International Competitiveness and the Unit-Labor-Cost-Based Competitiveness Index

Abstract

The paper attempts to estimate a unit labor cost based competitiveness index for Turkey. The trade weighted real effective exchange rate isthe generally used measure of external competitiveness,which at timesmay fail to explain why a country's export performance improves despite its overvalued currency. When unit labor costs of Turkey and its trading partners are compared, it is seen that especially over the 1999-2003 period, Turkey's unit labor costs remained far below those of its trading partners and hence the unit labor cost based competitiveness index turned in favor of Turkey. Hence, during this period the overvaluation of the TL was more than compensated by the reduction inunit labor costs. Turkey, during the last few years experienced relatively higher growth rates which was export led and the outcome of increased productivity. This is why despite the growing output, employment was notaffected.