Labor Markets and Geographic Differentials

by Malak Kazan, CECP, CCP, CBP, GRP 18. February 2016 12:52

 

Depending on whether the economy is experiencing growth or a recession, the private and government sectors have different strategies to manage them.  Recent macro-level topics focus on the need to create better quality jobs that grow the middle-income household segment while facing skills shortages, as in Science, Technology, Engineering, and Math (STEM) jobs, for example.  At ERI, we help subscribers determine the cost impact of their strategies through the application of compensation analytics.  As stakeholders, HR leaders want a trusted partner to keep a pulse on the competitive advantages of geographic labor cost differentials in light of external market conditions. 

Consider these questions presented by HR leaders:

Labor markets and the associated geographic differentials are a significant driver of business operations.  A labor market is defined as follows:

  • An area in which buyers and sellers are in close enough communication that price tends to be the same throughout the area
  • Labor costs are determined by the supply and demand of a specific skill type and skill level

Labor Market Supply and Demand

From a financial perspective, depending on the business decision you are addressing, you may want to understand the geographic labor cost advantages from different segmentation analyses.  ERI’s Geographic Assessor (GA) provides geographic labor cost differentials for base salary level changes (not fully loaded costs with taxes and benefits) represented by eight regression lines, limiting the lowest possible user-selected base city level to the minimum wage.  The eight “best fit” regression lines are assigned a salary range and a structure name.  (See ERI's Distance Learning Center course #49, Regression Analysis Used in Compensation Administration.)  The eight structures follow:

Depending on the business decision you are making, you may want to analyze geographic labor cost differentials on a citywide, statewide, or countrywide basis. Below are compensation analytics that provide geographic labor differentials for each type of analysis. 

ERI's Geographic Assessor:  Citywide Sample Comparison List

ERI's Geographic Assessor:  Statewide Sample Comparison List

ERI's Geographic Assessor:  Countrywide Sample Comparison List

Consider the insight that HR leaders gain from GA's Comparison List samples above: 

  • Citywide Sample Comparison List -- Longmont, Colorado has the highest cost of labor for lesser skilled jobs (5.7% higher than the US Average cost of labor);
  • Statewide Sample Comparison List -- The state of Arkansas has the lowest cost of labor across all job levels.  Arizona differentials compared to the US Average across all job levels range from 93.2% to 95.7%, which is very tight.  Hiring a Receptionist or a CEO in Arizona will result in 4.3% to 6.8% lower labor costs.
  • Countrywide Sample Comparison List -- Portugal's cost of labor is the lowest.  The geographic differentials for higher skilled jobs progressively decrease in Europe (except for Portugal).  Spain, for example, at the lowest structure of $24,000 is 80% of the US Average, then 70% at the $36,000 level, and continues to decrease to 58.5% for the highest structure.

Summary

High performance organizations understand the financial and operational implications of changes in external markets by having rigorous processes to keep track of these factors.  Partnerships with data analytics companies, like ERI Economic Research Institute, that provide trusted, real-time analytics serve as an essential part of the overall HR infrastructure.   For more information, call our “best in class” service team at 800-627-3697 or visit www.erieri.com.