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THE ANALYSIS OF CORRELATION BETWEEN THE LABOUR PRODUCTIVITY AND THE WAGE IN LATVIA

THE ANALYSIS OF CORRELATION BETWEEN THE LABOUR PRODUCTIVITY AND THE WAGE IN LATVIA
Znotina Daina, student

Conference participant

In the present research the pairs correlation method was used to analyse the correlation between the labour productivity and the wage in Latvia by kinds of economic activities for the period from year 1998 to 2008. In the result of the research the author also considers the possibilities to increase the labour productivity in Latvia.

Keywords: kinds of economic activities, added value, labour productivity, net wage, Latvia.

1. Introduction

With the decrease of people amount – in the result of negative population growth and negative migration balance, which we can observe in Latvia for the period of the last two decades, for the sake of development of the state economy, it is important to use effectively the available human resources. The labour productivity is the marker characterising the output of the work that is put in, where the wage is one of the factors contributing to the increase of the desire to work with the greater output. Macroeconomic regularities determine that with the increase of the labour productivity the wage also should grow.

Research aim is to make the correlation analysis of the labour productivity and the wage by kinds of economic activities in Latvia in order to determine the possibilities to increase the labour productivity.

Research objectives: 1) to characterise theoretical aspects of the labour productivity and the wage; 2) to substantiate the chosen research methodology; 3) to make the correlation analysis of the labour productivity and the wage by kinds of economic activities  in Latvia; 4) to make conclusions about the possibilities to increase the labour productivity in Latvia basing on the made analysis.

Research periodis from 1998 to 2008.

2.  Theoretical aspects of the labour productivity and the wage

The relation between wages and productivity is important because it is a key determinant of the standard of living of the employed population as well as of the distribution of income between labour and capital [5]. The labour productivity is the marker of the labour effectiveness – the production volume in the certain period (year) to one person employed in the country or in the company. The labour productivity depends on personnel’s capacity for work (physical and mental data, health, qualification, experience, age, etc.), desire to work (creative attitude to work and other contributing conditions), provision with tools (modern machines and technological equipment, outfit, work place arrangement, etc.) [3].

Labour productivity is defined as the output per hour of labour input, i.e., as the average output per unit of labour. In the special case of Cobb–Douglas technology, the marginal product of labour is proportional to the average product of labour, i.e., to productivity. In that case, the wage paid by a competitive firm should rise at the same rate as the rise in productivity. With a more general technology, however, the marginal product of labour is not necessarily proportional to productivity. For example, if capital deepening causes a rise in productivity and the elasticity of substitution between capital and labour is greater than one, the marginal product of labour will rise proportionately less than productivity. The implication of this is that since the actual technology may not correspond to the Cobb–Douglas specification, we should not be surprised if compensation and productivity do not move exactly in proportion to each other [5].

Concerning the usage of human capital, Latvia is one of the leading countries (in 2008 it was on the 5th place) in the Central and Eastern Europe, unfortunately in the case of Latvia the high employment does not mean the higher productivity of human capital [1]. The low labour productivity per hour in its turn is determined by three factors: 1) a relatively low level of physical capital – Latvia has a great potential in the infrastructure improvement; 2) in Latvia there is a relatively low level of human capital; although quantitative such indicators as amount of students or the length of studies exceed the average values in the EU, the low labour productivity indicates that the qualitative (that are more difficult to measure) indicators of education in Latvia are low; 3) in Latvia there is a low total productivity of factors, which in econometric studies is understood as the level of technology. It is linked to the level of physical and human capital – the higher is the level of technology, the higher are requirements for production equipment and personnel’s qualification [8].

3. The characterisation of the research methodology

The gross domestic product from the production aspect is calculated as the sum of total values added (in basic prices) of all kinds of economic activities or institutional sectors and products taxes (except subsidies) [6].

In the European Union the classification of economic activities is made according to the statistical classification of economic activities in the European Community NACE. Since 2008 the classification of economic activities is made according to the new version of NACE 2. As the author in the article is studying the labour productivity for the time period from 1998 to 2008, in order the data would be comparable the author uses the classification of economic sectors according to NACE 1.1.revision (also for year 2008). According to the present NACE revision, all kinds of economic activities are divided into 17 basic groups [13]. For calculations of the labour productivity according to the value added by kinds of economic activities, the author has divided the economic activities into 6 groups: 1. Agriculture, hunting, forestry, and fishing (A, B); 2. Mining and quarrying, manufacturing and services of these sectors (C, D, E); 3. Construction (F); 4. Wholesale and retail trade, accommodation and food service, transportation, communication and repair service activities (G, H, I); 5. Financial activities, real estate activities (J, K); 6. Public administration, public, social and individual service activities (L, M, N, O, P).

The gross labour productivity on the scale of the whole country for the definite time period is calculated as a numerator taking the total gross domestic product, but as a denominator taking the number of employed people (Formula 1) [11].

  (1.)

When calculating the labour productivity by kinds of economic activities, products taxes are generally not included into the gross domestic product, only the total value added of economic activities are considered (Formula 2).

 (2.)

Calculations of the labour productivity by kinds of economic activities are shown in Table 1. Further in the practical research the author uses the method of pairs correlation analysis with the aim to determine how close is the connection between the factorial and effective feature. The labour productivity is selected as the effective feature; its values are shown on the Oy axe. The net wage is selected as the factorial feature; its values are shown on the Ox axe. As the research period the author has selected 10 years, the time period from 1998 to 2008, when the Latvian economy gradually stabilised and there was observed the rise. As in calculations of the labour productivity the author uses the total value added, which does not include product taxes, for the second indicator – the wage, the author also uses the net wage, i.e. after taxes are paid. 

4. Correlation analysis of the labour productivity and the wage by kinds of economic activities  in Latvia

Data represented in Table 1 show that in the time period from 1998 to 2008 the labour productivity has increased every year almost in all sectors; that was followed by the growth of the net wage.

After the grouping of sectors made by the author, the correlation analysis has been made for each kind of economic activities. It is represented graphically on Figure 1. Obviously, there is a moderately strong correlation (G,H,I and J,K) or a very strong correlation (A,B; C,D,E; F; L,M,N,O,P) between the labour productivity and the net wage in all sectors. Further the author will make the situation analysis in each group of economic activities.

In sectors of agriculture, hunting, forestry, and fishing(A, B) there is a strong linear correlation between both features – the labour productivity growth and the net wage increase, correlation coefficient r=0,97936 indicates that the correlation between both features is very strong. In the time period from 1998 to 2008 the average labour productivity per one person working in these sectors was 2295 LVL, the average wage per one person working in these sectors was 1519 LVL.

 Mining and quarrying, manufacturing and services of these sectors (C, D, E) – correlation coefficient r=0,974437 indicates that the correlation between both features is strong. In the time period from 1998 to 2008 the average labour productivity was 6085LVL, the average wage was 1967LVL.

Construction (F)– correlation coefficient r=0,988232 indicates that the correlation between both features is strong. In the time period from 1998 to 2008 the average labour productivity was 5743LVL, the average wage was 1829LVL.

Table 1.

Labour productivity, net wage and correlation coefficient by kinds of economic activities in Latvia 
according to NACE 1.1. rev., years 1998-2008, LVL per year

Source: Author’s calculations according LR CSP data.

Wholesale and retail trade, accommodation and food service, transportation, communication and repair service activities (G, H, I)– correlation coefficient r=0,634763 indicates that the correlation between both features is moderately strong. In the time period from 1998 to 2008 the average labour productivity was 8302LVL, the average wage was 1963LVL.

Financial activities, real estate activities(J, K) – correlation coefficient r=0,734448 indicates that the correlation between both features is moderately strong. In the time period from 1998to 2008 the average labour productivity was 17444LVL, the average wage was 3827LVL.

Public administration, public, social and individual service activities(L, M, N, O, P) – correlation coefficient r=0,999159 indicates that the correlation between both features is very strong. In the time period from 1998 to 2008 the average labour productivity was 5391LVL, the average wage was 2117LVL.

From the received results we can conclude that during the 10 years period in Latvia the sectors with the highest productivity, which is followed by the average wage, is: Financial activities, real estate activities(J, K). These are capital intensive sectors. The high labour productivity can be explained by the mutual development tendencies of both sectors that were observed in Latvia during the 10 years period – the real estate purchase and sale operations and crediting connected to these operations. On the second place as the sectors with the highest productivity in Latvia there is Wholesale and retail trade, accommodation and food service, transportation, communication and repair service activities (G, H, I), but the average wage is comparatively higher in the following group of sectors - Public administration, public, social and individual service activities (L, M, N, O, P). The high productivity in the group of sectors Wholesale and retail trade, accommodation and food service, transportation, communication and repair service activities (G, H, I) can be explained by the developed services sector in Latvia.

Sectors with the lowest labour productivity and the lowest wages in Latvia are - Agriculture, hunting, forestry, and fishing (A, B). Though, Latvia has the necessary resources: the land used for agriculture, forests, waters for the development and intensification of the productivity of these sectors.

Sectors, where the correlation between the labour productivity and the net wage is moderately strong, are Wholesale and retail trade, accommodation and food service, transportation, communication and repair service activities (G, H, I) and Financial activities, real estate activities (J, K), since 2002 in these sectors the net wage is significantly behind the growth of the labour productivity.

One of the macro economy indicators that allow to evaluate the average wage in the national economy, whether it is too high or low comparing to the labour productivity, is the specific weight of the wage in the total value added. In Latvia the specific weight of the wage in the total value added during the stable inflation (2000 – 2005) ranged from 50 to 55%. In the period from the 3rd quarter of the year 2007 to the 3rd quarter of the year 2009 the part of labour force income exceeded 60% from the total value added; as a result it was one of the indicators characterising the internal unbalance of the Latvian national economy. In years of the rapid growth the lack of the labour force was the reason for the increase of wages above the corresponding level of the labour productivity.

Figure 1.Graphical representation of the labour productivity and the net wage correlation
by kinds of economic activities in Latvia according to
NACE 1.1. rev., years 1998-2008

Source:Developed by the author basing on her calculations.

Although the competitive ability of employers has decreased, in short time period the wage increase was substantiated by the expectations of the increasingly faster business extension and by the production equipment purchased on credit. Afterwards the rapidly diminishing gain has lead multiple companies to the threshold of bankruptcy, making them reduce the production volumes, and also – gradually – the number and wages of employees [9].

In general, evaluating the situation in the sphere of the labour productivity in Latvia, we can conclude that in 2008 the Latvian productivity per one working person was 51,3 % from the indicator of the European Union. In Estonia this indicator was 64,7%, in Lithuania – 61,3%. The lowest markers of productivity were in the newest member states of the European Union – Bulgaria 36,5%, Romania – 47,7%. The highest productivity markers in 2008 in their turn were in Luxembourg – exceeding the average level by 72,8%, in Ireland – by 31,5%, and in Belgium – by 24,3% [2]. During the 10 years the productivity per on working person in Latvia was increased by 40%, in Estonia by 56%, in Lithuania by 50%. These are the fastest productivity growths in Europe. During the ten years Poland has succeeded to increase the productivity by 25%, the Czech Republic by 19%, and Hungary by 7% [14].

5. Possibilities to increase the labour productivity in Latvia

In production the most important factors are technical organisation factors, but in the sphere of services the vital factors are personnel and product factors. Both in production and services spheres the determinative factors for companies are those ones of product market – if the is a demand for the products or services of the company, then there is work and a reason to try to produce more (render more services).

Eurostat in its studies about the productivity in European countries [11] indicates that capital intensive sectors have the highest productivity indicators. In these sectors the more significant role pertains to the connection between the volume of invested money and the number of employed people that was considerably reduced due to the technology development. The capital intensive sectors are mining and quarrying, manufacturingindustry, real estate activities, electricity and gas supply, water management. The labour intensive sectors, for example, services where a great number of employers is used (retail trade, accommodation, food service), in their turn show the low productivity.

The labour productivity can be increased in two ways: 1) using more powerful equipment; 2) to increase the specific weight of the high added value products in manufacturing. In the result of the labour productivity increase, the amount of products or services per one working person is increasing, the time for product manufacturing (service rendering) is getting shorter, the costs of these products (services) is decreasing, which positively influences the total activity effectiveness. For private companies the high effectiveness ensures the more stable position and bigger opportunities on the market. For organisations of the public sector the high effectiveness is the real assertion that the work confirms to the interests of the national well-being. The national well-being depends on the value of produced goods and services. It is important for all companies to understand that future achievements depend on the orientation to the higher value added. For that purpose the qualified personnel and support are necessary to enter the foreign markets. The only thing that can ensure the development of Latvian economy in the future is the increase of productivity, because, when employers increase wages not increasing the labour productivity, they stimulate the inflation. However, there are sectors, when the labour productivity can be increased to the certain limit, for example, in sectors of Wholesale and retail trade, accommodation and food service, transportation, communication and repair service activities (G, H, I) the human factor is and will be important. The important solution in the increase of the productivity is the new technologies — investments can compensate the lack of the labour force, but the technology cannot replace the human. For example, in agriculture separate countries can pay much higher wages because they get three times higher area payments, but not because they work more effectively. Latvian households that are market-oriented what concerns technologies are not behind the old EU states, but they are few. There are still many partially natural households. The increase of wages correspondingly the growth of the labour productivity is the way of development that also will contribute to the growth of employment. On the contrary, if the labour productivity is not being increased, but instead the new growth of wages will begin, increasing the wages above the corresponding level of the labour productivity for a short period of time (few years), that again will be followed by the painful wage correction and consecutive increase of unemployment.

 

Literature:

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