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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