Labor is a semi-variable cost. Semi-variable costs have elements of variable costs and fixed costs. Variable costs vary with increases or decreases in production. Fixed costs remain the same, whether production increases or decreases. Wages paid to workers for their regular hours are a fixed cost. Any extra time they spend on the job is a variable cost.

In a factory that makes dresses, the variable costs are the fabric and the labor used to make the dresses. Assuming the company employs 10 laborers, and the minimum wage in the state of operation is $8, the company has a fixed cost of $80 per hour in the form of salaries. If it takes six hours for a laborer to make a dress with eight yards of fabric, then two laborers would make two dresses in 12 hours and use 16 yards of fabric. An increase in the number of dresses (production) means there must have been an increase in the number of laborers and the size of the fabric used.

If the company in the above example requires all its workers to work six hours per day, the fixed cost for the company, if it pays minimum wage to each worker, per day is $48. If the size of the fabric required to make a dress is eight yards, then the company has a fixed cost of 80 yards per day for each worker. If a worker works for more than six hours per day, the extra amount paid to the worker is a variable cost because the worker is free to determine how many extra hours to spend working. The worker may also want to work extra time on a specific day but is free to choose whether to work on a different day.