What is the Cost of Living?
The cost of living is the amount of money needed to cover essential expenses such as housing, food, taxes, and healthcare in a specific place and timeframe. It is a key comparative tool to measure how expensive it is to reside in one city versus another. Higher expenses necessitate higher salaries for an affordable lifestyle — for example, living in a bustling metropolis like New York demands greater income levels.
Cost of Living and Lifestyle
The cost of living often bears a major impact on personal wealth accumulation. A given salary can grant a significantly better standard of living in a city with lower daily expenses. Conversely, a high salary may feel inadequate in expensive cities such as New York or Hong Kong. For instance, a 2023 survey revealed the priciest cities globally with Hong Kong, Singapore, and several Swiss cities topping the list. U.S. cities, notably New York City, are also among the most expensive, followed by Los Angeles and San Francisco.
The Cost of Living Index
The cost of living index is a benchmark tool that compares living expenses in one major city to another. This index evaluates aggregated costs across various essential domains, such as housing, transportation, and groceries. As new graduates and job seekers consider relocation, this index gives a reliable summarization of financial needs. Different indexes may present varying results depending on their calculation modes. In 2023, Kiplinger found San Diego to be the most costly city in the Council for Community and Economic Research’s assessment, which examines housing, groceries, utilities, transportation, healthcare, and more.
Cost of Living and Wages
Rising living costs have prompted debates over the U.S. federal minimum wage. Proponents argue for increased wages due to rising worker productivity, while opponents suggest any wage hike would increase consumer prices. Multinational corporations also evaluate the cost of living to determine appropriate expatriate compensation.
Wage Increases and Cost-of-Living Adjustments (COLAs)
Since 1973, Congress has implemented Cost-of-Living Adjustments (COLAs) for Social Security and Supplemental Security Income (SSI) to counteract inflation. These adjustments ensure that benefits keep pace with price increases assessed by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). For example, in December 2022, COLA adjustments were 8.7%, raising federal SSI payments accordingly.
Key Takeaways
- Cost of living encompasses necessary expenses such as housing, food, taxes, and healthcare.
- Salaries must align with the higher cost of living in more expensive cities.
- The cost of living index benchmarks to compare economic conditions across different metropolitan areas.
Real World Examples
The Economic Policy Institute’s Family Budget Calculator updated its figures in March 2022 to help families discern necessary salaries to meet their living costs in 3,142 counties across 613 metro areas. It found San Francisco to require a family income of $142,481 to cover basic needs, whereas, in the McAllen-Edinburg-Mission area in Texas, the same family needs only $45,446. In no U.S. location can a single adult meet the cost of living with just minimum wage.
Related Terms: minimum wage, inflation, economic index, cost of living adjustment, consumer price index.
References
- Mercer. “2023 Mercer Cost of Living Survey”.
- Kiplinger. “The 11 Most Expensive Cities to Live in the U.S.”.
- Economic Policy Institute. “Raising the Federal Minimum Wage to $15 by 2025 Would Lift the Pay of 32 Million Workers”.
- U.S. Congress. “H.R.11333 – an Act to Provide a 7-percent Increase in Social Security Benefits Beginning With March 1974 and an Additional 4-Percent Increase Beginning With June 1974, to Provide Increases in Supplemental Security Income Benefits, and for Other Purposes”.
- Social Security Administration. “SSI Federal Payment Amounts for 2023”.
- Social Security Administration. “2023 Social Security Changes”, Page 1.
- Social Security Administration. “Computation of the Social Security Laws”.
- Economic Policy Institute. “Updated Family Budget Calculator Provides Data on the Cost of Living in Every County and Major Metropolitan Area”.
