Four factors of production needs to be used efficiently in order to maximize an organization’s profits. This post focuses on how labor, one of the four factors of production, can affect a business’ profitability.
Labor is also referred as human capital because humans put in their physical and mental efforts in business operations. Labor is involved in the manufacturing processes, management, decision-making, hiring and everything you could possibly think of. Even in capital-extensive firms, labor is required to some extent for an efficient business. Total output of a business divided by the total number of labor working gives output per worker and this measure evaluates labor productivity. According to the labor productivity theory, profitability does not depend on how many workers does a firm employs but how efficient a small number of workers are. Therefore, it is necessary to calculate total output per worker since it is the best measure of labor productivity.
The following reasons could lead to an increase in business costs entailed by inefficient labor or a lower output per worker:
Lack of motivation: It is very necessary for a business to keep its employees motivated because several studies have successfully proved that motivation keeps an employee happy and confident about work. Motivation is when an employee feels safe, secure and important in the workplace and feels comfortable in the environment he is working in. When employees are not motivated, they tend to work more slowly and may not use their best skills to tackle issues. This will lead to uneconomical decisions which will eventually increase business costs and hence reduce profitability.
Missing or imperfect skills: It is important for all employees to be highly skilled in whatever they do. Skill is achieved through training and therefore we can see how most of the successful firms provide on-job and off-job training before hiring them for the task. One major reason reported to increase business costs is the lack of professional skills of workers. This leads to them tackling a task in an inefficient manner when there is another highly efficient option that could significantly reduce business costs. Therefore, firms must pay special attention to the training of employees.
Inappropriate attitude of higher level employees: Higher level employees, especially managers, must be very friendly and lenient towards employees because this contributes a lot to the labor productivity. A study showed that in firms where managers are rude and ‘bossy’, employees tend to work under severe pressure and are not able to work as efficiently as they actually can. Therefore, managers and other high level employees must be a role model for all other employees and show them an attitude that would encourage them to work hard. Also, a good technique that managers of reputable firms use is that they appreciate the work of employees individually so they feel important.
Personal life issues: No matter how much you tell your employees to leave personal problems at home, they always remain tensed about them to some extent. Fight with spouse, financial hardships, debt burdens and illness are some examples that lead to a lower productivity of employees at work.
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