1.2.5 - Human capital, pay and trade unions

Quantity and quality of labour

A business needs sufficient labour to carry out its work and suitable labour to carry it out well.

The quantity of labour is the number of workers or worker-hours available. Too few staff can mean unfilled orders, slower service and expensive overtime. Hiring more workers can allow more production when there is enough equipment and customer demand, but employing surplus workers raises costs without useful extra output.

The quality of labour includes skills, knowledge, experience, reliability and health that affect workers' ability to produce. Skilled workers may complete tasks faster, make fewer errors, reduce waste or give better service. This can improve productivity and product quality, strengthening competitiveness. A business needing specialist knowledge cannot replace one qualified worker with several untrained workers for every task.

Quantity and quality interact. An illustrative clinic may have many administrative staff but still be unable to offer extra treatments without trained clinical staff. A factory may have skilled employees but too few worker-hours to meet a sudden increase in orders. Paying a higher wage is a cost, but a more productive worker can have a lower labour cost per unit of output than a less productive cheaper worker. Compare output and suitability, rather than judging labour only by the wage bill.

Education, training and human capital

Education and training can improve the productive abilities embodied in workers.

Education develops general knowledge and abilities such as numeracy, communication and problem solving, as well as specialist qualifications. Training develops skills for particular tasks, for example learning to operate a new machine safely. Both can increase human capital and the quality of labour. More capable workers can produce more or better output, make fewer costly mistakes and adapt to changing technology.

For an illustrative furniture business, training staff to use computer-controlled cutters can reduce errors and wasted wood. If the saving exceeds training costs, average cost can fall and the business can compete more effectively. Workers may gain access to higher-skilled jobs and stronger earning prospects. Training is an investment: fees, trainers' time and output forgone while learning are costs now in return for possible future benefits.

The benefit is not automatic. Training must suit the equipment and jobs available, and employees need chances to use the skills. Benefits may take time; trained staff might leave, so the firm loses some return while the wider economy can still benefit. Education can increase the supply of qualified workers over time, while productive skills can also make them more attractive to employers. Do not treat “more qualifications” as a guarantee of higher pay in every labour market.

Gross and net pay

Gross pay is earnings before deductions, while net pay is the amount left after the specified deductions.

For hourly work, multiply hours by the applicable hourly rate. If overtime has a different rate, calculate ordinary and overtime earnings separately before adding bonuses. A salary can instead be stated for a week, month or year; keep all figures on the same time basis.