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As two industrial US states vote to almost double the minimum wage, corporates may have some difficult decisions to make around their supply chains.

In the recent US midterm elections, voters in Arkansas and Missouri overwhelmingly approved increasing the minimum wage for workers to US$12 and US$11 per hour respectively, up from US$7.85 and US$8.5. This comes after 18 states raised their minimum wage in January, six of which will eventually mandate pay of US$15 an hour.

The two states are important nodes in the US supply chain: Arkansas is home to Walmart’s HQ and hosts 2,318 manufacturing firms, while Missouri continues to add manufacturing jobs thanks, in part, to its Amazon distribution centre.

Supply chains in the US employ 44 million people and account for 37% of all jobs. After spending about two decades on a steady march downwards, manufacturing’s share of the labour market is slowly regaining ground, with an increase of 327,000 jobs between July 2017 and July 2018 in factories and warehousing facilities across the country.

But increasing labour costs are a growing concern, with over a dozen companies in the S&P 500 mentioning them in conference calls so far this earnings season, up from a handful of companies over a similar period in the year-ago quarter, according to a Thomson Reuters analysis.

Speaking to GTR, Lydia Boussour, senior US economist at Oxford Economics says: “These minimum wage hikes are not an isolated event; this is happening in the context of wages rising across the country. We’re starting to see widespread wage gains across sectors.”

Not only are wages going up, but employees are scarce. The current US unemployment rate is just 3.7% – the lowest in 50 years and a good way below the 4.5% level which represents “full employment”.

According to Moody’s analyst Adam Ozimek, “if wages become too high in one place, it’s easier for a manufacturer than for, say, a restaurant, to relocate operations. After all, the huge decline in manufacturing employment in previous decades is in part a warning about the unsustainability of above-market wages in a globally competitive environment.”

Given that labour can make up a majority of supply chain costs, could rising US wages put President Trump’s pledge to bring back manufacturing in jeopardy?

In its Assess Costs Everywhere (ACE) tool, developed to persuade companies to reshore manufacturing in the US, the Department of Commerce challenges that hourly labour costs are just one factor to consider in the overall labour cost equation, and that wage increase or no wage increase, the US remains a competitive location. It points to the country’s comparative productivity advantage versus offshoring locations such as China and Mexico, highlighting that productivity gains have outpaced labour cost increases in the US since 2000.

Meanwhile, the Economist Intelligence Unit (EIU)’s “labour market risk” indicator, which scores from one to 100 the likelihood of labour market factors disrupting business operations in country, gave the US a 14, placing it second-lowest in the world, tied with Switzerland and Hong Kong and only beaten by Liechtenstein.

Another key factor is whether companies actually need to cut costs in their supply chains. Boussour points out that companies are now gaining pricing power, enabling them to pass on increased costs.

Indeed, far from shying away from growing labour costs in the US, large corporates are currently pushing up wages of their own accord. “Amazon raised its minimum wage to US$15 last month. That’s very important. It shows that they are able and willing to raise wages for their workers to attract and retain them as the labour market has become very competitive,” says Boussour. “We think we are at a point in the business cycle where companies with big supply chains are able and willing to raise wages to meet high domestic demand and to attract and retain the workers that are left in the labour market.”

However, she cautions that given the complexity and expenditure involved in moving supply chains, while there is no current negative impact as a result of pay hikes, a delayed reaction may be possible. Added to growing input costs as a result of tariffs, increased wages may yet prove the tipping point for manufacturing competitiveness in the US.