I live in Hawaii and recently heard my large, Hawaii-based employer use the term “cost of labor” when explaining how they derived the organization’s new salary ranges. It’s no surprise that jobs and companies in Hawaii generally pay less than equivalent jobs/companies on the mainland. But when I asked my employer on an all-company call to explain what cost of labor actually is and why Hawaii employers can pay so much less than companies on the mainland, the answer the consultant provided was largely a non-answer.
Can someone explain to me like I’m 5, why is Hawaii’s cost of labor so low compared to the mainland?
(Edit: for clarification, cost of living and cost of labor are different terms, and I’m wondering why the cost of labor in Hawaii Is so disproportionate to the cost of living compared to parts of the mainland that also have high costs of living, such as much of California, NYC, Washington, and so on. The disparity between these two terms seems much more significant in Hawaii)
In: Economics
Look up the “Paradise Tax”. People are willing to accept lower salaries to live in nice places, so wages in those places can be lower than comparable “normal” places.
You’re the labor. And they’ve determined that most, or at least enough, of you will stay working there at those salary ranges.
I don’t know for sure the economy of Hawaii, but typically it would be some combination of a lower cost of living (so people can get by with less money), large number of job seekers (so people can’t afford to be picky about what job they take), and little desire/ability to go elsewhere for work (it’s presumably pretty hard to commute to work from Hawaii).
It’s easier to hire workers for lower wages in Hawaii, because If they don’t like what you’re paying, it’s not like there’s a lot of other higher paying jobs in Hawaii, Or easy to move to another state where there are. Unless you’re lucky enough to get into civil service or healthcare you’re basically flipping burgers for tourists or making up rooms for tourists. Due to the remote location there’s not a big manufacturing or technology industry.
Yes, Good example Madison Wisconsin.
My Uber driver has a PHd and a Masters.
When asked why he drives for them.
He says, I’ll do anything to live in Madison…
Labor has a price just like any other good/service.
Thus it is subject to supply and demand just like anything else. Being that they’re inversely correlated, changing one affects the other in the opposite direction.
When you plot them on a graph, the point at which they cross each other is the price.
Increase supply, demand goes down. If everyone wants to live in Hawaii, there’s a surplus of workers, costs(price/wages) go down.
If you want wages to increase, you need to make Hawaii less attractive to workers.
The ELI5 answer.
The cost of labour is the lowest amount they can get away with paying you and not have everyone quit.
For the US, the federal govt tracks labor costs pretty closely and publishes them for all to see and use. [Here’s](https://www.bls.gov/news.release/pdf/cewqtr.pdf) an example of a report by county.
Lot of people want to live in Hawaii due to it’s great weather and vacation lifestyle therefore companies can get away with people less.
Supply and Demand works for cost of goods as well as it does for the labor to provide them. If people across the street want the job they don’t have to pay as much. Sad but true. Wages don’t connect to how much money you can make the company if someone else can also do the same. However the more specialized and highly skilled you are the harder it is to find someone”across the street”, the more you can demand in wages.
The way I explain salary levels to people is that salaries are your replacement cost.
What salary would I have to pay to get someone to do your job when all factors are taken into consideration. The answer to that is “market salary” or “cost of labour”.
If all other things were equal (ie you didn’t have to relocate, you had the same friendship groups in both locations, your family was perfectly fine with either) would you work in Hawaii or Gary, Indiana (google tells me that’s the worst city in the USA)? How much more would you need to be paid to move to Gary?
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