What Happened to My Cost of Living Increase? - ERI Economic Research Institute

AS SEEN ON PRLog.org

REDMOND, 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 Economic Research Institute blogs and add your own comments!

Read the full press release at: PRLog.org