Labor cost per unit is a useful lagging indicator because wages typically start rising
only well into an economic expansion.
At the beginning of an expansion, there is
considerable slack in the economy and output can expand without employers
bidding up the price of inputs or the wages of employees.
By the time wages start
increasing due to high demand for labor, the boom period has already progressed
The concept of an industrial life cycle refers to the tendency of most industries
to go through various stages of growth.
The rate of growth, the competitive
environment, profit margins and pricing strategies tend to shift as an industry
moves from one stage to the next, although it is generally difficult to identify
precisely when one stage has ended and the next begun.
The start-up stage is characterized by perceptions of a large potential market
and by a high level of optimism for potential profits.
However, this stage
usually demonstrates a high rate of failure.
In the second stage, often called
stable growth or consolidation, growth is high and accelerating, the markets
are broadening, unit costs are declining and quality is improving.
stage, industry leaders begin to emerge.
The third stage, usually called
slowing growth or maturity, is characterized by decelerating growth caused by
factors such as maturing markets and/or competitive inroads by other
Finally, an industry reaches a stage of relative decline in which
sales slow or even decline.
Product pricing, profitability and industry competitive structure often vary by
Thus, for example, the first stage usually encompasses high product
prices, high costs (R&D, marketing, etc.) and a (temporary) monopolistic
In stage two (stable growth), new entrants begin to appear
and costs fall rapidly due to the learning curve.
Prices generally do not fall as
rapidly, however, allowing profit margins to increase.
In stage three (slowing
growth), growth begins to slow as the product or service begins to saturate the
market, and margins are eroded by significant price reductions.
In the final
stage, industry cumulative production is so high that production costs have
stopped declining, profit margins are thin (assuming competition exists), and
the fate of the industry depends on replacement demand and the existence of