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The United Kingdom international cost competitiveness.

The United Kingdom international cost competitiveness

The United Kingdom joined the European Exchange Rate Mechanism (ERM) on 8 October 1990, at a central parity of 2.95 Deutschemark to a pound with permissible fluctuation margins of [+ or -]6 per cent. At that time, some concern was expressed about the level of the real exchange rate and hence for international competitiveness. This Annex examines various measures of competitiveness and assesses the position of the "real exchange rate" as measured by relative unit labour costs.

Measures of international competitiveness

The OECD publishes indicators of competitiveness, measured by relative unit labour costs and relative export unit values in a common currency twice yearly[1]. These indicators are based on indices of unit labour costs and export prices for the manufacturing sector. As such, they provide information on changes in costs and prices from a given base period. They do not allow comparisons of absolute levels.

In this annex, calculations have been made of levels of unit labour costs in the manufacturing sector. The difficulty in constructing such indicators is the conversion of individual country's manufacturing output into a common currency. Purchasing power parities calculated by the OECD are used for this purpose. They do not represent "optimal exchange rates", as the basket of goods covered includes non-traded goods and services. They are, however, the best available proxy.

The U.K.'s relative competitive position

Diagram A1 shows indices of U.K. relative unit labour costs since 1963, on a quarterly basis. It illustrates the relative competitive position of the United Kingdom against 20 major competitors and against EC countries. In the fourth quarter of 1990, when sterling entered the ERM, U.K. relative labour costs vis-a-vis its major competitors were in line with their 1980 average and about 15 per cent above their long historical average. Compared only with EC countries, relative unit labour costs were 9 per cent lower than on average over the 1980s and about 2 per cent above their average over the past 28 years. [Graphical Data Omitted]

Table A1 provides measures of differences in the levels of relative unit labour costs in the United Kingdom compared with its main trading partners in the 1980s. These data suggest that, since the early 1980s, labour costs in the United Kingdom were higher than in France, Italy and the Netherlands, but below those in Japan, Germany and about those in Belgium and the United States. The data do not suggest a major deterioration in the U.K.'s relative position throughout the period or in 1990. [Tabular Data Omitted]

On any of the above OECD measures, the current competitive position of the United Kingdom is in line with the average over the past 25 years. This suggests that sterling does not appear to be significantly over- or under-valued in real terms, relative to historical averages. This result is in accordance with studies by H.M. Treasury and the Confederation of British Industry[2].


[1.] See for example Chart R of Economic Outlook n [degree] 49. The theoretical background for these

indicators is presented in M. Durand, "Indicators of international competitiveness", OECD

Working Paper n [degree] 29, 1985.

[2.] See "Measures of real exchange rates and competitiveness", Treasury Bulletin, Winter

1990-91 and Williams, N. "Is sterling overvalued within the ERM?", CBI, Economic

Situation Report, January 1991.
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Title Annotation:Annex 2
Publication:OECD Economic Surveys - United Kingdom
Date:Aug 1, 1991
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