Before we talk about why entrepreneurs go for cheap labour, let’s first of all understand what LABOUR is.
What Is Labour?
Labour refers to all human efforts used in the productive process, usually for a wage. The efforts may be physical or mental, skilled, semi-skilled or unskilled, scientific or artistic.
- Skilled Labour is labour that has undergone a relatively long and special type of training. Its cost is usually high. e.g. teachers, accountants, lawyers, programmers, etc
- Semi-skilled Labour is labour that has undergone some form of training, but not as specialized as skilled labour. Its cost is relatively cheap when compared with skilled labour. e.g. tailors, masons, etc.
- Unskilled Labour requires little or no training. Its cost is usually cheap. e.g. labourers, porters, cleaners, etc.
Why Entrepreneurs Go for Cheap Labour
To Reduce Costs of Production
The overall reason entrepreneurs go for cheap labour is to reduce cost of production. It is obvious that the first challenge an entrepreneur faces is to produce quality product or render quality service. The second is to offer such product or service at the lowest possible cost. Cost of labour takes a huge chunk of production costs of a business’s products and services because it is recurrent in nature. It is therefore factored in pricing for the goods and services. It should really be kept absolutely low for the business to survive. Every business must keep its costs of production low for it to survive especially the small businesses.
Market Price of the Goods and Services
Costs of production supposed to determine market prices of goods and services, but when the business man does not have total control of price fixing, he tries to find a way to cut costs of production which labour cost is one of. There is need to keep labour cost low when the consumers are only willing to pay cheap price for quality goods and services. The entrepreneur is therefore compelled to keep cost of labour low. To offer cheap products and services, the cost of labour must be cheap also. Cost of labour is factored in product pricing. Production costs don’t usually determine the price of a good or service, rather market price most times does. When there is a particular price customers are willing to pay for a good or service, the supplier of such good or service has to try as much as possible to reduce his costs of production. When competitors are willing to sell for cheap prices, probably big companies that produce in larger quantities, you must cut your costs to be able to compete with them to remain in business. Don’t it baffle you how imported goods from China and India are cheaper than locally made ones? The reason is not far fetched — cheap labour. Products from China and India are flooding Nigeria, Africa and global markets at cheap prices because there are cheap labour in those countries.
Limited Business Funds
The major constraint entrepreneurs or small businesses face is lack of fund. Fund is back bone of every business. When there’s limited fund, entrepreneurs try to make the best out of he little they have to run their businesses. Business owners do not have control over other costs of production like land, raw materials, machineries, rents except labour. This makes entrepreneurs to go for cheap or unskilled labour. Read 5 Resources An Entrepreneur Must Have At His Disposal To Harness Entrepreneurial Business Opportunity. In that article I extensively explained the importance of fund in entrepreneurial business enterprise.
Excess Supply of Labour
When there is excess in supply of labour, demand and supply law sets in. If there are too many people chasing fee jobs, the employers will not be willing to pay high prices for the available jobs. Workers themselves, most times, are willing to accept any pay just to eke out a living. Despite that the type of labour determines if it will be cheap or costly, when there’s over supply of labour in the labour market, the skilled labour is likely to become cheap. This is what we are experiencing in Nigeria today due to high level of unemployment.
Size of Business
Size of business plays a rule in the kind of labour a business can recruit. Small businesses may not be able to afford the kind of labour big companies can afford. Small businesses invariably has low turnover, and it’s from turnover that operating costs are paid for. Small businesses produce small quantities of products. When production quantity is low, production cost is higher due to fixed costs that do not change irrespective of quantity produced. The production size therefore affects the pricing of products, and the small businesses may not be in control of the market prices of the products and services. They have the large companies that produce in mass to compete with in the marketplace. Since fixed costs are not proportional to size of production, cutting labour cost becomes the low hanging fruit for the entrepreneur to cut costs of production.
Profit Maximization
Every entrepreneur is profit oriented. Entrepreneur accepts profit as legitimate reward for enterprise, so he tries everything possible to maximize his profits. Maximizing of profits also determines survival and growth of his entrepreneurial business enterprise. Entrepreneurial business enterprise is not a charity venture or government establishment; it is for profit making. In as much as businesses are established to meet societal needs, it’s for profit making, otherwise, it becomes charity organization. Profitability of any business is what makes it viable. Wage bills affect profitability and survival of small businesses.
What Is The New Trend?
Outsourcing
The need for cheap labour has given birth to outsourcing. The outsourcing or contract staffing is gaining prominence in labour market. This is because contract labour is cheap, contract staff are not entitled to many work benefits full staff members enjoy. Benefits like allowances, pay raise, training, promotion and retirement benefits, and other incentives. In outsourcing, people with the required skills are hired periodically; no room for training and promotion. Once the work contract ends, your contract is either renewed or you are laid off, new person with higher skills is contracted instead of training you to acquire same skills.
Bottom Line
Entrepreneurs go for cheap labour to reduce costs of production, and maximize profits. When there is excess supply of labour in the labour market, entrepreneurs are likely to offer cheap prices for all labour, whether skilled, semi-skilled or unskilled. The new trend is outsourcing of labour as a means of getting cheap labour.
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