The cost of labor has been steadily on the rise. How will this affect the hotel market going forward?

The rising cost of labor has been a hot button topic in recent months. According to Reuters, labor costs in 2021 “surged [about] 4.0% on a year-on-year basis, the largest rise since 2001.”

With both wages and inflation steadily increasing, industries reliant on in-person service have fallen victim to rising operating costs and noticeable deficits. Profitability in the hotel industry had already taken a significant hit since the onset of the pandemic and the proliferation of new variants. But with the changing demands and dynamics of the modern workforce, the rising cost of labor could be the next challenge for the hotel market and the hospitality industry as a whole. 

So what is the true cost of labor in the hotel industry and how will that affect the hotel market in 2022 and beyond? 

The Cost of Labor in the Hotel Industry

The rising cost of labor has a significant effect on the hotel industry over the last several years.

Hotel Management quotes a 2016 edition of Trends in the Hotel Industry report that estimates “the combined costs of salaries, wages, service charges, contract labor, bonuses and payroll-related expenses averaged 42.8 percent of total operating expenses at U.S. hotels during 2015.”

With nearly half of the hotel industry’s total operating spend being on staff, small changes, such as the 1% cost of labor increase we saw in the last quarter of 2021, can have a huge effect on overhead. And this doesn’t even take into account contracted labor and upkeep costs.

Why are Labor Costs on the Rise?

One of the major contributing factors to the rising cost of labor is the national labor shortage COVID-19 has caused. In the early stages of the pandemic, many people in the hospitality industry lost their jobs due to the significant reduction in global travel spend. As people have slowly begun to return to in-person operations, companies have found it harder to fill all the vacancies where people were let go or unable to return to work for various reasons. 

Another major factor driving up the price of labor is the advocacy of fair wage and benefits for all employees. The modernization of the workforce has not only changed the way we work, but the perception of how workers should be treated in their respective fields. Jobs that were once considered “low skill” are now struggling to find workers due to increased pressure for better compensation. 

The rise of minimum wage across the nation has also had a direct impact on labor costs in the hospitality industry. States such as New York and California will have minimum wages as high as $15/hr by 2022 and there has been increased pressure in recent years to raise the federal minimum wage from $7.25.

Whether the industry will capitulate or the workforce will cave remains to be seen. But it does appear demand will eventually push up labor costs and those costs will have to be made up elsewhere.

How Can Hotels Reduce Labor Costs?

A reduction in select guest services is one sure way to cut costs. However, this solution is a double-edged sword. 

The one distinct advantage the hotel industry generally has over its competitions is amenities and services. Offering less on-site services runs the risk of alienating business and leisure travelers looking for more of an inclusive experience than the DIY short-term rental alternatives. But if the objective is purely to save on staff costs, cutting staff in non-essential areas is the best place to start. 

With labor shortages affecting more than just the hotel industry, most people will understand if their hotels didn’t offer spa and gym services or had reduced food and housekeeping hours. These are simple inconveniences two-plus years of a global pandemic have led us to expect.

Labor Efficiency is another tactic hoteliers have resorted to to combat rising costs. By restricting employee hours and eliminating the possibility for overtime, hotels can save on overall labor costs without reducing salaries. While this may be cost-effective and necessary on some level, this also has the potential of alienating employees that are used to or rely on overtime as a benefit to their position.

In terms of new hires, salary negotiations and promotions, hoteilers looking to cut costs will need to be firm in their compensation and benefit offers. If the hourly rates and benefits are clearly labeled in your job descriptions, stick to them. You can find candidates willing to work for that rate, even if the search process takes longer. 

The catch-22 here is that every interview comes with a cost. In many cases of prolonged hiring practices, you’re likely to spend more on your search than you would matching the desired salary of a good candidate.

The median solution? Making the correct hires at the correct time. If you want to reduce labor costs, reduce the amount of turnover you make. Of course no HR department intends to make “bad” hires. But a lot are guilty of making hasty hires due to demand. Short-term thinking may help you get through in the interim. But the cost of making a bad hire is more than just the headache of firing and replacing someone.

When push comes to shove, employers face an uphill battle in today’s market: do you hold yourself hostage to employee demand or do you up your game as the employer and offer better packages, benefits and more flexibility? Is your budget more important than your reputation? What’s best for profits?

If anyone was certain of the answer, the market outlook would be much easier to predict.