What is the 'Cost of Living'?

The 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. The cost of living is often used to compare how expensive it is to live in one city versus another. The cost of living is tied to wages because salary levels are measured against the expenses required to maintain a basic standard of living depending on the geographic region.

BREAKING DOWN 'Cost of Living'

The cost of living can be a significant factor in personal wealth accumulation because a smaller salary can provide a higher standard of living in a city where daily expenses such as rent, food, and entertainment are less. In contrast, a large salary can seem insufficient in an expensive city. According to Mercer's 2017 Cost of Living Survey, cities with the highest cost of living standards included Luanda, the capital of Angola, Hong Kong, Tokyo, Zurich, and Singapore.  New York City was ranked the costliest city in the United States followed by San Francisco and Los Angeles, Chicago, Boston and Seattle.

The Cost of Living Index

The cost of living index compares the cost of living in a major city to a corresponding metropolitan area. The index incorporates the expense of various components of basic human needs 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.

In 2018, Kiplinger finds San Diego to be the most expensive city based on the Council for Community and Economic Research. The Council's cost of living index measures prices in 269 urban areas for expenses such as housing, groceries, utilities, transportation, and health care, even a getting a hair cut or going to a movie. In the case of San Diego, the cost of housing is 138% above the national average, and the cost of transportation is over 20% higher than the national average.

Cost of Living and Wages

According to Transferwise, a family of four can live in New York City for around $50,000, although that would not provide luxurious accommodation by any means. The rising cost of living has spurred debate over the U.S. federal minimum wage and 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 has 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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