Living costs differentials are frequenly cited to justify relocation expenses, but such relationships between cities usually don't come down to only one number. The typical family’s living costs vary by different percentages depending on how much money they make. For example, when Seattle pay is $50K and Spokane pay is 87.3% of that, the cost of living (COL) differential between the two cities is 59.1%. Someone earning $100K in Seattle typically finds the same job paying 88.3% of that ($88,300) in Spokane where the cost of living is 66.1% of the cost of living in Seattle. Local pay will not be discussed here, but the reasons for differences in living costs that affect the value of pay will be covered. The COL differential percentages don’t stay constant between people earning $50K and $100K because there are different lifestyles typical to those different income levels.
Long story short, the lifestyle choices that influence an individual or family "living cost" vary by income level. For example, poor people spend a much larger proportion of their income on essentials like housing and food than do the middle class; and the idle rich spend a much higher income percentage on luxuries, entertainment, travel, etc. Thus, when you compare how much it costs the average family to "live normally," their "normal lifestyle" assumes they fit the expenditure patterns for their income group.
While money has the same face value between locations, buying power varies according to product/service costs for the usual purchases families make. Income level largely determines WHAT people buy with those dollars. Expenditure patterns depend on the specific earnings level, housing size, if the family rents or owns, home characteristics, whether the location of the housing is urban or rural, family size, education level, and age of family members. There are a lot of factors specific to each family unit that will generate unique differential percentages.
Furthermore, local prices for basic essentials vary differently than local prices for luxury goods. The price of subsidized rental housing, public transport and food/water may govern the local living cost for a minimum wage worker, while the cost of a well-insured 3,500 square foot home, a top-flight major medical insurance plan, private school tuitions for children, multiple luxury vehicles, pricey maintenance and European vacations would reflect the standard of living for those earning in the top 5%ile for their area. Those different commodities and services have vastly different percentages of deviation from the national norm in each location. Put simply, bread prices don't vary much but four-star restaurant costs do have significantly variable cost differences from the national norm in virtually every location.
Another important reason for differences in COL costs is the circumstance of the comparison. Viewing two identical families living in Albany and Miami will show a different percentage relationship from one where the Smith family moves from Albany to Miami. In the first case, identical expenditure assumptions are made (same income, same family demographics, same housing, etc.). In the second case, one specific family departs their familiar area and relocates to a new community where they have many initial extra costs just to settle into the area. Plus, their purchases will be less economically efficient in the new town where they don’t know the best bargains. Obviously, the expenditures will be different in type, amount and percentage.
Taxes also have a tremendous effect on the amount of disposable income a family has in each location. Both local and federal taxes must be taken into account to determine how much net income remains from any gross figure. Local property tax rates can show dramatic differences too, such as the low millage found in Texas compared to the high millage in New Jersey. A U.S. homeowner with children who can deduct home mortgage interest and property taxes along with dependent tax credits will have more after-tax income to spend than a renter spending the same amount on an apartment.
Make sense? Hope so, because any fixed COL relationship that doesn’t change according to the underlying expenditure patterns of each family will probably be pretty inaccurate. Basing a relocation stipend on bad data can create quite a mess. If you don’t need this information now, you might want to keep a link to this article because it definitely will be important the next time you handle a move.
E. James (Jim) Brennan was Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. After over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.), serves on the Advisory Board of the Compensation and Benefits Review and will express his opinion on almost anything.
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