Higher demand, occupancy means higher labor costs
Higher demand, occupancy means higher labor costs
21 SEPTEMBER 2016 7:04 AM

A presentation at this year’s Hotel Data Conference explains the basics behind the growing cost of labor in the U.S. hotel industry.

NASHVILLE, Tennessee—There are reasons hoteliers should be excited about increasing wages.

Robert Mandelbaum, director of research information services at CBRE, speaking during a presentation at the Hotel Data Conference titled “Hotel labor costs: Greatest expense on the rise,” said wage increases often help lead to growth in lodging demand, particularly at a market-level. Increasing wages are also often tied to important economic indicators for the industry like gross domestic product and employment numbers.

But Mandelbaum said hoteliers must also be prepared to cope with the increasing labor costs that come with increasing wages and high occupancy.

Behind the labor costs
Wages and benefits are the largest expenses in hotel companies, Mandelbaum said, and they’re on the rise. On average, 43 cents of every dollar spent goes to salaries, wages and related expenses. Looking at a labor cost index dating back to 1980, hotel labor costs have increased by a factor of 3.5 times

There are two main reasons why wages and benefits increase, Mandelbaum said, and that’s staffing levels/hours worked and the amount employees are paid. After the recent recession, demand drove hotels’ recovery, he said. Increases in occupancy meant staffing increases to handle the demand, which lead to increase in compensation levels.

In 2012, hoteliers felt more comfortable and hired back some employees they let go during the recession. Initially, higher unemployment meant less pressure to increase wages, he said, but that changed as unemployment declined. Competition to retain employees and attract new ones put pressure on wages. Since 2013, compensation levels have increased 3.5% a year, he said.

“In 2013 and 2014, increases in labor costs were driven by compensation and paying more on an hourly basis,” he said. “In 2015, it was a combo of rising compensation and the number of hours worked.”

Along with lower levels of unemployment putting pressure on wages, minimum wage/living wage legislation has pushed for wage increases in some markets, Mandelbaum said. Hoteliers will also contend with the lowering threshold of federal overtime exemptions, as well as joint-employer standards.

Looking back at the economic data, he said, as revenue volume changes, hotel managers reacted.

Mandelbaum said the data shows hoteliers did a good job controlling labor during the last recession but operators will need to control staffing to offset growing labor costs from rising compensation levels.

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