If you’re transferring an employee, you want the process to be a smooth one. A large part of that is helping the transferee maintain their accustomed lifestyle. The cost of living index of their destination will have a big influence on potential salary adjustments. But what is it? And how is it decided?
There are certain things a person needs to live: food, clothing, housing, electricity, healthcare. A cost of living index is a measure of what it costs to live in a specific area, as decided by the average costs of those necessary consumer goods and services. They are often used to benchmark a transferee’s lifestyle when companies move employees.
Each index is specific to a region. So, an employee working in the Atlanta, GA is used to a vastly different cost of living than an employee working in Kansas City, MO. Those differences are reflected in the cost of living indices.
Employers use information from these indexes to determine whether employee salary should be adjusted to help maintain a similar lifestyle in the new location. But what goes into these cost of living indices?
Most cost of living indices start with a base, represented by 100. The base could be a single metro area (say Atlanta), or an average of multiple regions. Other regions are measured against that base to create a score. In relation to Atlanta, Kansas City might be 75, or 25% less expensive, while New York City might be 110, or 10% more expensive.
It’s important to know there is no official cost of living index. Though the U.S. Consumer Price Index (CPI) uses a similar approach, the U.S. Department of Labor’s Bureau of Labor Statistics asserts that a complete cost of living index takes more into account than the CPI. And there are different ways to calculate one.
A. A. Konüs established a cost of living theory working on the idea that consumers are making the best use possible of the money they can. This optimal utility set against the optimal utility of the following year determines the index. As utility isn’t quite quantifiable, other measures arose. For example, the Laspeyres price index compares previous consumer purchasing behavior against later costs of the same goods and services. Every version has its benefits and blind spots.
Type “cost of living index” into a search engine and you’re going to see a lot of free results. And, at first glance, that may seem like a great value. But these results lack the certification you’ll want before committing an employee to such a big change as moving locations. Skewed cost of living indices and out of date data could end up costing your company thousands more than necessary with each transferee. And that doesn’t even get into the costs of an unsuccessful employee relocation.
The best source of cost of living index information is one that is up to date. And our data is current and reliable. Each data component is specific to its location. Our fair and accurate information will save your company from the potential catastrophe of using bad data. Interested in learning more about our offering? You can contact us here.