Unit labor costs measure labor compensation relative to labor productivity. Defined as compensation per unit of real output (see Appendix II for a detailed description of this index), unit labor costs are a better indication of business profitability than labor compensation alone, and are the most crucial component of the cost of doing business within a geographical region.

Labor compensation growth, over time, is directly linked to growth in labor productivity. A workforce that is producing more output per person (i.e., higher productivity) will experience higher growth in real earnings. This growth in real earnings will not jeopardize a region's business competitiveness when matched by commensurate productivity gains. Growth in labor compensation that is not matched by productivity gains, conversely, will result in higher unit labor costs and deteriorating business competitiveness.

Relative business costs have been a major factor affecting regional economic performance. As U.S. businesses find it increasingly difficult to raise prices due to greater competition from both home and abroad, relative business costs will likely play an increasingly important role in business location decisions. States or regions that maintain uncompetitive unit labor costs will see an exit of capital and business formation to more competitive regions.

Table VII in Appendix I shows the time series of unit labor costs for each state and the District of Columbia from 1990 through 2000. Not surprisingly, the results show a clear pattern of higher unit labor costs in non-RTW states during the past decade. According to Economy.com, only three RTW states in 2000-Florida, Utah and Virginia-had unit labor costs above the national average (U.S.=100) while 11 non-RTW states exceeded the average. In 2000, RTW and non-RTW states' unit labor costs averaged 93.2 and 98.1, respectively. Uncompetitive at the start of the decade, Michigan's unit labor costs rose to 109.2 by 2000, ranking it second in the nation behind New Jersey.  See Chart 11.