Acceleration of Labour Cost along with Deceleration of Productivity: How the Slovak Manufacturing Lost the Advantage of Low Unit Labour Cost

Abstract

The recent development in the Slovak economy erased a significant competitive advantage of manufacturing - low labour cost. The paper analyses the driving factors of rising unit labour costs in the manufacturing sector. The paper aims to explain why the unexpectedly rapid loss of traditional competitive advantage took place in the group of V4 countries and why this phenomenon was particularly pronounced in Slovakia. The paper identifies the driving factors that caused a strong increase in labour costs in addition to factors that also caused a slowdown in productivity growth. The decomposition of ULC dynamics has shown that the primary problem in the case of Slovakia is a very significant slowdown in labour productivity growth. Especially, from a marginal perspective, the components of gross value added developed strongly in favour of increasing compensations of employees. The decrease in the working-age population represented a significant driving force of increasing labour cost (wages) along with a halt in productivity growth caused by relatively low investment rate and absence of convergence in capital-to-labour ratio. Such development was identified in all V4 countries; however, the least favourable trend took place in Slovakia.