Labor rates and labor costs are not the same thing. What is the difference between them then?
Labor rates
Labor rate is the hourly wage or salary paid to an employee. It is calculated by dividing the employee’s total compensation by the number of hours worked.
Labor rates are typically used to compare the cost of hiring different employees or to calculate the cost of completing a particular task.
An employee has a labor rate of USD$10 per hour. This means that the employee is paid USD$10 for each hour that they work.
Labor costs
Labor costs take productivity into account. Labor cost is the total cost of employing a person, including the labor rate, plus other costs such as payroll TAXes, benefits, and training.
Labor costs are typically used to understand the overall cost of labor to a business and to budget for labor expenses.
The employer’s total labor cost for this employee is higher than USD$10 per hour. The employer also needs to pay payroll taxes, benefits, and training for the employee. For example, the employer might pay an additional USD$2 per hour for payroll TAXes and USD$3 per hour for benefits. This means that the employer’s total labor cost for this employee is USD$15 per hour.
How to manage labor costs?
When considering cutting costs, business managers should attempt to lower labor costs which are a significant portion of Total Costs (TC). You can check different types of costs here.
However, business managers need to worry both what people cost the business and what they do every day. Managers should remember that the issue is not just what you pay people, but also what they produce. Employees, anxious to meet quotas and earn commissions on repair sales, may be selling unneeded services to unsuspecting customers. Also, workers who come only for money will also leave for money
That is why low labor costs are a potent competitive strategy including quality, service, delivery, innovation, etc. Pay cannot substitute for a working environment high on trust, fun, and meaningful work.
Overall, when paying workforce on a more group-oriented basis, people will not work hard because they know that if rewards are based on collective performance and their colleagues make the effort, they will share in those rewards regardless of the level of their individual efforts.
People in organizations are interdependent, and therefore organizational results are the consequence of collective behavior and performance.
