workers only receive a part of hourly compensation directly. Other parts of employer compensation costs, such as unemployment insurance, health insurance, or payments to retirement funds, may only provide deferred or indirect benefits to workers. In these cases, the relationship between current employer payments and potential future worker benefits is too indirect to be considered income. This report also provides measures of total direct pay, which is pay for time worked plus directly-paid benefits. However, total direct pay understates the total value of income derived from work because employer payments to funds may substitute for worker savings or self- insurance to cover retirement, medical costs, etc. Thus, total direct pay is also not appropriate as a measure of worker income.