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Labor Costs: The Number-One Site Selection Factor

In the current economy, it is not surprising that labor costs - a major operational cost component - are ranked as the most important site selection factor by corporate executives.

Michelle Comerford, Project Director and Industrial & Supply Chain Practice Leader, Biggins Lacy Shapiro & Co. and Frank Spano, Director, Austin Consulting (Feb/Mar 10)
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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 michelle.comerford@theaustin.com or frank.spano@theaustin.com.
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