Cost of Living vs. Cost of Labor

One of the biggest mistakes in the area of compensation is
to refer to any individual or companywide salary increase
as a cost of living increase.

When talking about salary changes, it is more appropriate
to speak about cost of labor increases.

The difference between cost of living and cost of labor is
very important.

“Cost of living” refers to the costs to a consumer in a
specific area for food, housing, groceries, taxes,
transportation, etc. It’s the cost of maintaining a
certain standard of living or lifestyle.

“Cost of labor” refers to the difference in pay or labor
market rates for a job from one location to another. It
is the “going rate” or compensation for a particular job
in a specific geographic market.

The fact is that the cost of living in a city may have
increased tremendously but because of a surplus of
candidates for a particular position, the compensation may
be declining. As such, references to cost of living will
create false expectations of larger increases among some

Similarly references to cost of living in an area with low
costs of living will send the wrong message to employees
in jobs that are in high demand and who may assume they
are only getting minimal salary adjustments.

From a compensation philosophy perspective, a company
should be more concerned about keeping salaries
competitive within a particular labor market for key
positions. As such, it is important when analyzing pay
changes to benchmark to the market specific key/anchor


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One Response to Cost of Living vs. Cost of Labor

  1. Thank you for all of your articles.

    Cost of Labor vs Cost of Living is extremely important.
    Employees (and most everyone else) want to know what is going on and what to expect.
    Clear communication, even if unpleasant, is much better than the unknown or false impressions.
    Clear communication can also restrain wild rumors.
    Keep up the good work.

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