Cost Of Labor


DEFINITION of 'Cost Of Labor'

The sum of all wages paid to employees, as well as the cost of employee benefits and payroll taxes paid by an employer. The cost of labor is broken into direct and indirect costs. Direct costs include wages for the employees physically making a product, like workers on an assembly line. Indirect costs are associated with support labor, such as employees that maintain factory equipment but don't operate the machines themselves.


When manufacturers set the price of a good they take the cost of labor into account. This is because they need to charge more than that good's total cost of production. If demand for a good drops or the price consumers are willing to pay for the good falls, companies must adjust their the cost of labor to remain profitable. They can reduce the number of employees, cut back on production, require higher levels of productivity, reduce indirect labor costs or reduce other factors in the cost of production.

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