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Labor costs refer to the total expenses incurred by a business to compensate its workforce. These costs can be divided into direct and indirect labor costs:

1. Direct Labor Costs

• Wages or salaries paid to employees directly involved in producing goods or services (e.g., factory workers, construction workers).
• Bonuses and overtime pay.

2. Indirect Labor Costs

• Salaries of employees not directly involved in production (e.g., HR staff, supervisors, office administrators).
• Benefits like health insurance, retirement contributions, and paid time off.
• Payroll taxes and workers’ compensation.

Factors Affecting Labor Costs

• Minimum wage laws
• Union agreements
• Cost of living in a region
• Industry demand for skilled workers
• Technology and automation (which can reduce labor costs)