The Reasons Behind Increasing Labour Costs Posted on: 09-12-2015

When drawing up the annual report of any company and the many components that go into the calculation of profits and losses, labour forms an integral part. It is one of the most basic expenses of any company and when added up, it says a great deal about a country’s growth rate and its labor policies. Labour costs includes the entire amount which is paid directly and indirectly to employees. It includes the basic wages, dearness allowance, contributions to the pension fund, free food, and lodging among others.

Here are some of the reasons that lead to increasing labour costs in companies.

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.

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 labor in the market due to increased competition in the industry or due to labor 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, labor 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.


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