and nearly five times less than increases in Japan, 

 which recorded the largest gains. However, 

 starting from a relatively high level of produc- 

 tivity in 1960, the United States might not be 

 expected to sustain the same high proportional 

 gains as countries starting from a lower produc- 

 tivity base. 



The effectiveness of a nation's productivity 

 level is perhaps best indicated by the measure of 

 "unit labor cost" (i.e., hourly labor costs divided 

 by output per man-hour). If gains in productivity 

 exceed increases in the cost of labor, then unit 

 labor costs drop, products can be produced at less 

 cost, and sold at lower prices, placing a nation in a 

 favorable competitive position in the inter- 

 national market.-'" 



Trends in this index for manufacturing 

 industries are shown for the five countries in 

 figure 1-18. It can be seen that productivity gains 

 in the U.S. were sufficient to offset increases in 

 labor cost from 1960 through 1965 and again 

 from 1970 through 1973. Productivity rises in 

 1974 were negligible, however, while hourly 

 labor costs had the largest yearly gain of the 

 entire period. As a result, unit labor costs in 

 manufacturing industries rose more rapidly 

 than in any other year since World War II. 



Gains in hourly compensation in 1974 ex- 

 ceeded advances in productivity in other coun- 

 tries also, and by even wider margins than in the 

 United States. Thus, unit labor costs increased to 

 an even greater extent in foreign manufac- 

 turing. The 1973-74 increase in Japan was nearly 

 30 percent and in the United Kingdom nearly 20 

 percent, both of which were the largest year-to- 

 year gains in unit labor costs experienced by 

 these countries during the 1960-74 perit^d. 



Figure 1-18 



Unit labor cost' in Manufacturing Industries, 

 by Selected Countries, 1960-74 



llndex 1960 = 100) 

 230 



220 



210 



200 



190 



180 



170 



160 



150 



140 



130 



120 

 110 



100 



90 



^1 



Japan ^ t 



W. Germany V«* 



•A* 



>^- 



--/.•• 



I I I I I I \ I \ I 1 L 



I960 '61 '62 '63 '64 '65 '66 '67 '68 '69 '70 '71 '72 '73 '74 



(Pre.) 



' In national currency unadiusted for inflation. 

 SOURCE: US. Oepartment of Labor 



Balance of trade in R&D-intensive products 



The U.S. position in world trade depends upon 

 a variety of factors, including the price of its 

 products, the effectiveness of its international 

 marketing, trading arrangements with other 

 countries, and its performance in technological 

 innovation. Such innovation, as discussed 

 elsewhere in this report, depends significantly 

 upon research and development. 



-'" For a discussion of recent trends in these factors, see 

 Patricia Capdevielie and Arthur Neef, "Productivity and Unit 

 Labor Costs in the United States and Abroad", Monthly hihor 

 Ra^iew, July 1975; for a detailed analysis of the role of these 

 factors in international trade, see Compeliliveness of U.S. 

 Industries. United States Tariff Commission, 1972. 



The precise role of R&D and technological 

 innovation in U.S. trade have not been deter- 

 mined, although recent studies suggest that it is 

 substantial. ""o Some indication of this is provided 

 by analyzing the U.S. trade balance in terms of 

 the products involved, with the latter classified 

 according to the relative level of R&D invest- 

 ment of the industries which produce the 

 products. For this purpose, products from 

 industries-*' with (a) 25 or more scientists and 



^° Raymond Vernon (ed). The Teihitology f:ictor in Inffr- 

 national Trade, (New York: Columbia University Press, 1970). 



<i Only manufacturing industries (which account for 

 nearly all industrial expenditures for R&D) are included in 

 the analysis. 



24 



