UNEMPLOYMENT LOW, LABOR COSTS HIGH

When the Chairman of the Federal Reserve speaks, hoteliers listen.

In late November, Fed Chairman Ben Bernanke stated that the tight labor market remains a top concern because it could prod some companies to raise prices. In November of 2006, the national unemployment rate remained at the relatively low level of 4.5 percent.

Why are hotel owners and operators concerned? - Because labor related costs are the single largest operating expense for the typical U.S. hotel. And, when unemployment is low, employee recruitment and retention costs rise.

From 2005 to 2006, PKF Hospitality Research (PKF-HR) estimates that labor costs rose 6.5 percent, the greatest single year increase since recovering from the 2001 industry recession. In 2006, an estimated 44.4 cents of every dollar spent by U.S. hotel managers went towards employee salaries, wages, and benefits. This equates to 31.9 percent of total revenue.

Fortunately for the lodging industry, prices (i.e. room rates) can be raised relatively quickly in order to cover increases in operating costs. The fact that hotel labor costs have remained within the tight range of 30 to 35 percent of total revenue is reflective of hotel management's ability to scale their staffing and wages rates.

In recent years, it has been the employee benefit component of labor costs that has concerned hotel managers the most. From 2003 through 2006, employee benefits have grown at nearly twice the pace of salaries and wages. The challenge for hotel operators is that some employee benefits are mandated by the government and out of the control of management.

Looking forward, hotel managers are keeping an eye on Washington, DC. The new Democratic congress has stated that an increase in the minimum wage is one of their legislative priorities. Most hotel employees already earn above the federal minimum wage due to state laws, union contracts, and competitive recruiting conditions. However, an increase to the federal minimum wage rate could raise the threshold for all hourly rates, therefore applying pressure to the salary and wage component of labor costs.

Besides being the largest operating expense, labor is an integral part of the hotel product. Consumer surveys consistently rank "service" as an important factor that influences guest satisfaction. Therefore, labor related expenses at a hotel go beyond salaries, wages, and benefits. Expenditures for recruitment, training, and staffing the human resources department push total labor related expenses above the 45 percent mark.

Managing personnel and controlling labor costs comprises a large percentage of hotel management time, thought, and effort. Over the years, operators have done a good job of monitoring those costs for which they have direct control. This trend should continue going forward. However, in the years to come, external factors such as low national unemployment or federally mandated increases in employee benefits and the minimum wage will add to the challenge of controlling labor costs.