Major Factors Affecting Labor Costs

by Wanda Thibodeaux; Updated September 26, 2017
Warehousing - people at work

Businesses have a multitude of expenses, one of the largest of which is labor. Companies often employ various strategies to keep labor expenses at a minimum. Even so, several factors dictate what businesses end up paying employees. Most of these reach far beyond the individual business and are a part of the larger economic web.

Worker Availability

When there is a shortage of workers who have the skills, talents, experience and education necessary to complete the tasks an employer needs done, the few workers who are available can demand higher pay. Conversely, as the number of workers available increases, employers can start offering lower wages. This follows the basic rules of supply and demand, assuming that the demand remains constant.

Location

Employers must offer wages that accommodate the current cost of living. Thus, in regions with a higher cost of living, wages typically are higher than those where the cost of living is low. In the United States, this generally means that wages are lower in the Southwest, as data for various industries from the Bureau of Labor Statistics' Occupational Outlook Handbook show. Urban areas generally have a higher cost of living than that found in rural regions.

Task Difficulty

Workers generally receive higher compensation when the tasks they must complete are more complex or difficult. For instance, performing brain surgery is a much more difficult task than typing a manuscript. There often is a correlation between task difficulty and higher education, and with doctorates typically earn the highest wages.

Efficiency

Efficiency in business means that it takes less time or resources to do a job and that labor costs go down in most cases. A plethora of factors can contribute to company efficiency and therefore lower labor expenses. For example, if employees constantly have to repair the machinery they use, it takes them longer to finish tasks. Employers subsequently must pay more to complete the same job. Building layout, scheduling issues, conflicts between workers and poor managerial planning are additional examples of inefficiency sources.

Unions

The presence of a union often means wages will be higher if an employer uses union employees, as the union sets a minimum rate of pay for its members. Unions can keep rates higher by controlling the number of members -- that is, they may manipulate supply and demand.

Legislation

The Fair Labor Standards Act is a federal regulation that dictates how employers compensate their employees. In addition to setting a general minimum pay rate, FLSA also dictates what constitutes hours for compensation. In addition to the FLSA, employers are bound by state wage regulations. Employers cannot pay laborers less than the amount specified in these laws.

Employer Philosophy

Some employers place a higher value on labor than others. Companies in which management views employees as the lifeblood of the business often provide high rates of pay, in part as a way to increase job satisfaction and recognize the role this plays in job retention, as keeping employees over time generally tends to be cheaper than recruiting and training new workers consistently. In other companies, particularly when the nature of the task does not require a high skill set and worker supply is high, workers are viewed as important but also disposable or interchangeable. These companies don't offer rates that are as competitive.

About the Author

Wanda Thibodeaux is a freelance writer and editor based in Eagan, Minn. She has been published in both print and Web publications and has written on everything from fly fishing to parenting. She currently works through her business website, Takingdictation.com, which functions globally and welcomes new clients.

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