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Understand what labor market costs are, how they emerged, why they influence the economy and what you need to know to understand their impact on companies and the lives of workers.
The Beginning of Labor Costs: A Historical Perspective
Understanding labor market costs It is essential for anyone who wants to better understand how the economy works, labor relations and decisions made by companies and governments.
Often, when we talk about work, we only think about the salaries paid to employees. However, the costs involved go far beyond that.
They encompass a range of economic, social and legal factors that shape hiring structures and investments in human capital.
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History reveals that work has always had a cost, even when money did not yet exist. In ancient societies, such as those of Egypt or Mesopotamia, work was carried out by servants, slaves or artisans who were paid in the form of food, shelter or other goods.
Over time, especially after the Industrial Revolution in the 18th century, work began to be measured in hours and paid in money, giving rise to what we know today as salary.
This period, as recorded by the historian Eric Hobsbawm in “The Age of Revolutions”, was a milestone in the change of working conditions and the global economic structure. It was at this moment, therefore, that the concept of labor cost began to take hold in a more objective way.
According to the website of Brazilian Institute of Geography and Statistics (IBGE), Industrial Revolution, which began at the end of the 18th century, caused a radical change in working conditions, bringing new concepts of productivity and remuneration that persist to this day.
The transition from manual labor to the use of machines created strong pressure on companies, which began to seek to maximize profits by reducing labor costs.
What makes up labor market costs?
In the modern era, labor market costs involve more than just direct wages. Furthermore, there are social charges, taxes, benefit costs, training, recruitment and selection expenses, among others.
In Brazil, for example, the cost of a formalized worker is composed of several elements.
The employer pays not only the gross salary, but also the FGTS, employer INSS, 13th salary, paid vacation with a one-third increase, and, in some cases, transportation vouchers, meal vouchers, health insurance and other benefits.
These additions are known as labor benefits and can represent a significant percentage of the base salary.
According to National Institute of Social Security (INSS), social security contributions are mandatory and form an important part of labor costs in Brazil.
A Social Security Reform, which came into force in 2019, changed the rules for contributions by workers and employers, directly impacting the value of social charges.
O Brazilian governmentthrough the Ministry of Economy, estimates that the changes made by the reform will have a positive effect on the Union's budget, reducing, in the long term, the cost of pensions and benefits.
In addition, the cost of the labor market also involves companies adapting to local and sectoral regulations.
Companies need to invest in compliance with labor laws, which may include costs for audits, legalization processes and hiring specialized professionals to ensure they are in compliance.
This type of cost, often invisible, has a direct impact on the financial viability of companies, especially small and medium-sized ones.
Labor laws and differences between countries
If we look more broadly, we can see that these costs reflect the worker protection model adopted by a country.
In countries with stricter labor laws, the costs are higher, as the State seeks to guarantee a safety net for employees.
In countries where regulations are more flexible, on the other hand, costs for the employer may be lower, but this may also mean fewer guarantees for those working.
A globalization and technological progress also transformed labor market costs.
With the emergence of new forms of work, such as home office, freelance work and temporary contracts, companies began to look for alternatives that offered greater flexibility and fewer costs.
However, this also raised important debates about precariousness, instability and the need to adapt legislation to the new realities of work.
According to International Labor Organization (ILO), advances in technology and the rise of remote work have caused significant changes in labor costs in several countries since the early 2010s.
In 2020, with the pandemic COVID-19, these phenomena have intensified, requiring rapid adaptations in companies and governments to ensure the continuity of economic activities.
The change in labor relations also reflects a new global economic scenario. Indeed, with the growing interdependence between international markets, many companies began to look for alternatives to reduce production and labor costs.
This includes, for example, the outsourcing of services and process automation, which end up directly impacting labor market costs.
Technological transformations and new ways of working
A automation e a artificial intelligence, for example, are factors that directly affect labor market costs.
Machines and software can replace functions previously performed by humans, reducing personnel costs. However, this change requires workforce retraining and creates new challenges for market inclusion.
This way, the education and professional training therefore become fundamental strategies to reduce the social impacts of these transformations.
According to World Economic Forum (WEF), automation and artificial intelligence have the potential to replace even 85 million jobs in the world by 2025.
However, it will also create new opportunities in areas such as technology, health and education. This scenario therefore demands continuous preparation and adaptation of workforces around the world.
O opportunity cost in business decisions is also relevant for understanding labor market costs.
This term is used to indicate what a company or person stops gaining by choosing a certain alternative.
In the case of work, it could mean time spent on training or even the choice between hiring an experienced professional or training someone with less qualifications. These are decisions that involve investment, risk and expected return.
In recent years, the COVID-19 pandemic accelerated the process of digitalization and transformation of work models.
With the increase of home office, for example, many companies have reduced infrastructure and travel costs, but have also faced challenges with technological adaptation and remote training.
This global phenomenon has brought new dimensions to labor costs, with an emphasis on digital tools, remote work and new demands for flexibility.
Productivity, performance and return on investment
The cost of labor is also directly linked to productivity. The more productive a worker is, the more value he generates for the company.
In many countries, there is a constant attempt to balance wages and productivity, ensuring that salary increases are accompanied by improvements in performance.
Otherwise, costs increase without an equivalent return, which can harm the financial health of the business.
According to World Bank, the relationship between productivity and labor cost has been a crucial factor for the development of emerging countries.
In 2021, for example, Brazil faced significant challenges due to low productivity compared to other Latin American countries, which increased labor costs and hampered international competitiveness.
On the other hand, investments in employee well-being and qualifications can generate significant returns for companies.
Continuous training, mental and physical health incentive programs, and adequate working conditions can increase worker satisfaction and commitment, which is reflected in increased productivity and work quality.
This ends up generating a positive cycle for companies that invest in their employees.
Os unions and collective bargaining also plays an important role in this scenario. When negotiating salary adjustments, benefits or better working conditions, they end up directly influencing labor market costs.
These negotiations are legitimate instruments that seek to balance the interests of employers and the rights of workers.
The impact of labor costs on the economy
In the field of economics, labor costs are analyzed on several fronts. They influence the level of employment, the indexes of inflation, competitiveness of a country and even monetary policy.
If costs rise too much, companies can pass this increase on to the prices of products and services, generating inflation. On the other hand, if costs fall dramatically, this may indicate loss of rights or increase of unemployment.
According to International Monetary Fund (IMF), the relationship between labor costs and inflation is one of the biggest challenges for developing economies.
During decade 2010, inflation was often driven by increases in labor costs.
Especially in emerging countries, which faced both internal and external pressures. This impact can also be observed in the global labor market.
