Understanding a business’s labor costs

Labor cost is the total sum of wages paid to employees, the cost of payroll taxes, and employee taxes paid by an employer. Labor cost is mainly divided into indirect and direct costs. Indirect costs refer to costs linked with support labor, such as employees involved in maintenance of factory equipment. On the other hand, direct costs are wages paid to employees involved in the production processes, such as workers in an assembly line or who help in clearance sales. If you are interested in buying men’s wear, you can check boohooman customer feedback, and if the reviews are okay, you can buy your piece from the e-commerce men’s store. Below are insights that will help the reader to understand the cost of labor in businesses.

When a company sets a product’s sales price, it considers the overhead cost, the cost of materials, and labor costs. The sales prices should incorporate the total incurred cost. If any costs are left out on calculating the sales price, the profit the business gets will be lower than the anticipated profit. If a product’s demand declines or competition compels a business to cut prices, it will be necessary for the company to lower its labor cost to remain profitable. Reduction of labor cost can involve reducing the number of employees, adopting higher productivity levels, or cutting on the production itself or factors affecting the production cost.

Fixed and variable labor costs

Labor costs can also be classified as variable and fixed costs. Variable costs denote costs that vary with a firm’s production level. For instance, the cost of running the machinery. On the other hand, fixed expenses include long-term service fixed contracts, for example, a contract that a company may have with an outsider provider for maintenance and repair of equipment.

Factors affecting labor costs

Supply and demand

 Supply and demand affect wages. Just as it is the case when a company is setting a service’s or product’s price, if there’s a shortage of workers in a particular field the company is hiring in, the company will have to pay relatively high labor costs. On the other hand, if there’s an availability of skilled workers in surplus, this will mean that the company will lower the cost it pays its workers.


If workers will have to deal with issues relating to efficiency, including shortage of necessary materials, equipment that are poorly managed, and unproductive meetings, among others, this tends to increase labor costs. Another culprit that has the effect of increasing labor costs is inefficient scheduling. It is worth noting even factors such as the layout of a building can affect labor costs. For example, if your employees have to walk 100 yards to perform a specific task due to poor workflow planning, it will take longer and incur additional costs to complete the work.

Task difficulty

Generally, the more the skills and education needed to complete a job, the higher the labor costs. Companies that need to hire highly literate employees who have specialized skills often have higher labor costs than organizations capable of quickly training employees to do repetitive and simple tasks. Employees with exceptional skills combination usually command for the highest wages.


The location of your company greatly affects the labor costs it will incur. Companies that have factories in regions that are depressed economically often incur lower labor costs than those situated in areas with higher living costs. Also, if a company is looking for employees that are highly skilled in a region without an educated workforce, it might incur higher labor costs as the company will be needed to offer financial incentives to the employees for them to relocate to this region.

The philosophy of the employer

Certain employers usually value labor than others. Companies with management that values employees as the businesses’ lifeblood will often offer employees high rates, which helps boost the employee’s job satisfaction and also plays a significant role in job retention, which tends to lower the cost as it is cheaper to keep employees over time that it is to train and recruit new ones.


Some laws dictate the rates that employers compensate employees, such as the Fair Labor Standards Act (FLSA). FLSA sets a universal pay rate while also dictating what makes up compensation hours. There are also state wage regulations that employers have to abide by. Employers cannot pay workers lesser rates than those set by the specific laws.


When a worker’s union exists, wages tend to be higher as the union will set for its members a minimum pay. Unions also tend to ensure rates stay high by controlling their member number to manipulate supply and demand.

In conclusion, the reader can get essential insights regarding a business’s labor costs with this article.