Cost of Living vs. Cost of Labor

The Nitty Gritty

Candidates are constantly bringing up cost of living, but HR is always talking about cost of labor. What’s the difference and to which should I be paying attention? Wanna get deep? Read on. 👉 Short attention span? Skip to the end! 👇

Cost of labor is how much it costs to employ workers in a geographic area. What does that really mean, you ask? In its simplest form, think of it as the “going rate” for a job. It’s dependent on supply and demand of the labor force in a location, e.g., the more talent that’s available, the lower the cost of labor for that job, and vice versa. It’s also what your Comp team uses to figure out things like pay guidelines or salary ranges.

In some cases, the labor market can dictate the monetary value of a job - regardless of where that job is located. For example, we've all run across “hot jobs” that require premium pay because there is a scarcity of talent and/or competition for talent is high. Think about highly skilled / educated data scientists - they’re hard to find and I bet you’d pay a lot to get one - no matter where you needed the job to be.

Cost of living is how much it costs for a consumer to reside in a geographic area. You can think of it as “what it costs me to buy a basket of goods (i.e., stuff).” It’s dependent on external factors like the local housing market and taxes, groceries, transportation, etc., and typically reflects inflation. Places that are extremely expensive, like San Francisco or New York City, have a higher cost of living in part because of the desirability to live there. Higher cost of living also has to due with access to goods, or limited availability of those goods. For example, Hawaii has to import almost all of it’s consumer goods, which impacts prices and also results in a higher cost of living.

But what about all the now-remote jobs? With organizations shuttering their physical office spaces due to the pandemic and most employees now working remotely (perhaps indefinitely), a lot of major cities - especially those with high costs of living, like San Francisco - have seen an exodus. If a job can be done remotely, then I can technically live anywhere and don’t have to keep living in a city where a majority of my income is going towards rent. My money goes further and I theoretically have more disposable income. So my cost of living is reduced, but how do we think about a labor market if jobs are everywhere?! This former (reformed?) comp professional thinks we’ll eventually go to regional or nationalized markets for many jobs - especially if a majority of white collar workers continue to work remotely.

The Sum Up

It might feel like a tricky conversation, but at the end of the day it comes down to one question. How much is an organization willing to pay for a job*? If there’s no competition, or a lack of qualified candidates, then we have more choice and better bargaining power. Conversely, if there’s a lot of competition, or a scarcity of talent, then we may be forced to pay more to get what we need.

Ultimately, pay should reflect the labor market. It’s our best attraction and retention tool. Using Compa will help you narrow in on that market. The more offers (yours or competing) you capture, the more data available to triangulate what’s really happening in the market.

Footnote

To reinforce the work our friends in HR do, remember that pay isn’t the only factor you can use to help differentiate a job or your company. In today’s market, pay and benefits are table stakes - everybody's got 'em. You can up the ante by building a comprehensive picture for candidates, including what their experience (supported and flexible careers, help in managing well-being) and purpose (work that matters, belief in the vision, belonging) will be when they join your organization.

The resources available here are for informational purposes only and do not constitute legal advice or opinions. For legal advice, please consult with your employment counsel directly.