Relocation and HR Professionals using the Relocation Assessor frequently ask, “Why does the cost-of-living differential change when I increase or decrease the Annual Earnings? Shouldn’t it always be a fixed percentage?” To evaluate COL differential estimates, it is necessary to have an understanding of the underlying expenditures patterns. Since the mid-1980s, the Bureau of Labor Statistics using the annual Consumer Expenditure Survey has produced average expenditures for various family profiles (e.g., earnings level, age, and race). Survey participants are asked to keep detailed diaries of all spending, and in-person interviews are conducted. The goal is to accurately capture both reoccurring purchases (such as grocery items) and larger expenditures over a period of time (such as a car, rental/mortgage payment, etc.). Results from the survey demonstrate that, at lower earnings levels, it takes a larger percentage of Annual Earnings to cover the expenditures for Housing, Consumables, Transportation and Health Services for the professional/mid-management lifestyle estimated in the Relocation Assessor data.
Another (more mathematical) way to think about this is that more and more of the typical expenditures are being covered as Annual Earnings increase, so more is available for the Miscellaneous expenditure category. The Relocation Assessor assumes that the Miscellaneous expenditures are equal in both the Base and Destination locations. The “mathematical” explanation follows: The Miscellaneous category becomes a higher percentage of Annual Earnings as it increases. The COL differential of Miscellaneous is always 0, so an increasing percentage of entire budget is not impacted by a COL differential. Now consider the “intuitive” explanation: Does it make sense to offer the same COL differential percentage to an employee making $50,000 as an employee making $500,000?
In the example below, we illustrate with a 900 square foot apartment rental at an Annual Earnings level of $75,000 for a family of two. The COL differential from Atlanta to San Francisco is a 51.7% COL increase. For the same parameters (900 square foot apartment rental and family size of 2), when the Annual Earnings increases to $125,000, the COL differential decreases from 51.7% to 34.3%. If the Annual Earnings is $200,000, then the differential falls to 26.5%.
Here is the generalized explanation: Expenditure patterns differ based on earnings levels. At lower earnings levels, households typically spend a higher percentage on Housing and Consumables. Further, as income increases, the percentage of Income and Payroll Taxes increase due to the progressive tax structure in the US.
In practice, the HR or Relocation Professional gets this common question from the recipient of a Relocation Assessor report: “I found different data online about the cost of living in my new location. Why is what I found so much higher?” Ask to be provided with the results (the COL differentials) from the source being for several different income levels (perhaps $50,000 and $500,000 in addition to the individual’s salary). If the percentage difference for both (all) salary levels is the same, share the above explanation.
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