Cost of Living Index

The Cost of Living Index shows the disparity in living costs between two specific locations, and it can give employees a better idea of the comparable cost of living across cities, states and countries. The cost of living index can also provide useful information about the necessary wages needed to sustain a certain standard of living.

For example, if you are currently working in London it is considered the "base" city, which is expressed as 100. If, however, your company decides to move you to New York, which has an index of 120, this means it will cost you 20% more to live in New York.

How is cost of living index used in employment?

Cost of living allowances are often given to employees. The Cost of Living Index may not be applied to the base salary but rather to that portion of an employee's pay which is considered spendable income or the money spent on food, clothing, recreation, and transportation. Using the index, employers are able to create flexible compensation packages specifically tailored to the employee.

COLAS or cost of living adjustments may also be offered for certain types of income including contracts, pensions, or government benefits. A COLOA increase provides additional income for workers to keep up with the increased cost of living, as represented by the CPI.

Cost of Living and Salaries

Employees can use Cost of Living Indexes in salary negotiations to compare salaries and benefits in various geographic locations. For example, if you are considering moving to a new city it's important to understand how suitable a salary offer is relative to your current income. Keep in mind, cities with a lower cost of living will allow you to do more with your money. If you move to a city with a high cost of living, you will have less disposable income.