Question

Primary reasons for relative changes in labor costs are increases or decreases in:

1. compensation.
2. productivity.
3. exchange rates.
4. A and C.
5. all of the above.

Answer 1

Answer: E : All of the above.

Explanation for the answer :

Productivity : 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.

Decreasing productivity – One of the main reasons behind the increase of labour costs is the decrease in productivity. This might occur due to the increase in idle time and increase in employee turnover or higher attrition rates. Idle time is the non-productive time spent by the employees during working hours.

Long lunch breaks are one of the examples, where employees spend a considerable amount of productive hours in non-productive activities. Errors in work also increase both loss in wastage and time spent on rework. This is also an example of decreasing productivity, which ultimately leads to an increase in labour costs. Higher turnover also leads to an increase as with each new batch of employees the company has to bear the related hiring and training costs.

Compensation : 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.

Higher pay to employees – This particular reason of increasing labour costs can be due to a number of reasons:

• Government regulations– Often the government comes up with certain rules and regulations to put a standard amount that has to be paid by organizations to their employees. It could be in the form of an increase in their basic pay or in the form of other employee benefits and perks, like health insurance, and others
• Supply-demand mismatch– When there is a higher demand of labour in the market due to increased competition in the industry or due to labour union strikes, labour costs might go up in order to secure employees to continue the production process
• Shortage of employable skill– Some industries require skilled or semi-skilled labour. When there is dearth in such skill, labour costs may go up in order to secure the handful of people who are skilled enough for the job. Similarly, when organizations hire unskilled labour, they have to train them to get them ready for the job, and this too increases labour costs