Finding the Real Cost of Labor
The executives responding to Area Development's 2007 Corporate Survey ranked cost of labor second in importance among the site selection factors, but determining a region's true wage rates is not always at easy task.
Dr. C. R. (Buzz) Canup, President, Canup & Associates, Inc.  (Jun/Jul 08)

Cost of labor is a significantly important factor in all site location studies, but this factor takes on an even higher level of importance for businesses that are most sensitive to the recurring cost of labor. Businesses that employ large numbers of workers, that operate on very thin profit margins, that are subject to sudden changes in operational conditions, and/or have high turnover rates are among those that are most sensitive to labor costs. Also included in this group are businesses that may be in serious competition for qualified labor within a geographical region and may be experiencing a ratcheting effect on wages.

Total Cost of Labor
In evaluating cost of labor for a particular region, it is important to take into account total payroll costs, not just wages. The net impact of the cost of labor is magnified when payroll taxes are entered into the equation. Payroll taxes - including unemployment insurance, workers' compensation, FICA, and FUI (Federal Unemployment Insurance), and, in some locations, local payroll taxes - add significantly to a business' recurring operating costs. In addition to payroll and payroll taxes, add the cost of holidays, vacation, and sick leave, and one can experience a significant differential in total costs for labor between various locations. For companies employing large numbers of workers, these differentials can represent millions of dollars over a 10- to 20-year period.

BLS Data
While the above payroll and associated costs can be calculated and compared directly from one location to another using simple formulas and mathematics, how does one go about estimating, projecting, or determining the base payroll cost for a given occupation or cluster of occupations for a specific geographical region? It is the base payroll cost that drives the supplemental cost of payroll taxes and other associated costs.

Corporate Survey 2007
Combined Ratings* of 2007 F actors
Site Selection Factors                   2007
Ranking
1. Highway accessibility 96.9
2. Labor costs 92.3
3. Energy availability and costs 89.0
4. Availability of skilled labor 88.7
5. Occupancy or construction costs 88.2
6. Available land 85.4
7. Corporate tax rate 83.8
8. State and local incentives 83.4
9. Environmental regulations 83.2
10. Tax Exemptions 82.8
*All figures are percentages and are the total of "very important" and "important" ratings of the Area Development Corporate Survey and are rounded to the nearest tenth of a percent.
Many businesses assume that determining average wage rates for a particular occupation or region is a fairly easy task. Simply go online to the Bureau of Labor Statistics (BLS), look up the state, region, and/or community of interest, and find the reported average wages by geographical region and/or by occupation - right? WRONG!! It would be a significant mistake to simply use BLS reported data to determine the wages one might have to pay to attract and retain labor within a given geographical region.

BLS is a good general resource and reference for wage information and data, and can be used for generalization purposes. But be aware that total average wages for a geographical region include both public and private employment. Additionally, the information broken down by employment classification within BLS is a compilation of both hourly and salaried employees (total payroll) within a given employment classification, and includes everyone from entry-level clerk to CEO for a given occupation. Taking an average of payroll expenditures that range from $8 per hour to $800 per hour is not exactly the best way to determine "average wages" or potential exposure for wages for a new employer. Nor is it the best way to compare wage data across geographical regions.

One significant "look out" in using BLS data relates to its integrated use within many geographical information systems (GIS) databases. It is quite common for businesses, agencies, organizations, and consultants to use BLS data to screen geographical regions based on average wages. Geographical screening may be by county, by city, by MSA, or by clusters of counties. In many instances, this screening is used to "qualify" or "eliminate" defined regions.

By way of example, if a particular business doing a site location search does not want to pay more than $13/hour on average for hourly wages, the business may decide to eliminate from consideration all counties with an average wage that exceeds $13/hour. The fallacy of this strategy is twofold: first, what about counties where the average wage is $13.01 per hour? Should they be summarily eliminated? Is there really a significant difference based on a penny per hour? Secondly, what about the use of all payroll to determine average wages? Does this really represent average hourly wages? It is critical to understand not only the data being used, but also how to interpret the data once it has been identified.

Another Data Source
A popular alternative to using Bureau of Labor Statistics data is to use information reported in County Business Patterns (CBP). CBP information and data is compiled by the U.S. Department of Commerce based on an annual survey of all major businesses in North America. Businesses are required by law to respond to the survey. Since this information is compiled on an annual basis, it tends to be more up-to-date than BLS data, although CBP information and data is typically two years old by the time it is published.

Additionally, one should be aware of characteristics of CBP data that can be misleading or misinterpreted. For instance, CBP does not report any wage or salary data for government employees. When one considers that government employment typically represents 25 percent or more of total employment within a region, a significant amount of employment and cost of labor data is missing. Similarly, the information reported by private business and industry on an annual basis may be skewed based on the manner in which the U.S. Department of Commerce protects individual employer information. Commerce will not report information on a particular occupation if there are not sufficient numbers of businesses within a given occupational classification to protect information from individual businesses. Hence, reported data may not be fully representative of the county.

Corporate Survey 2007
Combined Ratings* of 2007 F actors
Site Selection Factors                   2007
Ranking
1. Highway accessibility 96.9
2. Labor costs 92.3
3. Energy availability and costs 89.0
4. Availability of skilled labor 88.7
5. Occupancy or construction costs 88.2
6. Available land 85.4
7. Corporate tax rate 83.8
8. State and local incentives 83.4
9. Environmental regulations 83.2
10. Tax Exemptions 82.8
*All figures are percentages and are the total of "very important" and "important" ratings of the Area Development Corporate Survey and are rounded to the nearest tenth of a percent.
Field Work
So how can one determine wage rates within a specific geographical region? Using BLS or CBP information and data is an accepted practice among many businesses, organizations, and consultants. However, one needs to be keenly aware of the characteristics of the data as just described. Using ranges of wage data from these sources for screening purposes is much more reliable than using a single-point average wage for qualification or elimination purposes.

The bottom line, however, is that nothing can take the place of good, hard, current field work, including interviews with existing business and industry representatives, to identify and determine average wages by occupation for a specific region. Whether the field work is performed by a consulting organization engaged by the local economic development agency to define average wage rates by occupation for the region, or whether the information is gathered on an individual project basis by a site location consultant or a representative of the prospect's company, nothing can take the place of fresh, face-to-face information gained from interviews with existing business and industry representatives. Not only can current and more accurate wage data be collected, but also many additional characteristics of the local work force can be collected at the same time. These characteristics include, but are not limited to work force availability, trainability, productivity, and, unfortunately, drug abuse.


In Sum
Cost of labor is a significant factor in every site location study for every type of business. Affordable or attractive labor costs can become a magnet for the attraction of new business and industry, as we have seen through the massive out-migration of many U.S. businesses to "cheap labor" locations overseas. We have seen similar transitions within the United States as businesses have relocated to geographical regions offering total lower operating costs, much of which are comprised of labor costs. Expect this factor to be at the top of every site location study, and expect it to have a significant influence on the final location decision. Just make sure that reliable and valid information is used to make that final decision.

Canup & Associates is a full-service management consulting firm specializing in site location studies for private business and industry, incentives negotiations, economic development consulting for states/regions/communities, and project implementation. Dr. Canup, president and founder, has more than 30 years experience in a broad range of management and consulting services, both domestic and international, and both public and private.

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