Wondering if a "cost of living raise" is in the cards for you? You've come to the right place. Read on for everything you need to understand this type of raise, including how it's defined, how frequently it's usually given out, who qualifies — and more.
what is a cost of living raise?
- A cost of living raise is a type of salary or wage increase designed to offset inflation, typically as measured by the U.S. Bureau of Labor Statistics (BLS) Consumer Price Index (CPI). A four percent increase in salaries or wages awarded to all employees in order to offset a four percent increase in the cost of everyday consumer goods is an example of a cost of living raise.
- A cost of living raise differs from a traditional raise or bonus in that it is given to all employees equally, not on the basis of individual merit, productivity or performance.
- Most cost of living raises are calculated and issued annually.
- Cost of living raises are much more common in the public sector, where they are legally required of certain employers. In the private sector, however, they're optional and relatively uncommon.
- There are several other names for a cost of living raise, like "cost of living adjustment" (COLA) — the term used by U.S. Social Security Administration — and "cost of living allowance."
While labor unions frequently secure what they refer to as "cost of living raises" as part of their negotiations with employers, these aren't always true cost of living raises. For example, imagine that a union has successfully negotiated a wage increase of two percent for each year of a four-year contract. In this example, all union workers will receive the increase — even in the event that there's no inflation. Because the raise isn't tied to any price index, it doesn't quite qualify as a true cost of living raise.
why do employers offer cost of living raises?
Inflation is how economists measure and compare increases in the general price of goods and services over a period of time. In the U.S. economy, inflation is a fact of life (and if you don't believe us, just check out the BLS Inflation Calculator to see how much your buying power has changed over time). Today, the rate of inflation in the U.S. is hovering around 7.9 percent.
So the rationale for a cost of living raise is fairly straightforward: As the cost of everyday items goes up, it becomes more expensive for employees to cover basic needs, like clothing, housing and food. In this sense, a cost of living raise isn't really a raise at all — rather, it merely keeps pay in a state of equilibrium with prices.
There are other factors that might incentivize employees to offer cost of living raises beyond simply ensuring that employees are able to afford basic necessities. For starters, this type of raise might bolster employee retention and loyalty, encouraging experienced and knowledgeable workers to stay with employers over the long term. Plus, companies that offer this type of raise could tout it as a job benefit — and use it as a lure to attract great new hires.
who receives cost of living raises?
Cost of living raises are more common in the public sector than in the private sector. In large part, that's because certain public sector employers are legally obligated to offer cost of living raises, whereas cost of living raises are optional for private sector employers.
However, cost of living raises aren't entirely unheard of in the private sector. For example, if your employer is transferring you to a new location with a higher cost of living, it's a good idea to ask for increased salary or wages to make up for that difference. This is sometimes referred to as "locality pay." (If you're not sure what the cost of living will be in your new location, here's a handy cost of living calculator to help you out.)
how are cost of living raises calculated?
Cost of living raises can be calculated in a variety of different ways. But however it's calculated, a cost of living raise must account for a real-time index of purchasing power.
By far the most common index for calculating cost of living raises is the CPI, which is compiled by the BLS based on a sample of workers' earnings. Other commonly used indexes include the Employment Cost Index, an index of pay levels across a range of jobs, which is used to calculate the pay of certain federal employees.
To calculate a cost of living raise in the simplest terms, let's imagine that the cost of living increased by three percent during the course of the past year. For an employee earning an annual salary of $40,000, that would entail a raise of three percent — or $1,200 — on their annual salary. So after the cost of living raise, that employee would now be earning $41,200 annually.
how often are cost of living raises given?
Most cost of living raises are calculated and issued annually. Take recipients of Social Security, for example. Their annual cost of living adjustment, which is based on changes to the consumer price index from the third quarter of the prior year to the third quarter of the current year, goes into effect in December each year and lasts for the following 12 months.
At this point, you should have a pretty clear understanding of what a cost of living raise means and how it may apply to your work environment. And if landing a raise or promotion are among your goals for the new year, check out our guide to getting ahead by managing up.