What are the fixed costs of labor?

Labor is usually concceived as a variable cost. Is it completely variable though?

Is employing 1 person to work 100 hours* a week while giving a wage of 100K the same as employing 2 persons to work 50 hours a week while giving each a wage of 50K or employing 4 person to work 25 hours a week while giving each a wage of 25K?

I can see that the cost of hiring them would be greater. Apart from that, how is employing more people to work less hours each but as many hours combined more expensive?

*Ignoring the increased cost of overtime.

It depends on what benefits are involved. If the company pays for (even part of) a medical plan, then each additional worker raises the company’s total cost. Likewise payments for some forms of retirement programs.

If the company supplies uniforms or tools, same thing.

Any HR-related functions will get more expensive. Each time card processed or each hire/fire cycle or each annual evaluation costs something. The company pays some sort of fee for each paycheck they issue and each 401K account they maintain.

Depending on local law, some taxes, notably unemployment taxes, are levied on a per-worker, not a per-payroll-dollar basis.

Other than the benefts, most of these costs are minor.

Note the benefit issue can cut both ways. E.g. If the company pays medical for full timers but not part timers, they can take a single 40-hour job with bennies, give it to two part timers at the same base hourly wage & pocket the money that used to be spent paying for a medical plan. The rest of the incremental marginal admin costs for the second worker ought to be far below the savings provided by no longer funding medical care for the first one.

Also, your original question isn’t quite right. When folks talk about labor being a variable cost, they mean it scales more or less with sales, not that it varies or doesn’t by the labor headcount.

If your factory is going to produce 2x the widgets, you’ll need 2x the bodies to run the machines more hours. Or if you need to cut production, you can, within reason, cut workers (or at least worker-hours) proportionally.
As with any discussion of fixed / varable costs of any factor of production, this is true in the center of the range, but not at the edges.

There is such a thing as fixed overhead labor, such as having managers & support staff. These don’t scale with production or sales, at least not directly. So while your direct production labor may scale directly with sales/production, there’s also a baseline quantity which doesn’t.

Also you can’t reduce actual production labor too far because you may need distinct skill sets. And one guy can’t run a big factory or an entire IT infrastructure or both man the cash register & restock shelves all by himself.

On the increase side, there comes a point where you can’t throw more labor at the problem without growing your overhead labor also. Eventually you need more middle managers & more HR folks.


I understand that labor is a variable costs in that it varies with production rather than headcount.
I asked this question because I’ve heard that many workers, especially in professional occupations like lawyers, would be willing to take a pay cut to work less. I was wondering why more employers aren’t offering that.
People face a trade-off when it comes to consumption (i.e.: working to be able to consume) and leisure. It’s not zero sum, but there’s a trade-off. I was wondering about the effect of diminshing marginal returns on both consumption and leisure and how they interact.
When someone is allocating their time 100% to leisure and 0% to consumption, and starts to sacrifice leisure for consumption, the units of leisure they sacrifice are the least useful they have. The units of consumption they gain are the most useful.

Example: If you go from spending 100 hours a week on leisure to spending 90 hours a week on leisure and 10 hours a week on consumption in exchange for 200$, the 10 hours of leisure you’ve sacrificed were likely spent doing something that was the least pleasant of the things you did. On the other hand, those first 200$ are spent on goods which are extremely useful (shelter, food).
As more leisure is sacrified for consumption, the units of leisure being sacrificed are more and more useful whereas the units of consumption are less and less useful.

Example: If you work 100 hours a week with no leisure time for 2000$ a week, you might very well find that having 90 hours of work and 10 hours of leisure would be more useful more than what you could buy with a 10% of your wage. You might be willing to take more than a 10% paycut in exhange for working 10% less.
So I’m wondering why we don’t see more employers offering reduced working hours in exchange for further reduced paychecks, especially in professional services.
In fields like law, it seems there would be a lot of people, especially women, who would be willing to be paid 50K for 50 hour weeks rather than 100K for 80 hours weeks.

One possible explanation I had was fixed costs to employers.

Good thinking & FWIW, I agree with your premise.

For most non-factory jobs, adding additional workers increases the costs of coordination. Two people sharing what used to be a single lawyer or computer programmer job need to spend time (& hence the employer’s money) handing off the project to each other at each changeover.

In the USA today, there is the fact that people are totally dependent on their employer for medical care, and most companies offer it only to full time workers. That is a huge obstacle to increasing flexibility.

One of the huge boons to both workers and employers woud be if Obamacare actually did what the Demos started out to accomplish. Decoupling affordable medical care from full time permanent employment would be a huge gain in flexibility for both parties. I don’t want to start a debate about the merits of the legislation as implemented. But the idea would have been great.

Also, employers hold all the cards on hire / fire / promotions / career paths. As long as business leaders all read the same magazines and they all preach that minimum headcount sweating 100 hours is the cheapest way to do things, they’ll follow that mantra.

If being a flexible employer becomes fashionable, you’ll see a lot more flexible employees.

Addressing this part of the question specifically, there are some reasons why companies don’t do this.

First, I don’t believe the workers. It’s not that I think they’re intentionally lying. It’s just that a few months at 75% of their usual salary would change their mind about it. They’d realize pretty quickly that they could go look for a job that would offer 100%. And the ones who would leave are the best qualified and best connected.

This puts the employer at a disadvantage, especially when the economy starts to scale up. If your people go from 75% time to 80% as the economy improves, but your competitor offers 5 jobs at 100% time, then the competitor can pick off your best people. While this scenario is perhaps best for the workers and maybe even for the economy as a whole, it is not best for the employers.

The employer would rather sack their pick of the workforce and then rehire as needed.

Second, there are morale issues. Conventional wisdom in business schools is that one big layoff is better than several small layoffs. And layoffs are better than wage and hour reductions. Workers with low morale are less productive and more likely to steal from the employer.

As mentioned, there are some costs per head. Unemployment is one - the federal government taxes the first $7,000 in wages per year, and my state taxes the first $37,000. So a lot of low-wage employees are more expensive than a few high-wage ones, but only by a few hundred dollars a year.

Medical and other benefits can be scaled with wages, but traditionally are not. When medical benefits do scale with wages, workers perceive it as a double cut to pay - they make a lower salary and have to shoulder a higher deduction for the medical insurance. While these costs can be a few thousand a year, the so-called fixed costs are not as important as the morale and retention issues.

Don’t forget training as a fixed cost. There’s the hiring and any formal training, but probably even more importantly the woman with experience at the firm who knows the ropes is a lot more valuable than the G-D newbie, even if you’re not paying her that much more. And two women splitting a job stay newbies for twice as long as one doing the whole job.