Faced with growing demand, the U.S. hotel industry spent 6.3% more on labor costs last year versus 2003, reports PKF Hospitality Research. The increase was driven by an 8.9% increase in benefit costs, which represents the highest two-year growth in benefit costs in 16 years. The PKF study drew upon the year-end 2004 financial statements of more than 5,000 U.S. hotels.

“In the hospitality industry, labor is not just a necessary operating component. It is an integral part of the product,” says R. Mark Woolworth, executive managing director at Atlanta-based PKF.

Labor and related costs accounted for 45.9% of all hotel operating expenses. During the last recession, many hoteliers reluctantly cut these budgets after business slowed down. That’s a tricky measure since hotel managers are hesitant to reduce staffing because it often translates into poor service for the guests.

“Therefore, managers will cut payroll only to an amount commensurate with the lost revenue,” he says. Long-term labor costs have hovered around 34% of total revenue. In 2004, however, labor costs represented 34.4% of total revenue, a trend that could put added pressure on hoteliers’ profit margins.

Over the past two years, employee benefits have risen by 16.6%, making it the largest two-year increase since the 25.2% increase posted between 1988 and 1989.