How Growing Labor Pricing Impacts Hotels

Rising labor costs have emerged as a primary challenge for the U.S. hotel industry, putting pressure on profit margins. While top-line performance has been strong, the persistent increase in employee compensation, coupled with other operational expenses, has made it harder for hotels to translate revenue growth into equivalent bottom-line improvements. This trend is a complex issue driven by a variety of economic, social, and market-specific factors.

 

Macroeconomic Landscape Impacts Labor Costs

The American Hotel and Lodging Association estimated that hotels paid a record $123 billion in wages, salaries, and other compensation in 2024, which is a 20% increase from 2019. This substantial growth in labor costs is rooted in several key components.

 

One large factor is ongoing labor shortages as the hospitality sector continues to face staffing challenges. Around two-thirds of hotels across the country reported persistent labor decreases at the end of 2024, with many being understaffed. The decline is a result of the pandemic when many employees left the sector, and it has been compounded by a high turnover rate. Hotel managers and owners are now increasing wages in order to attract employees back.

 

Elevated inflation across the country has also impacted the hotel industry. With the rising cost of living, hotel employees and their unions have pushed for wage increases to maintain their purchasing power. This resulted in several strikes across the country by hotel workers last year, which led to significant pay raises across the sector.

 

An additional contributor to increased costs is the resurgence of group and corporate travel. Although it has boosted revenue, it has also required the need for more employees. Full service hotels have seen a greater increase in the labor cost per available room, compared to limited-service hotels, as they require more employees to support on-site dining and catering.

 

Impact on Hotel Profitability

While U.S. hotel profits have grown in recent years, the increase has been limited by rising labor costs and other inflationary pressures. For example, hotel profits rose in 2024, but labor costs also grew by 11.2% year-over-year. This has led to a decline in gross operating profit, leading to difficulties for hoteliers to match the same level of profitability from before the pandemic.

 

The increasing use of overtime and contract labor, which often comes at a higher cost than regular staff, is another factor contributing to the rise in labor costs. This is a common strategy for hotels trying to manage staffing shortages without over hiring full-time employees, but it comes with its own financial penalties.

 

Main Markets Noting Increased Labor Costs

The impact of rising labor costs is varied across the country. Certain metros and top-tier markets are experiencing more significant increases, due to a combination of high costs of living, strong union presence, and intense competition for talent.

 

Specifically, markets in the Sunbelt recorded some of the highest increases in labor costs. San Diego and Phoenix were at the top for noting the greatest upticks, with both metros noting a rise of 33% in labor costs from 2019 to 2024. Los Angeles and Miami were also some among the largest increases, recording a jump of 29%. Upticks will most likely continue to occur in Los Angeles as the city’s legislation passed a law that will raise hotel employees’ minimum wage to $30 an hour by July 2028.

 

While the return of demand has provided a revenue buffer, the rising movement of wages, benefits, and operational expenses are persistent headwinds. The trend is especially ongoing in major metros where labor competition is occurring, unions are strong, and the cost of living is high. For hoteliers, managing these costs will be critical for maintaining profitability and ensuring the long-term financial health of their properties.