What is the Cost of Labor?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 07 December 2018
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Cost of labor is a cost of doing business associated with maintaining employees. It includes the cost of payroll along with benefits and any taxes paid on behalf of employees by the employer. Labor costs can be a significant business expense, especially for a large company with a number of employees, and they are an important consideration when evaluating the expenses incurred by a business. Businesses must think about the cost of labor before making decisions about wages, benefits plans, and other issues that could potentially increase labor costs.

Employees may not be aware of the cost of labor, as the only costs they directly see are the funds paid out with each paycheck. Depending on the benefits a business provides and tax policies, employers may spend much more on maintaining individual employees. While benefits like insurance and pensions are often negotiated at a bulk rate, the costs of these benefits still add up over time. Taxes are fixed expenses and cannot be avoided with cost cutting measures, and in some regions, they can be quite significant.


Employers developing payscales weigh the cost of labor when thinking about how much pay to offer employees in various positions and when to offer raises. They must also think about this issue when they develop benefits plans. Once benefits are provided they are difficult to retract and the costs of those benefits is calculated over the long term to see if they are a feasible option for the company; something like health insurance, for example, might be out of reach for a small company without the clout to negotiate a bulk insurance rate.

The cost of labor adds to the end cost of products and services produced by a company. The number of hours of labor involved in production are an important factor in pricing, as employers must think about these costs along with raw materials, general overhead, and other expenses. To keep product prices competitive, employers may look to the cost of labor as a potential expense that can be controlled to keep costs down, by doing things like not offering benefits or keeping wages low.

Calculating the cost of labor for a given company can be challenging. Companies providing public records about their financial activities account for labor-related expenses in their disclosures, but these expenses are often not broken down to provide specific information about the costs of individual benefits and other employee expenses.



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