Cost of Labor and Cost of Living
Differentials at a Glance
Cost of Labor
Definition
Cost of Living
Definition
Factors Considered
Cost of labor data consider these factors:
- Supply and demand of labor across all industries and occupations by geographic location
Factors Considered
Cost of living data consider these factors:
- Consumables
- Transportation
- Health services
- Housing
- Taxes
Practical Applications
How cost of labor data may be used:
- Compensation strategy and program
- Cost to hire and retain local nationals
- Incentive compensation
- Salary surveys
- Geographic salary structures
- Merit increases
- Benchmarking pay rates
- Evaluating salary ranges
- Calculating competitive compensation packages
- Analyzing total compensation trends
Practical Applications
How cost of living data may be used:
- Global mobility strategy and program
- Cost to relocate between geographic locations
- Temporary relocation allowance
- Per diem allowances
- Assignment pay
- Cost of living increases
- Business acquisitions, divestitures, relocations
- New and revised business locations
- Offshoring a business location
Other Applications of Cost of Labor and Cost of Living
Cost of labor and cost of living data may be used in the following compensation planning process:
Remote Workers
Determining pay for remote workers has become more important than ever. When planning compensation for remote workers, there are different approaches that can be taken from a cost of labor and cost of living perspective.
Cost of Labor Approach
- In this approach, a remote worker could be considered a company branch office with the number of employees of that branch office simply being equal to one.
- One of the most frequently used methods is to apply geographic pay differentials for remote employees when adjusting salary structures for branch offices.
Cost of Living Approach
- In this approach, the remote worker is viewed as a relocated employee.
- When relocating an employee, one goal is to “keep the employee whole,” at least until the employee has had an opportunity to adjust spending patterns to the higher-cost location. Cost of living data are compiled to support this process.
Geographic Pay Differentials
Geographic pay differentials, which are only applicable in cost of labor analyses,
are an important tool when it comes to compensation planning.
Definition
Geographic pay differentials measure market-driven pay. Geographic differentials enable organizations to attract and retain talent in premium markets, manage labor costs in non-premium markets, and facilitate perceptions of equitable pay.
Practical Applications
Geographic differentials may be applied for specific cities, or cities with similar differentials may be grouped into geographic tiers. Companies may also create geographic pay differentials using a particular region or by grouping locations with similar market rates.
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