Economic Aspects of Wage Negotiation
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1 Economic Aspects of Wage Negotiation Dr Gustavo Rinaldi ITC ILO Consultant (University of Turin, ESCP Europe)
2 The accountant's profit and loss account +Revenues (price X quantity) - cost of raw materials, labour, suppliers - depreciation = OPERATING PROFIT - interest = PRE TAX PROFIT - Tax = AFTER TAX PROFIT - dividends = RETAINED EARNINGS 2
3 Inflation 3
4 Standard of Life Depends on the ability of people in acquiring goods. Depends on how much they earn. Depends on how much goods are expensive. 4
5 Standard of Life It can be measured by the real income. Income =.. Level of Prices Real Income 5
6 Standard of Life Income =.. Level of Prices Real Income The real income indicates the purchasing power of the recipient of that income. It indicates how many goods she/he can acquire. 6
7 Level of Prices We measure it by observing the total price of a set (basket) of goods. We usually compare the price of the basket of goods today with the price of that basket of goods at a different date. The ratio between the two prices gives an index. 7
8 Price Index Today Price of a set of goods today.. Price of a set of goods at the reference time Sometimes they are multiplied by
9 Price Index: P t+1 P t 9
10 Consumer Price Index - CPI It is about what we consume. Ii is based on a basket of goods made either domestically or abroad. Different goods are included in the basket with different weights. It is usually defined by the statistical authority of the country. Politics plays a role. Usually available every month. 10
11 Politics in the CPI Sometimes governments like to underestimate the inflation in their country. This can be done with different techniques. They can exclude or under represent some goods. They can over-represent the weight of certain goods. Technology goods have prices which increase slowly or sometimes decrease. 11
12 GDP Deflator It is about what we produce domestically. It is based on a basket of goods made domestically. In our country we may produce goods that we do not consume and we may consume foreign goods. Different goods are included in the basket with weights corresponding to their share in the national GDP. Available every 3 months. It is a measure of the competitiveness of a country. 12
13 Nominal GDP The sum of final goods produced in the country at current prices. 13
14 Real GDP = GDP Constant prices GDP In terms of goods Quantities of this year, prices of a different year (the reference year).
15 15 GDP Deflator: Nominal GDP Real GDP
16 GDP Deflator
17 GDP Deflator
18 GDP Deflator steepness = growth rate 18
19 GDP Deflator
20 20
21 BIH (GDP Deflator) and BIHC (Consumer Price Index) 21
22 CHN (GDP Deflator) and CHNC (Consumer Price Index) 22
23 23 Other Price Indexes exist They may not include some goods. They may exclude certain goods on purpose. Sometimes they are the result of a political agreement, e.g. Planned Price Index In Italy for many years workers recovered the planned inflation not the actual one.
24 Inflation It is a generalized increase of prices. Some inflation is natural and necessary. Too much is a problem. It redistributes income from those with fixed income to those with adjusted income. It takes money from creditors and it gives them to debtors. 24
25 Rate: A ratio between two measurements Very often it is the ratio between a difference and a reference value 25
26 Rate of variation x = a variabie (e.g. GDP, Consumption, Investments, etc.) This variable at time t This variable at time t+1 26
27 Rate of variation x = x x t +1 t The variation of x between t and t+1 27
28 The variation rate X t 28
29 An Index H X t H is some variable A ratio between two variables or between two different values of the same variable 29
30 An Index of variation X t +1 X t 30
31 GDP Deflator P t = Nominal GDP Real GDP Y t P t = Y t 31
32 Inflation Rate P P t Inflation rate = (Price Index - 1) 32
33 Inflation Decreasing inflation Disinflation Deflation 33
34 Productivity
35 Productivity (average) A measure of efficiency The ability of transforming input into output Productivity = Output Input 35
36 Average Labour Productivity A measure of Efficiency of Labour (or of the company?) Productivity = Output. Units of Labour 36
37 Units of Labour Heads an easy measure, but what if workers are kept with reduced working hours? Worked Hours more difficult to find, but more precise. 37
38 Measures of Output Physical units. Monetary terms Total sales Value Added 38
39 Physical Measures of Output They are not affected by prices. They seem objective. Problems arise when different workers produce different goods, e.g. different type of cars or different clothes. We may actually end up comparing totally different things. 39
40 One Car 40
41 One Car 41
42 42 42 Monetary Measures of Output They are affected by prices. They take into account the value of goods. Prices may be an indicator of quality. Prices may be an effect of good management. Prices may also be an indicator of monopolistic power of the firm.
43 Monetary Measures of Output Sales are easy to find and to calculate. Sales do not only represent the effects of work but also of other inputs, e.g. expensive components. Value Added is probably a more precise measurement. Gross Value Added = (Sales Intermediate Consumption) 43
44 Intermediate consumption: Things and services that the firm buys from external sources (do not include those goods which do not disappear during production, i.e. equipment, durable production goods). 44
45 Intermediate consumption: approximately corresponds to the value of the sum of all the received invoices.(does not include those goods which do not disappear during production, i.e. equipment, durable production goods, patents,). 45
46 Intermediate consumption includes: raw materials partly finished goods sub-assemblies services you buy outside Banking costs Services of outsourcees. 46
47 Intermediate consumption does not include: Equipment Real estate Intangible Assets Wages to employees Compensation of equity Indirect taxes Interests Rents to families 47
48 Value Added: represents the contribution of labour and capital to the production process. Gross value added = + Gross output - intermediate consumption Net value added = gross value added - consumption of fixed capital (or depreciation charges) Net value added = gross wages + pre-tax profits net of depreciation + indirect taxes - subsidies. + Interests + Rents to families 48
49 French Labour productivity measured in different ways 49
50 Marginal Productivity The output created by an additional worker or by an additional unit of investment. It is used to explain differences in wages. It is used in more sophisticated analyses. It is easy to measure with simple technologies, but not with complex technologies. 50
51 What about the other production factor? 51
52 Does Gross Value Added really and only represent the work of employees? No. It also depends on the invested capital and on management. Workers may have low productivity because the equipment is very old or because the company is not well managed. And vice-versa. 52
53 Production depends on: Labour Invested Capital Type of raw materials and components. Management 53
54 The productivity of one factor depends on the others Good investments make labour more productive. Bad or little capital may heavily affect labour productivity. Good management and good marketing may improve the sale price of the product. Sometimes international conditions affect the price of the product. 54
55 Total Factor Productivity We can: - Collect the data of all the firms belonging to an industry for many years. - Define what the average firm of the industry produces in different circumstances - Compare the output of our firm with the output that the average firm of the industry would produce using the same capital and the same number of workers. - This provides us with useful information on the contribution of capital and on that of labour. 55
56 Triangular Operations
57 The Actors: The Firm in one country The Supplier in a second country The Apparent Supplier in a country with low taxation (tax heaven). 57
58 58 The Triangle The Firm The Real Supplier The Apparent Supplier
59 59 The Procedure The Real Supplier sells at low price to the Apparent Supplier. The Apparent Supplier sells at high price to the Firm and makes a profit. However it pays little or no taxes, because it is in a country with low taxation. The Firm has high costs and low profits and therefore pays little taxes.
60 60 This Procedure Hampers free and fair competition. Deprives the country of the firm from its tax revenue. Shows that there are no resources for anything. The British Government has decided to retaliate.
61 Profitability
62 62 If you need to attract capital, capital must receive some compensation This is measured in different ways.
63 63 Some Measures of Profitability Net Profit Margin EBITDA Margin Operating Profit Margin Return on Equity Return on Assets
64 64 Net Profit Margin: Net Income/ Sales Net Income = After Tax Net Profit
65 65 EBITDA MARGIN: EBITDA / Sales EBITDA= earnings before interest, taxes, depreciation (and amortization)
66 66 Operating Profit MARGIN: Operating Profit / Sales Operating Profit = Sales Non Financial Costs
67 67 Return On Equity : Net Income/ Equity Net Income = After Tax Net Profit
68 68 Return On Assets : Net Income/ Assets Net Income = After Tax Net Profit Assets In some cases people calculate: (net income + interest) / Assets
69 Financial cost Companies may make money with their core activity and then have heavy financial costs. The cost of obtaining money. Equity is only compensated when there are profits. Loans must be paid back. The higher the interest on loans, the heavier the financial burden.
70 Financial cost If a company is financed by a lender of the same shareholder, interests will remain in the same group. If the lender is in a tax haven, it will pay low or no taxes.
71 Unit Labour Cost
72 Cost of labour in different countries 10 years ago 72
73 Is German labour too expensive? 73
74 74 74 Cost of input per unit of production: Unitary cost of input Average productivity of this input
75 75 75 Cost of input per unit of production: In the case of Labour Unit Labour Cost = w = wage. Q/L average productivity of L
76 76 76 Cost of input per unit of production: In the case of Labour Unit Labour Cost = wl = Wage Bill. Q Production Production may be expressed in physical or monetary terms.
77 77 The role of Public Authority It provides the respect of the law and the certainty of rules. It regulates (e.g. the utilities) and eventually subsidizes the private sector. It provides some services that the private sector either could not produce (e.g. police, defense, justice) or would not produce in the right quantity (e.g. education and health). Purchases goods and services. Redistributes income with taxes, social contributions and transfers to people. It regulates business cycles.
78 78 In our income statement we can also observe: The tax rate. The level of social contribution. The price of utilities.
79 79 Outside the income statement: The certainty of law. The quality of public services. The quality of regulation. The size and the management of public procurement. The good management of the whole economy.
80 Wages: Do not depend only on economic considerations. Economics matters. The End 80
Economic Aspects of Wage Negotiation
1 Economic Aspects of Wage Negotiation Dr Gustavo Rinaldi ITC ILO Consultant (University of Turin, ESCP Europe) gustavo.rinaldi@unito.it The accountant's profit and loss account +Revenues (price X quantity)
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