Why Cost of Living Matters for Employee Pay
The Social Security Administration (SSA) in the United States announced last week that recipients will receive a Cost of Living Adjustment (COLA) of 8.7% for 2023. If you do not receive Social Security benefits, then you may not care about this number or understand why this increase is so important. The COLA adjustment is important because it impacts YOU, no matter the age. Here’s how.
The COLA adjustment for Social Security is based on the Consumer Price Index for the United States. The Consumer Price Index, published by the US Bureau of Labor Statistics, measures changes over time on the prices paid by consumers for different consumer goods and services. When consumers are paying more for these goods and services, then our cost of living as consumers are rising. Seems simple, right? And you know that the cost of living – the amount of costs to pay for basic necessities – has rapidly increased in the last few years.
For those who receive Social Security benefits, their income will increase by 8.7% in 2023 to account for these price increases. This is amazing news for those recipients. But, what about the millions of US workers that do not receive these SSA benefits? Will these workers receive an increase of 8.7% in their wages? The overall answer is NO. In the United States, employee income is driven by two main factors – minimum wage and organizational profit margins.
For minimum wage, the US federal government sets the minimum wage that workers receive per one hour of work (some exceptions apply, such as restaurant workers). The current federal minimum wage is $7.25 per hour. To calculate an annual wage, then you would multiply 52 weeks at 40 hours per week (full-time status). This equals annual 2080 hours. The federal minimum wage times the annual hours equals $15,080. Could you pay for your basic necessities, including housing, food, and transportation, for $15,080 per year? I don’t think so. Even the federal government recognizes this without linking it to minimum wage. The 2022 Federal Poverty Level for an individual is $13,590 and for two people is $18,310. Working full-time at the federal minimum wage qualifies you at the federal poverty level. The federal government is not planning to raise the federal minimum wage anytime soon.
Several states and cities have implemented higher minimum wages to account for the increased cost of living in these areas. For 2022, the state of Massachusetts has the highest minimum wage at $14.25 per hour. The state of Massachusetts wage times the annual hours equals $29,640. For 2022, the city of Seattle, WA, has the highest city minimum wage at $17.27 per hour. The city of Seattle wage times the annual hours equals $35,921. These increased minimum wages are great progress, and I hope that more states and cities raise these rates, especially if the federal government continues with inaction.
As I said before, US employee income is driven by two main factors – minimum wage (which we just covered) and organizational profit margins. Companies are required to follow the federal minimum wage and any state or city minimum wage laws. Following these laws creates a wage floor for all employees in a company. The wage floor is the minimum wage paid to an employee. Now, organizations have the opportunity to pay more than our wage laws. They might be willing to pay more for desired skills, years of experience, and talent market competition. Of course, that depends on the organization’s profit margin. If the organization has the money to spend, they can spend more on human talent if they so choose. High profit margin does not always equal better environments for employees (i.e. Amazon warehouse workers). Some organizations, such as nonprofits and government agencies, do not have a profit margin to use for these purposes.
In my own consulting work, I help firms work toward pay equity and transparency. This mostly involves setting a new wage floor and raising levels of pay according to the increased wage floor. What I am finding is that the new wage floor for entry-level workers is $55,000 per year or $26.44 per hour. This may seem shocking to you, and it is certainly much higher than any state or city is paying right now. The number is derived from the US Bureau of Labor Statistics, specifically the Consumer Expenditure Survey. This survey shares consistent and ongoing details on consumer expenditures, income, and demographics. Expenditures include basic necessities, such as food, housing, transportation, and health care. For 2021, the average annual expenditure for all consumers was $66,928 per year. That is a 9.1% increase from 2020.
This means that US adults are spending $66,928 per year to live here. Now, this is where people will start arguing with me about the cost of living. This number includes all households of all incomes, ages, locations, and household size. You could have a single person living in an airstream combined with a family of six living in a rent-controlled apartment in the same number. Yes, that’s true. The spectrum of situations included in $66,928 per year is wide. However, digging into this number only uncovers more disparities. Let’s look at the average annual expenditures for all consumers in the 10 most populated cities in the US.
1. New York City, NY - $75, 275
2. Los Angeles, CA - $68,814
3. Chicago, IL - $66,901
4. Houston, TX - $62,183
5. Phoenix, AZ - $61,471
6. Philadelphia, PA - $81,188
7. San Antonio, TX - $61,473
8. San Diego, CA - $88,841
9. Dallas, TX - $62,672
10. San Jose, CA - $74,033
When you look at the regional economic summaries used for these numbers by location, then you can see variances in basic necessities like housing, transportation, food, and health care. You may live in New York City and use public transportation, but more than likely you also live with really high rent. You may live in Houston, TX, and enjoy a lower cost of living than other big cities, but you also must contend with global warming changes like increased catastrophic hurricane chances. What we don’t see are the rural locations represented where more people experience a lack of access to health care and quality childcare.
So, if the US federal government isn’t raising the minimum wage anytime soon and many organizations are unwilling to distribute their profits into higher employee income, then what will happen? We are already seeing the effects across the job market. People are moving from lower wage & few benefits jobs to higher wage & better benefits jobs, leaving industries with major staffing shortages (Ex. Hospitality industry). People are moving from job to job more frequently, leaving gaps in skills and tenure. People are moving in and out of the gig economy, which creates higher wage demands for employers and institutional memory gaps. And most notably, workers are organizing into unions to fight for better wages, benefits, and working conditions.
The cost-of-living measure may not mean much to you right now, and if so, you are privileged. But you better keep watch because the cost of living will impact everyone in the future as a major employment disruptor.
Photo by Giorgio Trovato on Unsplash
Wanna learn how to conduct a pay equity assessment? Click here.