Unit Labour Costs (ULC) are calculated as the ratio of total labour costs to real output. In the OECD System of Unit Labour Cost Indicators the target variable for the quarterly indicator of real output is constant price value added compiled according to the System of National Accounts 1993 (SNA93). Where this target variable is not available a production index covering the respective economic activity is sought.

Where the use of proxy variables is required, an indicator of their quality can be determined by evaluating the correlation between annual growth rates in the proxy indicator and that of the SNA93 benchmark data. The following table (as collated on 16 March 2007) presents these correlations and also describes the type of proxy variable used.

The correlations give an indication of the reliability of the quarterly real output proxy variable used in the compilation of the ULC for the relevant country and economic activity. A low correlation implies that users should take caution when viewing the resultant quarterly ULC prior to reconciliation with annual benchmark data (which generally occurs with a 12-18 month lag). However the following processes used in the OECD System of Unit Labour cost Indicators also need to taken into account when understanding how these proxy variables are treated:

• Benchmarking: As part of the compilation production process of the OECD System of Unit Labour Cost Indicators, all quarterly variables are benchmarked (temporally disaggregated) against annual SNA93 values; and in all cases SNA93 data is available. This benchmarking procedure, using the Fernandez method in the software package Ecotrim, will in simple terms ensure that the quarterly proxy of real output has a correlation of 1 with the annual value for the overlapping period. As part of the Fernandez method also, the quarterly end points where there is no supporting annual data will in essence be smoothed and trend towards the long-term series average.
• Seasonal adjustment: The final ULC are seasonally adjusted using the TRAMO-SEATS method in the software package Demetra. In addition to the seasonally adjusted series, TRAMO-SEATS produces a trend-cycle series that includes all non-seasonal and non-irregular movements in the underlying time series. This series can be regarded as a smoothed seasonally adjusted series, where the degree of smoothing is dependent on the underlying ARIMA model.
  

Footnotes:
1. The Market Services Residual Compilation for the United States is compiled as: the Business Sector minus Industry minus Construction. The calculation (and the correlation) take place after the benchmarking procedure. For more metadata see: USA Unit Labour Cost Metadata