When Is a Cost-Of-Living Increase Not a Cost-Of-Living Increase?
Question: “My company claims that they give us a “cost of living” increase. But when I ask what its economic basis is, they say it’s not tied to anything. What is really going on?”
Answer: Sadly, too many companies say that they are giving their employees a “cost of living increase” when in fact they are giving employees a “general increase.” So what’s the difference?
A cost of living increase is a pay increase tied to some measure of the Cost of Living. Unfortunately, there aren’t many measures that can be used in a practical way. Often the measure is the CPI (Consumer Price Index). The CPI measures a “fixed basket of goods and services” both nationally and locally by State. However, the problem is, the “basket” that they study may not be our baskets. Put another way, we may not use those goods and services. For example, if you don’t own a car, then you’re not affected by the cost of gasoline or oil!
To make the problem worse, by using the term “cost of living increase” the company appears to be committing itself to “keeping pace with the cost of living.” And then (you know how this goes!) next year employees will ask the company “when are we getting our “cost of living increases”?
Just what you need… another employee relations issue to address!
Here’s another key difference between the two concepts. The Cost of Living does measure some expression of living expenses in various parts of the country. However, a General Increase is an increase granted to employees because the Cost of Labor has increased, not the Cost of Living! Giving employees a General Increase is an attempt by a company to keep wages and salaries competitive with other companies.
So, use the right terminology in your company from this day forward! If you grant your employees a “General Increase”, don’t call it a “Cost of Living increase.” Each year you may find employees outside your door asking “when will we get our Cost of Living increase”? We got one last year!”