Metrics for Cost-of-Living Analysis

by Marillyn Tefft, Senior Researcher 5. May 2015 14:36

 

Cost of living is frequently a key decision metric for opening and relocating business units.  It is common for management to ask relocation and HR professionals to compare the company’s locations to the US National Average cost of living as a benchmark in analysis. The Relocation Assessor databases contain data for over 6,000 US locations of all sizes, which are used to establish this important benchmark.  Since many companies are located in larger cities, it is useful to consider other averages in benchmark comparisons. Housing costs (both rental and home ownership), a key component of cost-of-living differentials between locations, are significantly higher in large cities.  Using the cloud-based Relocation Assessor, we develop two additional benchmarks below:  a US Large City Average and a US Large City Average which excludes New York City (NYC) and San Francisco (SF). The following cities are included:  Atlanta, Boston, Chicago, Dallas, Los Angeles, New York, Miami, Philadelphia, San Francisco, and Washington, DC.  It is interesting to examine the benchmarks graphically:

 

 

Housing costs are the biggest contributor to cost-of-living differentials.   In both the renter and homeowner situation housing costs are significantly higher in the US Large City Average and US Large City Average excluding NYC and SF averages.  In NYC and SF, monthly rental costs are $4,973 and $3,814, respectively, while the overall US Large City Average rental is $2,598. Excluding NYC and SF from the US Large City Average drops the monthly rental to $2,150. The US National Average monthly rental cost is $905.

Owning a home follows a similar pattern: the US Large City Average home price is $719,262; the US Large City Average excluding NYC and SF home price is $454,305; and the US National Average home price is $251,790. Notice that the Income and Payroll Tax is lower for both of the US Large City Averages than for the US National Average. The Relocation Assessor analysis includes a deduction for mortgage interest in the income tax calculation. In locations with higher home prices, mortgages and mortgage interest are higher, allowing for a greater deduction from income taxes.

Consumables are typically the second largest component of cost-of-living expenditures. Although consumable costs for both of the US Large City Averages are somewhat higher than for the US National Average, differentials for the same market basket of goods and services throughout the US are modest. The same holds true for transportation and health services components.

 

Using the Cost-of-Living Table by Earnings feature of the Relocation Assessor yields some interesting results. The cost-of-living differentials are always determined by the base (or home) location. The Relocation Assessor asks and then answers this question: Given an earnings level, what does a typical expenditure pattern look like in the base location (in our example below, the US Large City Average excluding NYC and SF and the US National Average)? How much does it take to replicate that lifestyle in the destination location?  Given the two different base expenditure patterns, the resulting destination patterns are quite different.  For the more costly US Large City Average excluding NYC and SF, at $120,000 annual  earnings, it takes $126,364 to have the same lifestyle in Stamford, CT.  Starting with the lower priced US National Average, at an annual earnings of $120,000, it takes $167,818 to that same lifestyle in Stamford, CT. Cost-of-living differential comparisons look quite different because $120,000 buys a nicer lifestyle in a relatively cheaper location than a relatively more expensive location.

 

The development of several benchmark averages for the Relocation Assessor databases allows for greater flexibility in cost-of-living analysis. Housing costs, a prime component of cost differentials, are much higher in large cities. For companies located in large cities, it may be more meaningful to develop a US Large City Average than use the US National Average.