Just Don't Call it a Cost of Living Increase

We are all feeling the pressure of rising prices, and our friends at the Economic Research Institute predict that this will soon translate (and for many of you, perhaps already has) into pressure from employees to address the increase in cost of living.

Step carefully, for this is slippery territory.

I have posted before on the distinction between cost of living and cost of labor, an absolutely critical one when it comes to compensation philosophy and compensation communication.  It speaks - I believe - to the very purpose of your pay program.

Is it...

1. To reimburse employees for their cost of living, or
2. To pay employees the market cost of their labor?

Cost of labor reflects what a particular geographic market offers as compensation for a specific type of work.  Cost of living reflects the cost of goods utilized by a typical consumer (i.e., housing, transportation, groceries, etc.)

More on the cost of living and cost of labor from Linda Lampkin, ERI's Research Director:

What you spend -- your specific cost of living -- depends on how you choose to spend your money. And what you earn depends on what you do for a living and where you do it. The reality is that different people have different expenses, even though cost of living is often discussed as if it were a single discrete universal number.  The federal government tries to measure the changing prices of a fixed market basket of goods and services over time, but there is no one single cost figure that accurately measures individual expenses. The real 'cost of living' is based on decisions by individual consumers on how to spend the money they have.

Setting and adjusting wage/salary levels in light of today's dynamics is a tricky thing.  It must be done thoughtfully, with clear intent and informed by the right set of data.

And so, repeat after me:

We pay cost of labor, not cost of living.

We pay cost of labor ...

Comments

[Wally Bock]

Congratulations! This post was selected as one of the five best business blog posts of the week in my Three Star Leadership Midweek Review of the Business Blogs.

http://blog.threestarleadership.com/2008/06/11/61108-a-midweek-look-at-the-business-blogs.aspx

Wally Bock

[Ann Bares]

Thanks, Wally. Always a priviledge!

[Michael Haberman, SPHR]

This is superb advice. I will be talking about this one with clients and students alike in the future.

[Ann Bares]

Cool! Thanks, Mike!

[almostgotit]

Maybe as a nonprofit employee married to a government employee, neither job paying anything like the cost of labor, while the latter periodically crows about the tiny "cost of living" raise it can only afford to give every few years, I should just stop reading these posts altogether. Too depressing! Lemonade and cookies, anyone?? :0)

[Betsy Welch]

I agree 100%. However, there is also some connection (maybe we could call it a dotted line) between cost of labor and cost of living. That is, IN GENERAL, if/as the cost of living goes up, the cost of labor will go up as well -- unless there is a significant oversupply of labor relative to demand in given market. Being able to understand and communicate that the cost of living and the cost of labor are not entirely disconnected may make employees feel a little more comfortable (if that's a goal). But again, I agree 100% that the cost of labor should drive compensation, and that cost of living is only a factor insofar as it is reflected in and feeds into cost of labor.

P.S. I just discovered your blog/archive, and love it...

[Ann Bares]

Betsy:

I agree, that the numbers are certainly not disconnected - and I often make this point to employees when I am giving my "speech" on the difference. But I also agree with your point that the distinction is a critical one, and that we need to be really, REALLY clear on which figure drives compensation.

P.S. Thanks for discovering the archive - glad to hear you liked what you found!