Forecasting Changes to Temporary Labor Costs

Most organizations that use high volumesof temporary labor need to estimate thequarterly or annual demand and costs forthis spend category as part of


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Contributed by Ben Walker, Director of Professional Services, Brightfield Strategies
CU Quarterly, September 2012

Most organizations that use high volumes of temporary labor need to estimate the quarterly or annual demand and costs for this spend category as part of their overall budgeting process. There are two cost components to consider: (1) the total annual cost, which is driven primarily by overall demand for temporary workers across the organization and (2) the unit cost, which equates to two primary variables: worker pay rates and supplier mark-up rates. This article focuses on estimating changes to the unit cost for temporary labor.

Companies often look to national economic indicators to build or support their cost projections. This includes measures of unemployment, inflation, or productivity. Unfortunately there’s limited information available focused specifically on predicting how those broader indices will impact temporary labor pay rates and markups. So, organizations must find the measures that best fit their specific environment. Here are a couple places to start.

As you’d expect, worker costs (for both employees and external temporary workers) tend to be a lagging indicator behind unemployment trends. When unemployment goes up, pay rate increases remain flat or slow down, and viceversa. The graph below compares this generally inverse correlation between unemployment and employment costs between 2007 and the first half of 2012.

relationship resized 600

Note that in 2008 and 2009, increases in totalemployment costs slowed as unemployment spiked, but costs never actually went down (fell below 0.00% on the vertical axis). This is an important consideration when predicting changes to temporarylabor costs. It’s simply a matter of estimating how much higher they’ll be from the same period 12 months earlier. If the national economic forecasts predict that unemployment will be going down within any given quarter or year, the relationship between these two variables will help to understand the most
likely impact on your temporary employment costs.

While there will certainly be isolated examples of payrate costs going down altogether for some positions, on the aggregate, you can expect an upward slope in the long run, even amid depressed economic conditions and very high unemployment. This is validated by another Bureau of Labor Statistics (BLS) measure that tracks changes to the average hourly earnings of workers.

Keep in mind that the BLS measures presented here are broad averages that incorporate many different geographies, industries, and occupations. It’s possible to include only more targeted unemployment and average hourly wage data segmented within the larger dataset. For example, if the majority of your temporary labor usage is for IT or engineering resources and you’re in the services sector, you can isolate this data to fine-tune your estimates.

When it comes to predicting changes to supplier markups for temporary labor, one of the most dynamic variables in the calculation is State Unemployment Insurance (SUI) rates. This is a state-specific payroll tax paid by employers.

MonthyChange resized 600

SUI rates have gone up dramatically over the last several years as unemployment spiked and then remained high. States are seeking to recoup unemployment payments by charging employers a higher tax rate. Although there isn’t a single forecast publicly available for all states in 2013, you can expect SUI rates to remain steady and possibly even increase in 2013. If past trends are any indication, even if unemployment falls by 2 percent or even 3 percent over the next 12 months, SUI rates will probably hold steady for several more years
until state coffers are replenished.

If I had to make my own prediction about the broad direction of temporary staffing rates for the rest of 2012 and 2013, I’d bet that they’ll essentially be flat, with nominal pay rate and mark-up adjustments aligned with SUI increases (at least within specific states) and cost
of living indices.