Labor, Land, Tax, & Profit

 I was going to write a different blog post when I realized I was going on a tangent. I think I need to explain my thinking first.

I have been exploring the concept of inflation and I was trying to figure out if it was the products(materials) or labor that was causing the increases in prices. In this blog post, I hope to conceptual deep dive into what it takes to get the products we buy to market.

“If you want to make an apple pie from scratch, you must first invent the universe” - Carl Sagan. I am not going to go down to the atomic or subatomic level, but I am going to go with the premise that there are four elements that go into the cost of the items we purchase. These are labor, land, tax, and of course profit. I am going to show how each of these plays a role and how some overlap.

Labor may seem like an obvious element for the production of a product. In cost accounting, we look at both direct and indirect labor when calculating the cost of goods (sold) manufactured. But labor costs go beyond that. There is the labor for marketing/advertising, selling, and administrative expenses for running the business. What if I told you that labor goes deeper than that? Let's consider the labor that goes into the raw materials that are used to make the product. For this example, we are going to assume that the product uses lumber that is delivered as a main raw material. Labor (and all 4 elements) goes into the cost of the lumber. There is the cost to have the lumber loaded on the truck, the labor to deliver the lumber, and the labor for the vendor to offload the lumber from their supplier's trucks. Now let's take into account other labor for this supplier. What about their clerk who schedules the deliveries, the worker who cleans their warehouse, the worker who maintains their fleet of trucks, the salesperson's salary, and so on? And this goes all the way back through the supply chain to the lumberjack that fell the tree.

And this concept does not just go towards the labor for materials. All four of these elements go towards anything that adds cost to the product, either as a direct cost or as they call it in cost accounting “factory overhead”. So what about the factory? What labor costs does the buildings and facilities a business use have? There are somewhat obvious labor costs like the cost to maintain the building: like plumbers, painters, gardeners, etc. but what about the labor cost to build the building? These labor costs don’t just include the people swinging hammers, but all the labor for the builder's administrative expenses, the inherent labor costs of the materials used (as I demonstrated in the paragraph above), and the inherent labor in the machinery used to build the building.

So, what about machinery? Let's go back to that original product that we were discussing. That product used lumber as a main material. But tools are needed to transform the lumber into the end product. So we can assume some type of saw is needed. There are labor costs that the company pays because of that saw. They need someone to purchase the saw. If it is a big saw they need someone to unload it. For safety, the person or people that operate that saw need to be trained. Now let's dive deeper. The cost of the saw has labor built-in. and these are similar (if not the same) costs as the lumber. And labor is a factor all the way back into the supply chain to the miner that dug up the iron ore used in the saw blade.


Now that we covered labor and inherited labor, let's look and land. At first glance when thinking of land we think of the property that the business occupies. If the business owns the land then the purchase price of the property is the land. We already discussed how the labor is associated with any buildings on that land. So the purchase price is not just land. It is labor, taxes, and profit too. Even if the business rests, the property land is still a factor. Now what about that lumber? Obviously, those trees needed land to grow, but what about all the other steps in the supply chain? The company that the business purchased the lumber from needed land for their warehouses and facilities; and this goes for each of the businesses from the sprouted tree to the end product. And what about the machinery used by all of these companies, the manufacturing, sale, and resale of that saw we mentioned needed land? This started with that iron ore mine all the way to the saw blade used to cut the lumber. And each of these companies has tools and equipment that need land (and all 4 factors). It is a supply web rather than a supply chain.


‘Tis impossible to be sure of anything but death and taxes’ - Christopher Bullock 1716. For our discussion taxes are any government fee. This can include property, sales, or labor taxes, but it can include regulatory and licensing fees. So, that land we mentioned in the paragraph above most likely has property taxes imposed on it. And this goes to any land that is used in the supply chain (or supply web). And that labor probably has payroll and income taxes associated with them. Unless they are using off-the-books labor, but we will assume they are doing everything legally. Now what about any business licenses? Or the fees paid to the Department of Motor Vehicles for the trucks they use? And what about the profit that we have not discussed yet? So the other three elements have something in common; taxes! Now let's dig into those taxes. So every string on the supply web has taxes just like they have labor and land, but do taxes have labor and land? They do; governments are run by people who have salaries. And governments also have land for their facilities. And while someone holds the deed to the land that the businesses in the supply web are on, does the municipality, state, and/or country own the land within their borders? Even if they don’t own it they exert a level of control over that land.


And then there is profit. We won’t go into gross profit vs net profit. But we will touch on profit before and after taxes. Just like land and labor of taxes, so does profit. If you purchase this hypothetical product we are discussing the company that sold it to you is expecting a profit. And the companies that hired the lumberjack and miner expect a profit. And so does every middle man (or middle woman) in between.  And each of these companies serves a purpose (hopefully) in the supply web. It would not be practical for the end company to chop down, mill, and transport their own trees. Or to mine, refine, and fabricate their own saw blades. Companies try to reduce or eliminate costs when possible. But they can’t do everything (unless they are a multi-billion dollar conglomerate ).

Do you agree with me on these four factors? Are there any other factors that I omitted? Which factor do you think is the most responsible for prices to continue to increase?