This chapter presents a comparative examination of labor costs in LAFTA countries. Labor cost is defined as straight wages, year-end bonuses, profit-sharing arrangements, family allowances, and employer's social security contributions. Also included is an adjustment for the difference in vacation and holiday pay in the various countries.
Labor costs are compared in money terms; they are converted into a common currency by the use of the official rather than the purchasing power parity exchange rates. This is because the labor cost comparisons are used for an examination of cost advantage and potential trade flows within the region. For such purposes the rates that determine intercountry trade and exchange are the relevant ones. It is usually on the basis of the officially set rates of foreign exchange that traders decide what to export and import.1
The methodology and procedures used in this chapter are the same as those in the previous one. Stepwise regression equations were run with logs of wages as the dependent variable, and the qualitative job requirements, intercept country dummies, and slope country dummies as the independent variables. A particular step was chosen on the basis of the previously discussed criteria, and from the corresponding regression equation, wages corresponding to the quartile combinations of qualitative variables were estimated. From these, wage relative indices and rankings were constructed. The results differ from the previous ones basically in terms of the wage concept used, and therefore the regression equations and the quartile levels of the independent variables will not be reproduced here.
In table 5-1 the labor costs by quartile are presented for the textile industry. These quartile wages are then averaged in geometric fashion, by applying the weights used previously. The results are presented in table 5-2.____________________