Cost of living is the amount of money needed to cover basic expenses like housing, food, taxes, and health care in a specific place and time frame. Cost of living is often used to compare how expensive it is to live in one city versus another. The cost of living is linked to wages. If expenses are higher in a city, like New York, for example, wage levels need to be higher so that people can afford to live in that city.
Cost of living and lifestyle
The cost of living can be a significant factor in the accumulation of personal wealth because a salary can provide a higher standard of living in a city where daily expenses such as rent, food and entertainment are lower. Conversely, a high salary may seem insufficient in an expensive city like New York. In a 2018 survey, Mercer, a global human resources firm, notes that cities with the highest cost of living include Hong Kong; Luanda, the capital of Angola; Tokyo; Zurich and Singapore, in that order. New York City was ranked as the most expensive city in the United States, followed by San Francisco and Los Angeles, Chicago, Washington and Boston.
The cost of living index
The cost of living index compares the cost of living in a large city with a corresponding metropolitan area. The index incorporates the spending of various living expenses by creating an aggregate measure that new employees can use as a benchmark. As graduates evaluate employment alternatives and currently employed job seekers consider relocation, the index provides an informative snapshot of rent, transportation and food costs.
Different indices can calculate living expenses differently. For example, in 2018, Kiplinger found that San Diego is the most expensive city based on the Council for Community and Economic Research, not New York City. The Council’s Cost of Living Index measured prices in 269 urban areas for expenses such as housing, groceries, utilities, transportation and healthcare, even for haircuts or going to the movies. In the case of San Diego, the cost of housing is 138% higher than the national average and the cost of transportation is more than 20% higher than the national average.
Four of the five most expensive cities in the world for expats are now located in Asia.
Cost of living and wages
The rising cost of living has spurred debate on the US federal minimum wage and the disparity between the lowest statutory wage and the income needed to maintain an adequate cost of living. Advocates of higher wages cite the rise in worker productivity levels since 1968 as unfairly correlated with the minimum hourly rate of pay. Since wage levels once tracked productivity gains, the divergence between worker earnings and efficiency has reached historically disproportionate levels. Conversely, opponents of a minimum wage argue that a rise could spur higher consumer prices as employers offset the rise in labor costs.
Multinationals use the cost of living to evaluate expatriate salary packages for international assignees.
Wage increases and cost of living adjustments (COLA)
In 1973, Congress enacted legislation to address cost of living adjustments (COLA). The COLA adjustments for social security benefits and supplemental security income (SSI) have been set up so that payments keep pace with inflation. For example, as of December 2018, the COLA was 2.8%, and the increased amounts had to be paid, as of January 2019. Federal SSI payment levels have increased by the same percentage.
Cost of living is the amount of money needed to support a certain standard of living by incurring expenses such as housing, food, taxes, and health care.
Salaries should reflect the higher cost of living in more expensive cities like New York City.
The cost of living index compares the cost of living in a large city with a corresponding metropolitan area.