How to control or reduce labor costs?

Published: 16th August 2010
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There are two ways to increase profits in any business: increase sales and reduce labor costs. Labor is an important part of the cost structure for most companies, and a small reduction in labor costs could mean a huge boost to the company's bottom line.

What Is Labor Cost?

Labor costs, wages, taxes and additional benefits (such as health insurance), that company must pay to employee during accounting period in accordance with Business Dictionary.

What Labor Costs Include?

Labor costs not only include employees hourly wages and salaries paid, but also employee benefits packages, health insurance, disability insurance, paid time off (also known as PTO) and 401-K plans.

Wage increases are expected in a fast growing economy, adding to the challenge of controlling costs and expenses. Whereas labor costs may perhaps account for a noteworthy percentage of a company's total annual operating budget, low labor costs will not necessarily be an easy way to increase a company's profit margin.

There are several ways to cut labor costs including the adoption of new technologies, labor and management training, and outsourcing. Here are some ways that can control or reduce labor costs, which could ultimately benefit your company.

Calculate overall expense

The first step in reducing the manageable costs is to know exactly how much you are spending. Find the percentage of costs such as labor, and you will know where to start saving money.

Replace blue-collar jobs with technology

Some jobs, especially in the production and distribution can be performed by machines or computer technology. Thus, replacing labor intensive jobs with technology can cut your overall labor costs.


By automating certain procedures facilitate your employees to do their work. For example, you can install the conveyor belts in the store to make it easier for workers to carry goods from one place to another.

Develop process-mapping systems

By developing process mapping system, you can train your workers in how to do their jobs more effectively. This process mapping system will vary by company to company, and you may need to hire an experienced consultant to help you design the system.

Offer early retirement

By offering early retirement to older, you can employ more highly better paid workers. This may allow you to avoid layoffs which could damage remaining workers' morale.

Cut bonuses and other perks

Think about reducing or eliminating benefits, bonuses or other perks.

Outsource certain jobs

By outsourcing some jobs to low cost countries such as India, Sri Lanka, you can cut overall costs of company. Many such foreign countries have highly educated and productive English speaking workforces. And, labor rates are normally much lower than in the United States.

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