Michelle Comerford, Project Director and Industrial & Supply Chain Practice Leader, Biggins Lacy Shapiro & Co. (Feb/Mar 10)
Typically, fringe benefits like life and health insurance and
retirement and savings plans are a percentage of total payroll costs
that may or may not vary by region or state. In order to be
competitive, a company will generally want to be sure that their fringe
benefit package is competitive with other operations in the area in
order to attract quality workers. A large multi-operation company may
have a corporate-wide fringe benefit package that is standard and
offered to all employees at all locations.
Mandated costs that can vary from state to state include workers'
compensation and unemployment insurance. Workers' compensation
insurance provides compensation for medical care for employees who are
injured on the job. Unemployment insurance provides unemployment
benefits to workers who become unemployed through no fault of their
own. Currently, Indiana and North Dakota have some of the lowest
workers' compensation rates, and Vermont and Nebraska offer some of the
lowest unemployment insurance rates. Conversely, Alaska and Montana are
on the high end for workers' compensation, and Washington and Minnesota
rank on the high end for unemployment insurance.
Social Security is a federally mandated program in the United States
that is funded through payroll taxes, which are based on total earnings
per employee. Although it is a mandated program for all U.S. employers,
a location that can offer a low total payroll cost will also help to
keep payroll taxes at a minimum. This may also factor into location
decisions for operations that are considering foreign countries that do
not require such a tax.
Labor / Management Relations
In addition, labor/management relations and unionization rates
can also factor into labor costs. According to Bureau of Labor
Statistics, the average worker not represented by a union commanded a
wage that was nearly 20 percent less per week than one represented by a
union. For this reason, it is less attractive to a company to locate an
operation in a highly unionized environment. Especially with the high
U.S. unemployment rates, most companies feel they can find quality and
skilled workers to meet their operational needs at a lower cost in
areas with lower overall percentages of organized labor.
This is also why an increasing number of companies are selecting
locations in right-to-work states, or states that prohibit employers
from having agreements with trade unions that require membership in a
union as a condition of employment. In most right-to-work states, the
unionization rate is low and the threat of the work force unionizing is
minimal. There are 22 right-to-work states, primarily in the southern
and western United States (see map). Since the right-to-work laws went
into effect, many states in the South have succeeded in attracting
business from highly unionized regions in the North.
Future Labor Cost Trends
As more jobs are lost or relocated due to the recession, it can
be expected that average labor wages will remain constant or even
decrease in areas of high unemployment. For emerging industries, such
as renewable energy, that are working on minimizing operating costs in
order to offer products that are at parity with those of their
competitors, low-labor-cost regions may be selected for new operations,
provided that they also meet other important requirements.
Going forward, it can be expected that the cost of labor will continue
to be an important location decision factor for new investment. Even as
the U.S. economy slowly improves, companies will continue to be mindful
of operating budgets and cost factors as operations are evaluated for
efficiency and cost-effectiveness. Since labor costs will continue to
be a major operational cost component, it can be expected that this
factor will remain one of the top site selection priorities in the Area
Development Corporate Survey for a long time to come.
Michelle Comerford is the managing director
and Frank Spano is the director of Austin Consulting, a leading
consulting firm specializing in location strategy, logistics analysis,
property selection, due diligence, and incentives negotiation. The
authors can be contacted via email at firstname.lastname@example.org or email@example.com.