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Although differentials between areas will vary at different wage/salary levels, the changes in these differentials tend to be gradual.  This is not the case with cost-of-living differentials. ERI has created a model which illustrates that individuals at different earning/spending levels may have strikingly different consumption patterns.  For example, in a state such as Rhode Island, with graduated state income taxes, an individual at minimum wage annual earnings might effectively spend 3% of earnings on state income tax, while top earners might expend 10% on state taxes.  Also, individuals at different earnings/spending levels will tend to spend a greater or lesser percentage of total earnings on combined effective income taxes and then a greater or lesser percentage of after-tax earnings on, for instance, consumables or housing.

 

The earnings level and the weighting of consumption pattern categories (cost-of-living methodology) will affect any reported cost-of-living variances or indices.  Any survey that reports an overall, generalized statement such as, "Subject City costs are xx% above the national average levels," risks oversimplifying and misleading with the reported "results."  The expenditure pattern for each spending level and the assumed spending level itself must be defined.  Nowhere is this factor more important today than in the effect that housing costs play in the cost-of-living equation.  Activity in housing costs following the real estate bubble has greatly influenced rental values (profiled in the Geographic Assessor) in addition to home purchase prices (profiled in the Relocation Assessor).  You may expect to see "cost-of-living" differentials between the same two cities vary by earnings level by as much as 50%.  Costs may vary greatly even from one release to the next, depending upon whether home ownership or rental is assumed.

 

It is important to note that the original Two City Comparison table in the Geographic Assessor only reports summary cost-of-living differentials based on the rental housing market and benchmark assumptions for each earnings level; the updated Two City Comparison table in the enhanced Geographic Assessor includes cost-of-living data for both rental and home ownership scenarios (contact info.eri@erieri.com to subscribe to the enhanced Geographic Assessor).  The Relocation Assessor was specifically designed to build relocation packages and reports rental and ownership differentials, along with itemized break-outs of the expenditure categories that can be modified by the user. While you should use the Geographic Assessor to set wage and salary levels based on geographic differentials, the Relocation Assessor is better suited to determine COLAs.

 

Please note that an individual's annual spending level may exceed the annual salary specified (due to supplemental income from spouse, investments, etc.).  You may wish to review the appropriate Spending Level (rather than Earnings Level) for the cost-of-living comparison.

 

For additional information regarding the Geographic Assessor cost-of-living methodology, please refer to the methodology for the Relocation Assessor.