If as a company you want to track what you spend on all your workers, then you must measure labor costs.

Every businessman is concerned about the cost of labor, that is, salaries and social security contributions. An attractive salary is essential for people to apply for jobs and work hard, but it will also reduce the employer’s profits. Hence the importance of following up.

Let’s learn more about this human resources indicator and how to measure it to better control your organization.


What is labor cost?

The labor cost corresponds to all the expenses linked to the use of the labor factor. It is the sum of the expenses incurred by a company in exchange for the work provided by an employee.

Labor costs include gross wages, that is, net wages (including vacation bonuses and bonuses) plus social contributions of employees and employers.

How labor cost is used in a company

It is useful to understand cost for several reasons, including the following points:

Cost management

If a layoff must be carried out, it is helpful to know what labor costs will be eliminated as a result of laying off an employee.


Management must know its labor costs before outsourcing any activity to a supplier, in order to estimate the company’s cost structure.

Union negotiations

If employees are represented by a union, management must know the labor cost associated with each bargaining position to determine the overall cost to the company.

Cost transfers

In some situations, the cost of labor can be reduced by passing the cost directly to customers. For example, tipping is encouraged in the hospitality industry, allowing employers to keep their labor costs down.

Advantages of controlling labor costs

These are some benefits of monitoring labor cost in your organization;

  1. Ensure proper utilization of labor : Control of labor costs is important for better control of labor in the production process. 
  2. Increase production : Controlling labor costs is important to obtain the maximum amount of production with the least amount of materials and other resources. I share with you some production indicators that you should follow up on.
  3. Ensure better quality : Controlling labor costs helps to obtain better quality of production with the least effort and time of workers.
  4. To minimize the cost of production : Labor cost control reduces the production cost of the products manufactured or services provided.
  5. To create a better environment : Controlling labor costs ensures worker satisfaction by creating a good work environment in the factory.
  6. To minimize labor : By controlling costs you can adopt the fair wage payment system and minimize labor turnover. Discover the advantage of measuring the employee turnover rate .
  7. Minimize waste : Cost control helps minimize waste of materials by workers, downtime, and unusual overtime.
  8. Ensure safety : Controlling labor costs is helpful in maintaining a safe work environment.
  9. To assist management: Cost control is important to maintain a complete record of employees and provide information to management on availability, efficiency, utilization and absenteeism .
  10. To maximize benefits : Labor cost control is very useful to increase the profitability and competitiveness of the organization.

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