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Nominal and Real Cost of Labor:

 

The payment which a labor receives for his services constitutes his income. But from the point of view of the entrepreneur, that remuneration forms a part of the cost of production. Just like wages, the cost of labor can also be looked at from two points of view:

 

(1) Nominal Cost of Labor:

 

By nominal cost of labor is meant the total money wages paid to the labor for the services.

 

(2) Real Cost of Labor:

 

Real cost of labor is measured in relation to the work performed by him.

 

Difference Between Nominal and Real Labor Cost:

 

If a labor is receiving high nominal wages or if the cost of labor is high, it should not be concluded that the labor will be dear to the employer. It is due to the fact that all labor are not equally efficient. A labor receiving higher nominal wages than his counterparts may be producing more commodities than others. And thus his labor cost per unit of commodity produced may be low. On the other hand, a labor receiving low wages may be dear to the employer as his labor cost per unit of the commodity is higher than the one who is getting higher wages.

 

Example:

 

For instance, we take the case of two persons, Jem and Lara, who are working in a certain cotton factory. Jem is getting $1000 monthly as his remuneration for the services which he renders and Lara $2000. Jem produces 20 meters of cloth per day and Lara 80 meters, if we compare the total output of both and the reward of the two workers, we will find that Lara's output is equal to four times than that of Jem's while the wages are only equal to two times. The labor cost of engaging Lara per unit of the commodity when estimated will he less than that of Jem. Thus, it can be said that a highly paid labor is really a cheap labor. It is due to the following reasons:

(i) A highly paid labor puts heart and soul in the work. As he takes keen interest in the work, the total output is increased more than proportionately to the increase in wages.

(ii) A well paid labor is generally honest. The entrepreneur has not to employ any extra person for the supervision of his work. This reduces the cost of supervision and direction.

(iii) Another point to be taken into consideration is that a highly paid labor being well contended takes better and greater care of the machinery used. The entrepreneur is thus saved of much-cost of depreciation of the machinery.

It can thus be concluded from the above discussion that labor receiving higher wages may be nominally dear but really he is cheap.

 

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How are Wages Determined/Theories of Wages Determination
Nominal and Real Cost of Labor
Minimum Wage
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