Looking to Benchmark Pay?
Cost of Living
Cost of living is determined by the:
- demand for goods and services
- AND
- supply of goods and services
Cost of living is very valuable for managing relocations and temporary assignments, but it is not traditionally used to determine the market value of jobs.
Consumer Price Index (CPI)
Q: What is the Consumer Price Index (CPI)?
A: A market basket of goods and services likely to be used by the average family. The government keeps track of the cost of living through the CPI.
When someone thinks that pay rates should be adjusted according to the cost of living, they've usually been looking at the change in the CPI. But each person differs in how the factors in the market basket affect their personal cost of living. So, establishing rates of pay according to cost of living alone will lead to overpayment of employees in high cost-of-living areas. CPI is not an indicator of the cost of labor.
Cost of living and Relocations
Companies that relocate employees on a regular basis have a base rate for the employee's job and add a cost-of-living allowance separate from the base-rate amount. When ERI subscribers use this method, they rely on ERI's Relocation Assessor® software, which breaks down the cost of living by:
- consumables
- transportation
- health services
- rent or home ownership/utilities/insurance
- income and payroll taxes
- miscellaneous expenses
Want more information on adjusting compensation for individuals based on cost of living? See DLC Course 57: Relocating an Employee Within the United States and Course 92: Expatriate Compensation.
ERI generally recommends that cost of living be used as a consideration in establishing relocation benefits for employees, not for determining salary differentials for entire offices.
Cost of Labor
Where cost of living is very valuable in managing relocations and temporary assignments, cost of labor is most valuable in managing ongoing, regular assignments. This includes developing salary structures, managing geographic pay, and assessing the cost of doing business in a particular location.
When ERI subscribers use this method, they rely on ERI's Geographic Assessor® software, which also prices the cost of labor. The cost of labor reflects the local demand for and supply of labor. Cost of labor typically will correspond to the labor market scope of a salary structure. Normal surveys price individual jobs, whereas the cost of labor approach prices all jobs combined for a particular geographic location
Memory Jogger
Cost of living is: