Cost Of Living Raise

The Cost of Living Raise and your Salary

One of the things to consider when evaluating the value of your job is whether it applies a cost of living raise to your salary along with the normal raises for performance and experience.  There are many kinds of jobs where after a few years you might reach the ceiling as far as salary is concerned.  If such jobs do not include a cost of living increase, however, you will find that over time your earning power will not keep up with inflation.  This will, in effect, mean that you are getting a salary cut every few years.

So what is “cost of living?”  The government keeps track of average prices of a series of necessary items such as certain types of foods and consumer goods that economists consider basic for people to live adequate lives.  In tracking the cost of these items and the natural inflation that takes place over time, the government comes up with a sense of how much your income has devalued overtime.  That is, the government comes up with a sense of how much you can buy with a dollar today, as opposed to having a dollar ten years ago.  This becomes what the government calls the Cost of Living Index.

A good way of thinking about this is to consider the effect that inflation has on wages and prices.  Consider the price of homes versus wages over time.  In 1950, the average home cost about $8,500 while the average yearly wage was around $2,800.  By 1960, the average home cost $12,700 while the average wage was $4,000.  By 1970, homes were $23,400 and wages, $6,200.  By 1980, homes cost $68,200 and wages were $12,500.  By 1990, homes cost $123,000 while wages were $21,000.  And by 2000, homes cost $132,000 while wages were $32,200.

One obvious conclusion is that prices and wages go up overtime.  The average home in 2000 cost roughly 15 times more than a home in 1950.  The average wage however, also went up, increasing by roughly 11 fold.  The important conclusion from the Cost of Living Index is not just about wages and costs going up, but about wages keeping up with costs.  Therefore, what we see is that by 2000, it was harder for the average person to buy a house (relative to 1950) because the average person’s wages had only increased by 11 times while the average home price increased about 15 times.

Consider this from another perspective.  You might think of it like this: how many years worth of salary does it take a person to buy a house?  In 1950, it took the average person just over three years worth of wages to buy a home.  By 2000, it cost the average person over four years.  (Even more interesting is that this was an improvement over 1990 because home prices rose more slowly during this period.  In 1990, it cost the average person almost six years worth of salary to buy a home.)

What this tells us then, is that the average wage has not kept up with inflation, as far as homes are concerned.  This conclusion means that people will take longer paying back higher amounts and thus find their earning power over time seriously hampered.  The cost of living increase attempts to address such issues by providing wage and pension increases that allow people to keep up with these costs so they do not become progressively poorer.

In order to insure that they keep up with the cost of living increase, many workers find that they must constantly adapt to a changing work place.  No longer can workers expect to spend their entire careers with one corporation as they did in the fifties and sixties.  The average worker these days works for about 8 different employers after earning their college degree and changes careers an average of two and a half times.  Despite this, workers have a strong sense that they are not only not keeping up with the Jones, but not even with the price of bananas.