What Is the Cost of Living?
The cost of living refers to the money needed for essentials like housing, food, taxes, and healthcare in a specific location and time. It is often used to compare the expenses of living in different cities. Higher living costs, like in New York, require higher salaries for affordability.
Key Takeaways
- Cost of living is the amount of money needed to sustain a certain standard of living by affording expenses such as housing, food, taxes, and healthcare.
- Salaries should reflect the higher cost of living in more expensive cities like New York City.
- Thecost of living index compares the cost of living in a major city to a corresponding metropolitan area.
How the Cost of Living Is Used
The cost of living can be a significant factor in personal wealth accumulationbecause a salary can provide a higher standard of living in acity where daily expenses such as rent, food, and entertainment are less.
In contrast, a high salary can seem insufficient in an expensive city such as New York. Changes in the CPI are often a triggering event in labor and other contracts with escalation clauses. The contract will detail exactly how any periodic adjustments happen and what parts of the contract will change.
In a 2024 survey, Mercer, a global human resources firm, finds the cities with the highest cost of living in order are Hong Kong, Singapore, Zurich, Geneva, and Basel.
New York City was ranked the costliest city in the United States followed by Los Angeles, Honolulu, and San Francisco.
The Cost of Living Index
Thecost of living index compares the cost of living in a major city to a corresponding metropolitan area. The index incorporates various living expenses creating an aggregate measure that workforce entrants can use as a benchmark.
As college graduates weigh employment alternatives and currently employed job seekers consider relocation, the index provides an informative snapshot of rental, transportation, and grocery costs.
Mercer's cost of living index measures prices in 226 urban areas for a basket of goods, which includes 12 large eggs, one liter of olive oil, espresso coffee at a popular cafe, one liter of gasoline (unleaded 95), men's blue jeans, and women's shampoo, haircut, and styling.
The Economic Policy Institute updated its Family Budget Calculator in January 2024 with data from 2023. The calculator helps families determine how much salary they will need to cover the cost of living in 3,143 counties in all 613 metro areas.
Three out of five of the world’s most expensive cities are in Switzerland.
Most Expensive Urban Areas in the U.S.
According to The Council for Community and Economic Research, the 10 most expensive urban areas in the U.S. in 2023 were:
- New York, (Manhattan), NY
- Honolulu, HI
- San Jose, CA
- San Francisco, CA
- New York (Brooklyn), NY
- Orange County, CA
- Los Angeles (Long Beach), CA
- Washington D.C.
- Boston, MA
- Seattle, WA
Least Expensive Urban Areas in the U.S.
According to The Council for Community and Economic Research, the 10 least expensive urban areas in the U.S. in 2023 were:
- Decatur, IL
- Harlingen, TX
- McAllen, TX
- Tupelo, MS
- Ponca City, OK
- Muskogee, OK
- Conway, AR
- Florence, AL
- Kalamazoo, MI
- Lawton, OK
U.S. States Ranked by Cost of Living
U.S. states, districts, and territories ranked by cost of living from lowest to highest as of Q1 2024 as provided by The Council for Community and Economic Research is as follows:
- West Virginia
- Oklahoma
- Kansas
- Alabama
- Mississippi
- Missouri
- Arkansas
- Iowa
- Indiana
- Tennessee
- Georgia
- Michigan
- Louisiana
- Texas
- Kentucky
- North Dakota
- Illinois
- Nebraska
- South Dakota
- New Mexico
- Ohio
- Montana
- Minnesota
- Wyoming
- Pennsylvania
- Wisconsin
- South Carolina
- North Carolina
- Delaware
- Idaho
- Virginia
- Colorado
- Puerto Rico
- Nevada
- Utah
- Florida
- Arizona
- Maine
- Connecticut
- Rhode Island
- New Hampshire
- New Jersey
- Oregon
- Vermont
- Washington
- Maryland
- New York
- Alaska
- Massachusetts
- District of Columbia
- California
- Hawaii
Cost of Living and Wages
The rising cost of living has spurred debate overthe U.S. federal minimum wage andthe disparity between the lowest salary allowed by law and the earnings needed to maintain an adequate cost of living.
Proponents of a hike in wages cite increased worker productivity levels since 1968 as inequitably correlated to the minimum hourly rate of pay. As pay levels once tracked the increase in productivity, the divergence between earnings and worker efficiency hasreached historically disproportionate levels.
By contrast, opponents of a minimum wage contend that a raise could spur higher consumer prices as employers offset rising labor costs.
Note
Multinational corporations use the cost of living to assess expatriate salary packages for international assignees.
Wage Increases and Cost-of-Living Adjustments (COLAs)
In 1973, Congress enacted legislation to address cost-of-living adjustments (COLAs). COLA adjustments for Social Security and Supplemental Security Income (SSI) benefits were instituted so that the payments keep pace with inflation.
For example, in December 2022, the COLA was 8.7% due to the high levels of inflation as a result of the COVID-19 pandemic, and the increased amounts were paid starting in January 2023. Federal SSI payment levels increased by the same percentage.
The Social Security Act requiresCOLAs to be based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The Social Security Administration states that:
A COLA effective for December of the current year is equal to the percentage increase (if any) in the CPI-W from the average for the third quarter of the current year to the average for the third quarter of the last year in which a COLA became effective.
Which U.S. State Has the Highest Cost of Living?
Hawaii has the highest cost of living as of Q1 2024. It has a cost of living index of 186.2. That can be compared to the state with the lowest cost of living, which is West Virginia, with a cost of living index of 83.8.
What Is the Most Expensive City in the U.S.?
The most expensive city in the U.S. is New York City as determined by various cost of living indexes.
Is Living in the U.S. Expensive?
Living in the U.S. is considered to be generally expensive. Many cities in the U.S. rank high in cost of living indexes, indicating a high living cost. Additionally, expenses for healthcare and college, for example, are relatively high when compared to other countries. As the U.S. is a large country, living costs vary greatly depending on location.
The Bottom Line
The cost of living refers to the expenses required to sustain a particular standard of living, including housing, food, taxes, and healthcare. It serves as a benchmark for comparing expenses across different areas and informs decisions about salaries and relocations.
A cost of living index aggregates these expenses, offering a detailed measure that helps individuals understand the financial requirements of different locations.
Rising living costs have ignited debates about wage increases and the need for cost-of-living adjustments. These measures seek to ensure that earnings are in step with inflation so that purchasing power is not reduced and economic stability is maintained.
