Cost Of Living

Cost of living refers to an economic metric that determines the living costs in a city, state, or country. It is based on the Consumer Price Index (CPI) published by the Bureau of Labor Statistics (BLS). People tend to use it as a benchmark while relocating from one place to another as it helps them ascertain whether their new wage will serve their daily expenditure. 

Based on this living cost, the salary structure for employees in a cosmopolitan city is adjusted accordingly. For example, if city A requires individuals or families to spend more on basic needs, the wages or salaries offered there must be more. In short, the living cost enables one to compare the living cost in a significant town to the corresponding metropolitan city of a state.

• Cost of living is the minimum expense needed to maintain a specific standard of living at a given place within a certain timeframe. 
• The expense against the income of an individual or family determines how well the living costs are managed in a region.
• A living cost index helps to determine whether it is feasible to relocate to another city. Also, it enables individuals to know how much additional income is required to sustain the current lifestyle in the new place.
• Living cost differs from minimum wage, which refers to the lowest income given to a worker to satisfy their daily consumption needs.

Cost of living is the minimum money and resources required to survive in a region. It is one of the most significant metrics to figure out what the expenses of living in a region would be and how much earning one has against it. This cost of living comparison, as a result, gives an individual an opportunity to decide whether they, alone or along with their families, should shift to that area or city or state or nation or they should continue having a life in their existing place.

The living cost takes into account the aggregate average cost of an assumed basket of goods and services across different locations, which varies geographically as different regions have diverse costs related to living in each area. One can measure it by assigning a numeric value to each location, representing the average cost of a uniform basket of goods and services. 

The goods and services include rentals, groceries, childcare, education, healthcare, taxes, transportation, food, lodging, and entertainment. A cost of living index (COLA) helps one easily compare expenses against salaries or wages of two or more city or region options. These living cost indexes use 100 as the primary reference number. This number represents the median or average living cost in the sampled regions and is assigned to each city or state. 

A region with an index score below 100 is considered cheaper than the base index. Also, one with an index score above 100 tends to be more expensive. Thus, if someone wants to move from one city to another, comparing the index with the target location's index is essential. If the target region's index falls lower than the base index of the region, it shows that living costs over there would be cheaper. 

As a result, they may consider shifting to the target place for employment or studies. However, if the target location has a higher index value, it indicates that the region is expensive to relocate. Moreover, using a cost of living calculator can help find living costs and determine the respective costs.

Let us go through some examples to understand the concept better.

Example #1

Suppose Stella lives in City A and earns her living there with a monthly salary of $7,000. She applies for a job in City B and cracks this opportunity at a compensation of $10,000. Though her parents were happy to see the hike that she received, Stella played smart and checked the living index to understand whether she should shift to another city for this job or stick to this one. When she checked the index, she compared the living costs of City A with City B. She found that the standard that she manages in City A with $7,000 would cost her $11,000 in City B. Hence, she decided to refuse the offer and continue to search for a better opportunity.

Example #2

As per the news report published in CNBC on Oct 13, 2022, the living cost of senior citizens is likely to increase with the increase in their income benefit to 8.7% in 2023, which has been the highest jump in the last 40 years. The increase would mean that the older citizen could expect a monetary benefit beyond the $140 every month on an average starting from January 2023. The retiree can expect an increase of more than $146 every month, leading to an increase from $1,681 in 2022 to $1,827 in 2023.

Both these terms are often considered synonymous with each other. Hence, it is essential to know how they differ from each other. Let us know the differences between living costs and minimum wages from the table below:

This article has been a guide to what is Cost of Living. Here, we explain its examples and differences with minimum wage in detail. You may also find some useful articles here –

• Cost of Living Calculator
• Cost Of Living Adjustment
• Cost of Labor