What Happened To My Cost Of Living Increase

WA - Rapid increases in the federal government's Consumer Price Index (CPI) often bring expectations of salary increases at least equal to the "cost of living." But the recently released CPI numbers show some startling economic trends.

* From October 2008 to October 2009, consumer prices decreased at an annual rate of 0.2%.

* The cost of household energy decreased 8.5% from October 2008 to October 2009, a dramatic change from huge increases in 2007 and 2008.

* The cost of food at home costs dropped 2.8% but cost of food away from home rose 2.2% over the year.

That easy justification for a salary increase – just match the change in CPI – doesn't work right now. According to ERI Economic Research Institute's research on salary increases, planning for increases by employers varies dramatically, based on specific industry and geographic area. But there really is no change in the reasons why wage increases don't match the "cost of living."

What you spend -- your specific cost of living -- depends on how you choose to spend your money. And what you earn depends on what you do for a living and where you do it. The reality is that different people have different expenses, even though "cost of living" is often discussed as if it were a single discrete universal number. The federal government tries to measure the changing prices of a fixed market basket of goods and services over time, but there is no one single cost figure that accurately measures individual expenses. The real "cost of living" is based on decisions by individual consumers on how to spend the money they have.

On the spending side of the equation, an increase in certain costs may cause consumers to make different choices – for example, to eat more meals at home rather than dining out in restaurants. Then those rediscovering their kitchens will take advantage of the decreasing costs of food at home and avoid the increasing costs of restaurants, thus minimizing the impact of the changing price of food on their cost of living. Obviously, while CPI may be useful in measuring changing costs in the economy, it does not really represent what most consumers actually experience.

On the earning side, companies pay what they do because that's what the labor market for a specific skill requires. Pay among different employers is often difficult to compare, as the value of total compensation packages varies based on non-cash elements like health insurance and working conditions. Obviously, each employer has a different view of a job's value to the company, as well.

And even more important, companies don't print money. The major source of money available to compensate employees usually comes from sales of company products or services. While there aren't that many rules about pay beyond the legally-required minimum wage, the consequences of wrong pay choices are serious. If companies don't pay enough, they lose good people and can't hire new ones. If they pay too much, their prices of their products or services won't be competitive.

Salary increases are currently reported as averaging around 2%, but never before has ERI seen such wide differences among different jobs, different industries, and different locations. Employers everywhere across the US are facing the stark reality of setting pay levels based on the demand for labor and the goods and services that they produce.

Thus, basing a salary increase on the increase or even a decrease in the cost of living just doesn't really work. Although an across-the board increase is easily understood and appears equitable, companies realize that increases must reflect the market for labor in their industries or they won't be in business long.

Check out salary increases by industry at ERI's blogs and add your own comments!
(http://salary-surveys.erieri.com/index.cfm?fuseaction=Sa ...)

ERI Economic Research Institute provides information on living expenses in various geographic locations for families with different characteristics (income, size of the home rented or owned, number of family members, number of automobiles and miles driven) in its Relocation Assessor. This data allows employers to compare living expenses between different cities and determine if a geographic differential is needed to attract and retain workers. ERI's Relocation Assessor illustrates typical expenses for consumers with different characteristics.

Wages and salaries can vary a lot from place to place, regardless of living costs. ERI created the Geographic Assessor to evaluate how pay varies at different income levels at over 7,000 locations. In addition, information on wages for different jobs (over 5,700 titles) in can be found in ERI's Salary Assessor. A source of information on competitive salaries according to years of experience and level of responsibility, it is also searchable by specific industry, by geographic location, and by size of employer.

For more information on ERI and its research on competitive salaries and cost of living data, visit http://www.erieri.com or call 800-627-3697.