Labor cost is the overall costs to a company associated with one employee, including wages, benefits, taxes and insurance. Recruiters and human resources managers have to take labor costs into account in every aspect of their jobs. How much the department or hiring manager can pay for an employee will inform everything from the job description, the job title, the way the job is marketed to applicants, the type of candidates the recruiter can seek out and the offers they can make to those candidates.
Labor costs are generally the highest expenditure for most businesses, as they incorporate the sum total of all human related work needed for company operations.
Elements of Labor Costs
There are many different elements to the cost of labor for an employee. Some of these costs are set by the government (taxes), and some are set by the client (benefits). Salary costs are determined by many different factors like the labor market, the candidate’s experience and the client’s labor budget. Sometimes the fee paid to a recruiter is also considered part of the labor cost for an employee in the same way that a signing bonus is part of labor costs.
When figuring labor costs, companies calculate the wages paid to an employee over a certain amount of time, which can be a year or a quarter, depending on accounting practices. Salaries are affected by many different factors like other salaries within the company, seniority or time on the job, salaries for similar positions in other companies and the job market in general. While many people think that salary is the major component of overall labor costs, it can sometimes be less important than other elements.
Many people immediately think of health insurance when they consider job benefits, but this category of labor cost can also include things like sick leave, tuition reimbursement, profit sharing, severance packages and sign on bonuses. Often, these benefits can be more important to a job candidate than wages, so recruiters should always ask candidates what sort of benefits would be more appealing to them. For example, a younger candidate might take a lower salary if it means that they can get reimbursed for tuition for further education to advance their career.
When talking about labor cost for one employee, administrative costs are the costs of hiring, training and insuring a particular new hire. Wages and fees paid to human resources professionals and recruiters are often considered administrative costs, as are workers’ compensation insurance and other costs. Some companies will add these costs into a general human resources budget, but others will consider this part of the labor costs for employees.
Cutting Labor Costs
In tough economic times, many businesses are looking to cut labor costs and improve their bottom line. This is both good and bad news for recruiters. Cutting labor costs can also be bad news for headhunters because some of the first jobs cut are contingency and contract labor like contingency recruiters. It’s good news because companies may do more promoting from within the company, which creates job openings for entry-level positions, and recruiters can place college graduates or candidates who are starting their careers.
Corporate accounting and HR offices are usually the most likely to be involved in either reducing or expanding labor costs. It is usually viewed in relation to product profit, as a determining factor of profit margin. Companies will usually try to match or beat their particular industry’s standard operating costs (the highest component of which is usually labor expenditures.)