What is 'Cost of Living'

Cost of living is the amount of money needed to sustain a certain level of living, including basic expenses such as housing, food, taxes and health care. Cost of living is often used to compare how expensive it is to live in one city versus another locale. Cost of living is tied to wages, as salary levels are measured against expenses required to maintain a basic standard of living throughout specific geographic regions.

BREAKING DOWN 'Cost of Living'

Cost of living can be a significant factor in personal wealth accumulation, because a smaller salary can go further in a city where it doesn't cost a lot to get by, while a large salary can seem insufficient in an expensive city. According to Mercer's 2015 Cost of Living Survey, cities with the highest cost of living standards included Tokyo, Osaka, Moscow, Geneva, Hong Kong, Zurich, Copenhagen and New York City. U.S. cities with a high cost of living as of 2015 included Honolulu, Los Angeles, Washington and San Francisco.

Cost of Living Index

A cost of living index compares the cost of living in a major city as compared to a corresponding metropolitan area. The index incorporates the expense of various components that comprise basic human needs, creating an aggregate measure to which new entrants into the workforce may refer. 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.

In 2016, using New York City as a benchmark for other U.S. cities, San Francisco maintains the highest cost of living in the Americas. Rental costs in San Francisco are about 3% higher than in New York, and food prices sit 22% above corresponding levels found in New York. By contrast, the citizens of Reno, Nevada enjoy a cost of living approximately 43% below that of New York residents when analyzing basic expenses on an aggregate basis.

Cost of Living and Wages

For a family with two adults and two children, the average cost of living in the United States hovered around $65,000 per year in 2015. The figure excludes discretionary spending on nonessential goods and services, such as leisure, entertainment and luxury items.

The debate over raising the U.S. federal minimum wage is deeply rooted in the disparity between the lowest wage allowed by law and the earnings needed to maintain an adequate cost of living. Proponents of a minimum wage hike cite increased worker productivity levels since 1968 as inequitably correlated to the minimum hourly rate of pay in 2012. As the minimum wage once tracked the increase in productivity, the divergence between earnings and worker efficiency have reached historically disproportionate levels. By contrast, opponents of a minimum wage increase contend that a raise could spur higher consumer prices as employers offset rising labor costs.

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