Cost of Living Increases May Not be in Your Future

Annual compensation increases sometimes have been justified by calling them Cost of Living (COL) adjustments, but this rationale is now less relevant to setting appropriate wage levels than in the past. Employees often expect salary increases at least equal to the “cost of living” increase as measured by the federal government’s Consumer Price Index (CPI). But recent CPI numbers are now less than average wage increases, currently projected at 2-3%. From December 2009 to December 2010, consumer prices increased an annual rate of 1.5%. That easy justification for a salary increase – just match the change in CPI – doesn’t work right now. Planning for increases by employers varies dramatically, based on specific industry and geographic area, and is really not related to changes in the CPI.

What you spend -- your specific cost of living -- depends on how you choose to spend your money. What you earn, on the other hand, depends on what you do for a living and where you do it. Although the CPI measures prices of a fixed market basket of goods and services over time, no single cost figure accurately measures individual expenses. That is up to the decisions made by individual consumers on how to spend the money they have. Consumers may make different choices if costs increase – for example, to eat more meals at home rather than at restaurants. Those rediscovering their kitchens will take advantage of the decreasing costs of food at home and avoid the increasing cost of restaurants. While CPI may be useful in measuring changing costs in the economy, it does not really reflect what most consumers actually experience.

Even more important, companies pay what they do because that is what the labor market for a specific skill requires. Companies don’t print money – it usually comes from sales of products or services. If companies don’t pay enough, they lose good employees and many have difficulties new ones. If they pay too much, their prices of their products or services won’t be competitive. Basing a salary increase on the COL just doesn’t work. Although an across-the-board increase is easily understood and appears equitable, wage increases must reflect the market for labor or companies won’t be in business long.

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