Why is the Cost of Living in International Locations So High when Compared with U.S. Cities?

by Marillyn Tefft, Senior Researcher 22. August 2012 10:03

ERI’s team of subscriber services personnel, researchers, and product managers routinely answer questions from human resource and global mobility professionals on various topics regarding cost-of-living data in the United States and abroad. We’ve prepared a series of blog posts to highlight some of the most frequently asked questions. 

Our Relocation Assessor provides cost-of-living differentials based on a North American management/professional lifestyle in both the home and host location. The traditional international expat lifestyle has typically encompassed an even higher level of perks than what is common in North America.  Replicating this standard of living in international locations considered “inexpensive” can be surprisingly costly.  In fact, it is not unusual for total global mobility costs to be two to three times the actual salary, with cost-of-living differentials comprising a relevant percentage of these expenses.

  • Housing is typically the largest component of the cost-of-living expenditure categories. Expats tend to live in the “international” areas of cities close to international shopping venues and schools. These locations are typically in or close to the most desirable areas of the city. It is common for these districts to have a limited supply of quality housing, and, coupled with high demand, prices are high. Expatriates who live in developing countries are usually employed by multinationals, NGOs, and international financial institutions. Since employers generally pay housing expenses, there is rarely an incentive for the employee to negotiate. Typically, the asking price is paid with few questions asked. Sometimes corporate housing, serviced apartments, or extended-stay hotels are provided by the company. Overall savings to the housing component of international assignments may be achieved by not using rental/leasing arrangements.  However, many costly amenities that would not be included in rental/leasing are built into these alternatives. Furthermore, there are normally additional costs in developing countries.  Safety surrounding expat living areas may entail substantial costs. In particularly challenging locations, expats may live in compounds surrounded by a constant high level of security.  It may also be considered “standard” to have full-time domestic help in some locations.  Additionally, a car and driver may be necessary to ensure security.
  • Cost of goods and services are generally much higher since expats purchase familiar items rather than host country items.  In order to get a valid comparison of costs, the prices of “like” goods and services as purchased in the home location must be compared to those in the host location. Although an exact match is usually impossible, survey price data from international shopping venues, which carry U.S. brands and quality, yield a higher price than what would be paid in the U.S.  Further, the survey items are usually originally priced in U.S. dollars, thus reflecting the value of the local currency to the dollar. Relocation Assessor data assume the expatriate purchases most consumables from international stores that carry items typical to those in North America rather than shopping at local stores.  A price level index for a market basket of international goods and services is used to compare costs in international locations. High inflation rates in developing countries may add further to the high costs of consumables.
  • International tax regulations and requirements are complex and involve detailed assistance of international accountants and attorneys to obtain reasonable estimates.  In many cases, tax obligations for the employee will be significantly higher.  In performing cost-of-living calculations, it is common to tax equalize so that the employee only realizes the same tax obligation as if living in the home country.

Transferring an employee from the United States to an international location requires careful consideration. Typical factors that affect relocation costs, such as housing, consumables, and taxes, are compounded by recreating a North American standard of living in the host country. ERI’s Relocation Assessor software compares cost-of-living differentials for these and other components in more than 11,000 locations worldwide.