What is Cost of Living?

Published by Thomas Herold in Economics

'Cost of Living' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Cost of living refers to the sum of money individuals require in order to maintain a given standard of living. The two concepts of standard of living and cost of living are therefore closely related. Expenses included in such a concept include all necessary costs for sustaining life, such as food, housing, health care, and taxes. This living cost frequently finds use in comparing the expenses to live between one city and another one. It is similarly closely connected with salaries and wages. This is because the levels for salaries are commonly measured up against the costs which individuals must pay in order to sustain their typical living standard in a given geographical area. Such living costs can and often do vary substantially from one part of the United States to the next.

The real Cost of living proves to be an important element in how successful an individual is in accumulating money and wealth. Even lower salaries will stretch longer in cities that are inexpensive places to live. At the same time, earning a big salary will hardly be enough to live decently in a costly city like New York City or London.

Mercer publishes its annual Cost of Living Survey that proves to be most illuminating on the differences in living costs from one major city to the next around the world. For their 2015 survey, they found the cities with the most expensive living costs to be Tokyo, Osaka (Japan), Moscow, Geneva, Hong Kong, Zurich, Copenhagen, and New York City. Among the American cities that boasted expensive living costs in 2015 were Honolulu, New York City, Los Angeles, Washington D.C., and San Francisco.

This leads to the Cost of living Index. Such an important index allows for comparisons between one significant city and another comparable one. To come up with a meaningful metric, the index takes into consideration elements that make up the basic living needs of people. It then compiles these into a total measurement that allows workers to reference and utilize when negotiating salaries in various towns and cities. This is particularly important for recent college graduates. They need to consider carefully their entry level jobs into their career and where they will work. For those already employed who are contemplating relocation for work, this index delivers a useful one-stop snapshot of food, rental, and transportation expenses in a prospective place of employment.

For the year 2016, the Cost of Living Index relied on New York City as its United States’ and North American cities benchmark. With this as the base for that year, San Francisco boasted the most expensive living costs in all of the Americas. This meant that at least in that particular year, the rent costs for San Francisco proved to be around three percent greater than those of New York City. Food prices were an eye watering 22 percent higher than compatible levels of New York. On the other side of the spectrum, Reno in Nevada offered its residents a living cost which equated to roughly 43 percent less than the one in New York City.

This Cost of living figure also can be extrapolated to standard sized families. In the year 2015, the average living costs for the typical American family of four (two adults and two children) stood at $65,000. Keep in mind that this amount did not include any optional discretionary categories of spending for those goods and services deemed to be nonessential. This would include dinners out, entertainment, leisure activities, vacations, and also luxury goods.

The living costs figure presents policymakers with a challenge and ongoing debate in the highest levels of government. It centers on the national federal minimum wage. There is a significant shortfall between the government’s minimally allowed wage and the income which families need to sustain a basic cost of living. This has grown progressively worse since the late 1960’s and early 1970’s to the point where no family can live decently on either one or even two minimum wage incomes any longer.

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The term 'Cost of Living' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.