Site Selection: Cost-of-Living or Payroll Analysis?

Although cost-of-living is important in estimating expenses for potential new locations for a firm expansion, and though cost-of-living is generally correlated with payroll costs, it is not a safe substitute for a full payroll analysis. 

A payroll analysis consists of defining staffing needs by occupation, capturing wage estimates specific to each occupation in the geographies under consideration, and then comparing the total payroll costs across those locations.

As an example, suppose an expanding firm is a manufacturer of lawn and garden tractors.[1] The staffing needs for the expansion should be known by the site selector, and these will be unique to the individual company. In this case, however, we'll use the typical staffing pattern for this industry.[2]

The top occupations used in lawn and garden tractor manufacturing are team assemblers, welders, and machinists. In addition to production occupations, examples of other prominent occupations in this industry are mechanical engineers, sales representatives, and industrial truck and tractor operators.  

Taking the mix of occupations needed along with average wages[3] for each, we can estimate the total payroll a typical firm would have. The above table contains payroll estimates at a potential lawn and garden tractor manufacturing with 250 employees based on locations within the largest 50 metropolitan statistical areas (MSAs) in the nation. 

Estimating relative payroll costs can be performed another way, by figuring the average payroll cost nationwide and then adjusting that by a cost-of-living index (COLI) for each MSA. That approach has some merit, as payrolls and cost-of-living are generally related, but that approach can also fall flat.

A good example of this is the Houston MSA, a region with a below-average cost-of-living, meaning the cost of living is cheaper on average compared to the rest of the nation. The COLI for Houston is 98.1,[4] which is slightly below the national average of 100. For a potential lawn and garden tractor manufacturer, however, the Houston MSA is well above average in terms of payroll costs, ranking 44^th among the largest 50 metros.

While not all of the occupations typically found in this type of manufacturer have higher wages in Houston compared to the nation, most do. For example, the average annual wage of welders is $49,900 in the Houston MSA compared to $42,400 in the nation. For mechanical engineers, the average wage in Houston is $109,800 compared to $89,800 in the nation.

A region with higher-than-average wages and a lower-than-average cost-of-living is beneficial for workers—as not only are wages high, but the costs of goods and services is low. From the employer standpoint, however, employee wages are a cost of doing business. As the Houston example points out, measuring those wages directly can give very different results compared to using cost-of-living as a proxy.

[1] Specifically, defined by NAICS 333112, lawn and garden tractor and home lawn and garden equipment manufacturing.

[2] Staffing patterns can be obtained from the BLS OES program, or through a system such as JobsEQ which incorporates the BLS staffing patterns, but has advantages such as ease of access and completeness.

[3] Average occupation wages for this analysis were obtained through JobsEQ which uses a source data the Bureau of Labor Statistics Occupation Employment Statistics.

[4] Cost-of-living for Houston is per C2ER 2017Q3 data. C2ER provides COLI estimates for three urban areas within the Houston MSA: the Houston area, shown in the text, as well as Conroe and Brazoria County. All three areas have a lower-than-average COLI.