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Employers rethink cost of living calculations

Kristin Schwab Oct 12, 2020
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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
Heard on:
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
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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 He thinks slashing salaries for workers who move is tied to the increasingly outdated idea that compensation should be pegged to location.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

What’s the outlook for vaccine supply?

Chief executives of America’s COVID-19 vaccine makers promised in congressional testimony to deliver the doses promised to the U.S. government by summer. The projections of confidence come after months of supply chain challenges and companies falling short of year-end projections for 2020. What changed? In part, drugmakers that normally compete are now actually helping one another. This has helped solve several supply chain issues, but not all of them.

How has the pandemic changed scientific research?

Over the past year, while some scientists turned their attention to COVID-19 and creating vaccines to fight it, most others had to pause their research — and re-imagine how to do it. Social distancing, limited lab capacity — “It’s less fun, I have to say. Like, for me the big part of the science is discussing the science with other people, getting excited about projects,” said Isabella Rauch, an immunologist at Oregon Health & Science University in Portland. Funding is also a big question for many.

What happened to all of the hazard pay essential workers were getting at the beginning of the pandemic?

Almost a year ago, when the pandemic began, essential workers were hailed as heroes. Back then, many companies gave hazard pay, an extra $2 or so per hour, for coming in to work. That quietly went away for most of them last summer. Without federal action, it’s mostly been up to local governments to create programs and mandates. They’ve helped compensate front-line workers, but they haven’t been perfect. “The solutions are small. They’re piecemeal,” said Molly Kinder at the Brookings Institution’s Metropolitan Policy Program. “You’re seeing these innovative pop-ups because we have failed overall to do something systematically.”

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