COVID-19

Employers rethink cost of living calculations

Kristin Schwab Oct 12, 2020
Heard on: Marketplace
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People sit in socially distanced circles while picnicking at Mission Dolores Park in San Francisco. Some companies are reconsidering compensation based on a worker's location. Justin Sullivan/Getty Images
COVID-19

Employers rethink cost of living calculations

Kristin Schwab Oct 12, 2020
People sit in socially distanced circles while picnicking at Mission Dolores Park in San Francisco. Some companies are reconsidering compensation based on a worker's location. Justin Sullivan/Getty Images
HTML EMBED:
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Microsoft is the latest big tech company to announce it will start letting more employees work from home part time or even permanently. Twitter, Facebook and a bunch of others are doing the same. And that’s got employers thinking about pay. When companies set pay rates, they consider two big factors: cost of labor and cost of living.

And that second piece — cost of living — could likely go way down if employees leave coastal cities, Silicon Valley or anyplace where it costs a lot to live.

There are tools online that calculate cost of living. You punch in where you live, where you want to live, your current salary, and out comes some magic number that tells you how much your money is worth in that prospective city. Behind that number are a lot of little ones.

“This is relatively straightforward if you think about prices of two items that are available in two locations,” said Ben Faber, an associate professor of economics at University of California, Berkeley.

Like how much is a gallon of gas? A pound of rice? A house?

“Where this becomes tricky is that a house is not just a physical structure with four walls and a roof on it. A house comes with a neighborhood, it comes with school quality, it comes with the types of neighbors that surround you,” Faber said.

Cost of living just assigns a dollar value to stuff. It doesn’t capture the unique value we place on how we live. And expectations about how we live are shifting, said Peter Cappelli, director of the Wharton School’s Center for Human Resources. He thinks slashing salaries for workers who move is tied to the increasingly outdated idea that compensation should be pegged to location. And yet?

“This is really kind of the dream of CFOs who think now here’s a way to cut pay by a lot,” he said.

Because to employees, taking a pay cut to live somewhere cheaper isn’t just about the value they place on a white picket fence. It could make them feel less valuable as workers.

“If you have the same person, they’re still providing the same value to the organization, they just happen to be living somewhere else, does that really change what you should pay them?” said Mary Ann Sardone, partner in Mercer’s talent consulting business.

Sardone thinks the pandemic may force employers to use national salary averages to create compensation packages. Because ultimately, if you want the best employee, you still have to give them the best offer, whether they’re living in the Big Apple or Boise.

COVID-19 Economy FAQs

How are Americans feeling about their finances?

Nearly half of all Americans would have trouble paying for an unexpected $250 bill and a third of Americans have less income than before the pandemic, according to the latest results of our Marketplace-Edison Poll. Also, 6 in 10 Americans think that race has at least some impact on an individual’s long-term financial situation, but Black respondents are much more likely to think that race has a big impact on a person’s long-term financial situation than white or Hispanic/Latinx respondents.

Find the rest of the poll results here, which cover how Americans have been faring financially about six months into the pandemic, race and equity within the workplace and some of the key issues Trump and Biden supporters are concerned about.

Are people still waiting for unemployment payments?

Yes. There is no way to know exactly how many people have been waiting for months and are still not getting unemployment, because states do not have a good system in place for tracking that kind of data, according to Andrew Stettner of The Century Foundation. But by his own calculations, only about 60% of people who have applied for benefits are currently receiving them. That means there are millions still waiting. Read more here on what they are doing about it.

What’s going to happen to retailers, especially with the holiday shopping season approaching?

A report out Tuesday from the accounting consultancy BDO USA said 29 big retailers filed for bankruptcy protection through August. And if bankruptcies continue at that pace, the number could rival the bankruptcies of 2010, after the Great Recession. For retailers, the last three months of this year will be even more critical than usual for their survival as they look for some hope around the holidays.

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