This working paper discusses the use of unit labour costs (ULC) by the European Commission as a measure of competitiveness of exports, especially in central and Eastern Europe (CEE). It shows the flawed nature of the European Commission’s argument that increasing wages ahead of measured productivity would necessarily represent  a threat to export competitiveness. In fact, past history has shown rising unit labour costs and rising relative wages have frequently accompanied increasing exports. It demonstrates that the recorded measure of productivity appears to be low in countries with lower wage levels precisely because wages are low, even when the work performed is often very similar, or identical, to much better-paid work in higher income countries.  The conclusion is that there is scope for significant wage increases without harming export competitiveness. 

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