Dr. Periklis Gogas, Associate Professor
Department of Economics, Democritus University of Thrace
What is the LCI?
In any economy, capital, labor and technology are the most crucial production factors in the supply process of all goods and services. ”The quarterly measured Labor Cost Index (LCI) is a Euro Indicator that measures the cost pressure arising from the production factor “labor”. The data covered in the LCI collection relate to total average hourly labor costs and to the labor cost categories labeled as “wages and salaries” and “employers’ social security contributions plus taxes paid minus subsidies received by the employer”. Data, also broken down by economic activity, are available for the EU as a total and EU Member States” (from the Eurostat website). All sectors of the economy are included with the exception of agriculture, forestry, fisheries, education, health, community and social/personal service activities. The LCI is a Laspeyre index. In other words it calculates the total cost of labor as a rate of change between a base year and the year we examine. For Greece this base year is 2012. The numbers in the Figure below are calculated as the arithmetic mean of the quarterly values. The vertical line shows the rate of change in costs of labor and the horizontal one the time that this change has occurred. The grey line represents the LCI for the Euro area countries and the orange one for Greece. The LCI, except from assisting enterprises in the decision making process, also helps European Central Bank and the European Commission to sense the stability of prices. The U.S. use a similar index, the ECI (Employment Cost Index) that is calculated by the Bureau of Labor Statistics.
What can we conclude from Greece’s LCI?
The first thing that we can conclude from this indicator is that Greece’s labor costs vary over time, while the EU average looks constant. This is a deterrent factor for investment, as it is an obstacle in decision making and business planning. It increases risk and risk must be compensated by more return.
This could be one of the many reasons why the country’s economy is constantly shrinking the last years.