Do Labour Costs Really Matter?

Abstract

This article examines the size and significance of labour costs in modern manufacturing industry. Labour costs are doubly salient because wages are both part of the input costs of production and a way of distributing net output. The evidence on British manufacturing shows that labour accounts for less than half of production costs and two-thirds or more of net output. When profit is a relatively small residual claimed by capital, labour costs determine profitability. But the linkage to final product costs and prices is much weaker. The macro- and micro-economic implications of these facts are explored and the positive success of the Japanese in managing labour costs is contrasted with the negative achievements of British manufacturing. It is argued that British managers are handicapped by poor control of the production process and a narrow obsession with direct labour and work practices.