LABOR COST VOLATILITY

Rising standards come with a price tag

LABOR COST VOLATILITY

Volatile wage movements driven by government policy, inflation, or skill shortages are reshaping the cost landscape of global supply chains. This chapter introduces the Labor Cost Volatility Index, highlighting country-sector pairings where rapid wage growth can destabilize supplier economics. The index is based on wage increase data from Oxford Economics measured in USD and is overlaid with sectoral labour dependence data from the US Bureau of Economic Analysis.

The top 10 most volatile countries span Europe, North America, and APAC, reflecting global labor pressures. This is not surprising. Recent years have seen the fastest wage increases in decades, driven by post-pandemic labor shortages, global inflation, and active government intervention on wage floors. According to the International Labour Organization, real wage growth in emerging G20 economies reached 6% in 2023, with similar levels projected for 2024. In contrast, advanced economies saw a 0.5% decline in 2023 and are expected to grow by just 0.9% in 2024.

Procurement teams must assess:

1   | Skill availability and concentration in sourcing regions
.   2 | Wage inflation trajectory in supplier countries
.   3   | Labor’s share of the total cost in the product or service

For example, if labor accounts for just 5% of total costs in tech manufacturing, a 10% wage rise only has a minor effect. However, wage inflation can hit margins hard in sectors like textiles, where labor might be 40% of the total cost. Understanding this share is essential for contract and cost modeling.

WHY IT MATTERS FOR PROCUREMENT

Sectors with high labor intensity - such as financial services, aviation, construction, and technology - are particularly exposed. As wages rise, so do costs to produce, assemble, or deliver.

Global labor pressures are IMPACTING ALL REGIONS

TURKEY

Poland’s economy is
SHIFTING FROM MANUFACTURING
TO SERVICES

COUNTRY SPOTLIGHTS

CHINA

Wages in China have risen 8–10% annually over the last decade, driven by urbanization, a shrinking labor force, and rising living standards. Government policies continue to push minimum wages higher. As a result, China is no longer the low-cost labor market it once was, accelerating China plus one sourcing strategies. Labor cost escalation here is now structural, not cyclical.

TURKEY

Turkey has faced extreme volatility, fueled by inflation and currency devaluation. Consumer prices jumped 72% in 2022, prompting wage hikes of over 50% per year. From 2022 to mid-2024, the minimum wage rose more than 400% in lira terms, from 4,253 to 22,104 TL. While currency depreciation softens the USD impact (about 10% annually), Turkish labor is now three times more expensive than in Vietnam or India, putting pressure on export-focused sectors like textiles and automotive.

TURKEY

POLAND

CHINA

POLAND

Poland’s wage volatility is driven by inflation and a structural economic shift from manufacturing to services. While 15%+ annual minimum wage hikes have been seen to keep pace with inflation, the real story is the shift from manufacturing to services:

Over 60% of GDP now comes from services, pulling younger, skilled workers away from industry
Still, 30% of the economy is industrial, with 17% in manufacturing, where bottlenecks are starting to emerge

Despite these pressures, Poland remains attractive due to strong foreign direct investment (FDI), especially in high-skill sectors. While traditionally a cost-effective manufacturing hub for firms like Volkswagen, Toyota, LG, and Whirlpool, it’s now emerging as a BPO and R&D center for companies like Google and IBM - leveraging a highly educated STEM workforce. Costs remain 30–50% lower than Western Europe, particularly in services and tech.

EMERGING TRENDS ELSEWHERE

Elsewhere, Vietnam is experiencing wage growth driven by urbanization and skills development, particularly in manufacturing and services. Notably, the United States is increasing domestic production capacity by onshoring critical sectors like semiconductors and EVs, creating exposure to a higher-cost labor base.

SOURCING AND SUPPLY TACTICS

To manage wage inflation shocks or labor bottlenecks, organizations are shifting labor-intensive activities to markets with slower cost growth, such as Indonesia, Thailand, or the Philippines. Dual-sourcing blends low-cost flexibility with high-cost reliability.

A “next wave” of nearshoring is also underway: companies are moving from Vietnam to Cambodia or Turkey to North Africa, seeking better labor economics and geopolitical alignment. For example, in the EU, Bosch offsets higher Polish costs with suppliers in Romania. IKEA likewise moved final assembly operations from Turkey to Eastern Europe to better manage wage differentials while staying close to core markets.

On paper, automation is a key lever to manage rising labor costs. By investing in technology, companies can reduce reliance on manual labor and processes, improving throughput in both manufacturing and services.

However, buyer beware: the short-term business case for moving from low-cost labor to automation is not always high. That said, in high-wage/wage-growth locations, it may be the smartest and most sustainable option for the long term.

In Vietnam and China, electronics firms increasingly use robotics for repetitive assembly. In services, automation in finance, procurement, and customer service is curbing white-collar headcount costs.

As wages rise, supplier productivity must rise, too. Procurement can co-invest in supplier development, supporting training, digital tools, and lean process optimization. This approach seeks efficiency through optimization.

Intel, for instance, trains its Vietnamese suppliers in quality management and digital manufacturing, reducing defects and labor intensity. Others embed Six Sigma or lean programs to eliminate waste and boost output.

Procurement teams should prioritize suppliers willing and able to improve, offering co-investment, development, or shared benefits where appropriate. In markets where labor inflation is unavoidable, supporting suppliers' ability to do more with less becomes essential.

3 | WORKFORCE INVESTMENT AND
LEAN PRODUCTIVITY

2 | AUTOMATE, DIGITALIZE,
AND LEVERAGE AI

1 | SOURCING AND PRODUCTION
DIVERSIFICATION

SOURCING AND SUPPLY TACTICS

As wage inflation reshapes sourcing economics, procurement teams must adopt smarter, more flexible strategies. From footprint shifts
to automation and supplier enablement, the goal is not just to contain cost but to strengthen resilience and future-proof supply networks.