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Factors of Production: Labor

Updated on July 7, 2014

Meaning of Labor in Economics

Labor is one the most important factors of production. Without labor, other factors of production, namely land, capital and organization cannot operate. Therefore, labor is known as an ‘active factor of production’. Labor refers to the work performed by a person for a monetary consideration. Labor includes both physical and mental tasks. Hence, not only a construction worker but also a software engineer delivers labor.

Who is a laborer?

Anyone who delivers labor is known as laborer. Note that labor denotes only the work performed by a person. Laborer refers to the person who performs the task. We could say that laborer is a human being and labor is a factor of production. Labor is completely different from other factors of production because it involves all sorts of human emotions. For this reason, to handle labor as a factor of production is a challenging task for business management. If you want to be a successful human resource (labor) manager in an organization, it is crucial that you are aware of the peculiarities of labor.

Peculiarities of Labor

1. For an organization, labor is just a product; labor is a product, which can be used to perform various tasks of the organization; labor cannot be purchased but can be hired only. A job offer does not mean that the company is purchasing you. The offer simply means that the company is hiring your service (labor) only. However, companies forget this and think that they own the labor. This is a starting point for all problems such as labor disputes.

2. You are a laborer when you work for a company for monetary benefits. If you do not work on a particular day, it is a loss for you. The reason is that your labor (ability to work) is dwindling as each day of your life passes. Therefore, you cannot store your labor for future purpose.

3. Labor can never be separated from the laborer. In other words, a laborer is the sole owner of his labor (ability to work). Therefore, labor is basically a human being. An entrepreneur cannot treat labor just like any other factors of production. The management must respect its workers’ personal life, customs, traditions, sentiments and so on. Anything that denigrates the self-respect of a worker certainly influences his quality and quantity of the work negatively.

4. Among the four factors of production, labor is the only one, which has the poorest bargaining power. There are various reasons for the weak bargaining power of labor. Automation is one eminent factor that keeps the bargaining power of labor under control. In some countries, the supply of labor is abundant. In such cases, laborers have to accept low wages because of competition. India and China are examples for ‘excess supply of labor and low wages’. In general, laborers are unorganized. Therefore, employers tend to practice unethical tricks to lower the bargaining power of labor.

5. We have seen that labor is not a machine but a human being. Therefore, it is very difficult to move labor from one place to another. Everybody wants the comfort of the hometown. In addition, new customs, traditions, practices, language, environment and so on are all obstacles for labor mobility. Hence, labor is a less mobile factor.

6. The supply of labor is inelastic. It means that you cannot increase or decrease the supply of labor at your will. Excess supply of labor results in low wages. Scarcity of labor results in wage rise. However the supply of labor may be, the prudent act of a government is to utilize its labor supply optimally and efficiently to develop its economy.

7. A laborer is a producer and a consumer at the same time. Laborers produce goods. When the finished goods are ready to sell in the market, same laborers become consumers.

8. Not all laborers are same in efficiency. Efficiency differs from laborer to laborer because of factors such as education, training, observation skills, willingness to learn and experience.

9. Demand for goods plays a vital role in determining the demand for labor. For instance, during depression, there is a less demand for goods and services in the market; therefore, we see many employees losing their jobs. During prosperity, when demand for goods and services increases, companies tend to be on a hiring spree. Hence, demand for final goods and services determines demand for labor.

10. Low wages, in some cases, tend to increase the labor supply. Suppose you are the only one working person in your family. Now your employer reduces your salary because of recession. In order to compensate the income loss, your other family members also have to look for jobs. In this way, low wages tend to increase the labor supply. Many of the third world countries experience this phenomenon.

11. Companies invest money on labor to improve efficiency. Capital invested on labor to improve efficiency is known as human capital investment. However, it is very difficult to calculate the exact cost of production of labor (costs involved in the process of creating a perfect labor).

© 2012 Sundaram Ponnusamy


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