Unit labour costs (ULCs) reflect total labour costs relative to a volume of output. Hence, growth in unit labour costs is often viewed as a broad measure of the international cost competitiveness of firms within a country.

Despite their frequent use, unit labour costs (ULCs) are an incomplete measure of international competitiveness, as they deal exclusively with the cost of labour and do not consider changes in the cost of capital or intermediate inputs. For this reason, they need to be complemented with other indicators. In an era of global value chains, a measure based only on the costs of domestic labour may not be representative of overall cost competitiveness of firms within a country. Moreover, ULCs as a measure of cost-competitiveness cannot capture the capacity of firms to serve international markets through high quality goods and services and where demand is relatively price inelastic.

Economic theory suggests that countries more open to international trade should grow faster and have higher income levels than less open ones. International trade enables firms to specialise in goods and services that can be most efficiently produced in the home country; to sell to larger markets, hence exploiting economies of scale; and to benefit from higher quality and variety of inputs as well as technological spillovers and knowledge exchange. Trade also puts pressure on prices for final goods and intermediate inputs and facilitates international fragmentation of production processes, further reducing costs. Firms exposed to international competition ought to innovate continuously in order to succeed.