New York, U.S.A. — Amid continued economic, financial, and political turmoil, several E.U. countries are seeing improvement in a crucial measure of competitiveness. According to a new Executive Action Report from The Conference Board, the cost of labor per unit of output has fallen significantly in a number of the hardest-hit economies, led by Ireland and Eastern Europe.

For the Euro Area, controlling unit labor cost (ULC) — defined as nominal labor compensation per unit of real output —may be key to redressing the competitive unbalance between core and periphery that has haunted a continent and fueled four years of recurring crisis.

“A drop in unit labor cost is an important sign of the beginning of adjustments in Europe’s most trouble economies,” said Bart van Ark, The Conference Board Chief Economist and co-author of the report. “For now it is mainly the reduction in wages which leads the adjustments, but once productivity begins to increase as well, it could be the key to a more sustainable recovery.”

Since states within the Euro Area cannot devalue their currencies or dictate interest rates, boosting ULC and, thus, competitiveness relative to other members of the zone can only come about through real changes in worker efficiency,” he adds.

There are early signs that the rebalancing through unit labor cost adjustments is under way. While France, Germany, Austria, and other relatively strong continental economies have pursued social welfare policies to limit unemployment during the downturn — thereby reducing productivity and increasing unit labor costs — countries with more flexible labor markets in the “Anglo-Saxon” model have been able to make faster adjustments.

Ireland lowered its ULC by 5.3 percent between 2008 and 2011, a success only rivaled by less mature Eastern European countries such as Hungary, Latvia, and Lithuania, which still retain their own currencies. Elsewhere outside the Euro Area, ULC in the U.K. has fallen by 3.6 percent — the sharpest decline of any large economy.

In the most troubled European economies of Greece, Portugal, and Italy, a tradition of rigid labor markets kept unit labor costs rising through the early years of the crisis. Continued weakness and deepening austerity measures, however, have recently pushed them towards turning points suggesting a strong reduction in costs and faster efficiency gains compared to the Euro Area’s northern core.

In Greece, ULC rose by 4.4 percent overall between 2008 and 2011, but fell by more than 5 percent from 2010 to 2011. With its large contingent of flexible part-time workers, Spain is further along; Spanish ULC fell 4.4 percent between 2008 and 2011. Across the Euro Area, unit labor costs in manufacturing have fallen by 3.9 percent in the past two years, after rising at the outset of the crisis.

Because of the rapid shifts in unit labor cost in recent years, the German manufacturing sector has become less competitive in terms of cost per unit of output relative to the manufacturing in many other European economies — again, led by Ireland, Eastern Europe, and the United Kingdom. Dramatic reductions in workforce and compensation have propelled British firms ahead of formerly more cost-competitive French, German, and Italian rivals. Meanwhile, Ireland is now Europe’s most efficient manufacturing economy by far, ahead of even low-wage off-shoring destinations like Poland.

In contrast to manufacturing, the service sector — which is more labor-intensive with output largely composed of non-tradables — remains a weak performer across Europe. Only Spain and the United Kingdom have managed to substantially lower unit labor costs in the services sector. With output falling faster than workforce or wages can be cut, Germany, France, Greece, and Ireland all saw significant ULC increases in services. The remarkable 41.5 percent decline in Irish ULC for manufacturing was largely offset by a 26.4 percent ULC increase in services.

Given the significant private and public sacrifices needed to bring down unit labor costs against an over-strong currency, an exit from the Euro Area altogether has become a tempting option for the most troubled economies. To test the consequences of a Euro Area exit, The Conference Board modeled the impact that regaining a national currency — and independent monetary policy — would have on unit labor costs in a country like Greece compared with alternative scenarios.

“The huge devaluation following an exit from the Euro Area would certainly boost competitiveness in the first year or two,” said Bert Colijn, labor market economist for The Conference Board Europe and co-author of the report. “But these effects would quickly evaporate, as the subsequent recovery in labor compensation in the medium- to long-term outpaces GDP growth. Hollowing out labor costs can only do so much. Lasting competitiveness gains must ultimately come from the productivity side of the unit cost labor equation.”

“For this reason, we found that neither a troubled economy nor the Euro Area as a whole is likely to benefit in the long run from a unilateral exit, or a wider breakup, or the status quo of muddling through,” says Colijn. “Ultimately, the best outcome for competitiveness is achieved with greater fiscal integration, including a banking union and Eurobonds, that will encourage the sort of investment needed for productivity, innovation, and competitiveness that is substantive and sustainable.”

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NEW YORK, U.S.A. – Customers have always been fickle, but never before has it been so easy for them to channel discontent into social-media campaigns with potentially disastrous consequences for companies. In The Conference Board Review cover story, “Anger Management,” writer John Buchanan explores how technology has helped spur “a massive power shift,” emboldening consumers to express their outrage. Still, counsels Buchanan, there’s plenty that organizations can do to keep their customers from turning on them.

“The kind of business move that used to generate mild grumbling and then grudging acceptance,” writes Buchanan, “now brings immediate denunciations, viral social-media protests, front-page headlines, and the worst fate of all: being made an example of.” Buchanan points out three companies – Netflix, Verizon, and Bank of America – which recently suffered the wrath of unhappy customers. He illustrates how and why changes in policy quickly snowballed into major PR debacles for these organizations.

It’s not just bad management decisions that can spark massive consumer revolts. It’s often a lack of empathy, explains Buchanan. While this is hardly a novel complaint, what’s different now is the ability of consumers to connect through social media, create a firestorm, and force companies to take notice and, many times, alter policy. What might begin with one dissatisfied tweet can quickly turn into an avalanche of negative publicity for an organization.

“Companies have to realize that the business environment has changed,” Buchanan writes. “But they haven’t yet. And they haven’t realized how intense the consumer anger is.” By doing a better job of listening to their consumers, businesses might be able to avoid backlashes.

For example, executives should interact more with customers, online and in the field. And companies should engage their PR departments more when making decisions that will impact consumers. Unfortunately, Buchanan points out that market research is “a discipline that has been devalued at a time when managers wrongly believe that they can grasp customer sentiments by having a summer intern monitor tweets and Facebook posts about the company’s brands.”

At the same time, it’s not only consumers that are scrutinizing and reacting to marketing decisions. Increasingly, boards are second-guessing management and judging leaders by how well they cater to and respond to customer demands. Ultimately, the message is clear: Pay attention to your customers.

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Freddie Mac recently released the results of its Primary Mortgage Market Survey, showing average fixed mortgage rates finishing the year near their all-time historic lows helping to keep homebuyer affordability high. Averaging 3.95%, the 30-year fixed has been at or below 4.00% for the past nine consecutive weeks and only twice in 2011 did it average above 5.00%.

News Facts

• 30-year fixed-rate mortgage (FRM) averaged 3.95% with an average 0.7 point for the week ending December 29, 2011, up from last week when it averaged 3.91%. Last year at this time, the 30-year FRM averaged 4.86%.
• 15-year FRM this week averaged 3.24% with an average 0.8 point, up from last week when it averaged 3.21%. A year ago at this time, the 15-year FRM averaged 4.20%.
• 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.88% this week, with an average 0.6 point, up from last week when it averaged 2.85%. A year ago, the 5-year ARM averaged 3.77%.
• 1-year Treasury-indexed ARM averaged 2.78% this week with an average 0.6 point, up from last week when it averaged 2.77%. At this time last year, the 1-year ARM averaged 3.26%.

Average commitment rates should be reported along with average fees and points to reflect the total upfront cost of obtaining the mortgage. Visit the following links for Regional and National Mortgage Rate Details and Definitions. Borrowers may still pay closing costs which are not included in the survey.

Attributed to Frank Nothaft, vice president and chief economist, Freddie Mac.

• “Mortgage rates ended the year hovering near historic lows in an already affordable housing market. For instance, the seasonally-adjusted S&P/Case-Shiller 20-City Composite home price index in October was the lowest seen since March 2003. The largest hit areas were Las Vegas with the lowest reading since January 1997 and Atlanta which was since June 1998.

  It’s not surprising then that over 5% of households in December plan to purchase a home over the next six months, the highest share since May, according to The Conference Board.”

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