Cost of living is the cost of maintaining a certain standard of living. The standard of living refers to the quality and quantity of goods and services available to people and the way these goods and services are distributed within a population A cost-of-living index is a price index that measures relative cost of living over time. A price index ( plural: “price indices” or “price indexes” is a normalized Average (typically a ''weighted'' average) of Prices for a Such indexes are constructed to have a value of 100 in a given year (or period or place), called the base. An index value of 110 means that the current cost of living is ten percent higher than in the base year. Because the index provides measure of the change in the cost of living, it has no units.

There are many different methodologies that have been developed to calculate cost-of-living indexes, including methods that allow for substitution among items as relative prices change. In Economics, one kind of good (or service is said to be a substitute good for another kind insofar as the two kinds of goods can be consumed or used in place of

Contents 1 Variations 2 Uses of cost of living indexes 2.1 Cost-of-living allowances (COLA) 3 Other uses of the term "cost-of-living allowance" 4 See also 5 References 6 External links

Variations

• There exist cost-of-living comparison calculators which compare the cost of living at different locations (such as cities) rather than in different years. A value of 100 for the index would indicate a place with equal overall costs as the base location. A value of 200 would indicate a place where the overall cost of living is double that of the base location.

• A Konüs index is a type of cost-of-living index that uses an expenditure function such as one used in assessing expected compensating variation. In Economics, compensating variation (CV is a measure of utility change introduced by John Hicks (1939 The expected indirect utility is equated in both periods. This method can be used to introduce risk aversion into cost-of-living indexes.

• The United States Consumer Price Index [CPI] is a price index that is often referred to as a cost-of-living index. The US Consumer Price Index is a Time series measure of the price level of consumer goods and services A price index ( plural: “price indices” or “price indexes” is a normalized Average (typically a ''weighted'' average) of Prices for a The two are related but not exactly interchangeable, however. The US Department of Labor's Bureau of Labor Statistics [BLS] explains the difference:

"The CPI frequently is called a cost-of-living index, but it differs in important ways from a complete cost-of-living measure. The United States Department of Labor is a Cabinet department of the United States government responsible for occupational safety wage and hour standards The Bureau of Labor Statistics ( BLS) a unit of the United States Department of Labor, is the principal fact-finding agency for the U BLS has for some time used a cost-of-living framework in making practical decisions about questions that arise in constructing the CPI. A cost-of-living index is a conceptual measurement goal, however, not a straightforward alternative to the CPI. A cost-of-living index would measure changes over time in the amount that consumers need to spend to reach a certain utility level or standard of living. Both the CPI and a cost-of-living index would reflect changes in the prices of goods and services, such as food and clothing that are directly purchased in the marketplace; but a complete cost-of-living index would go beyond this to also take into account changes in other governmental or environmental factors that affect consumers' well-being. It is very difficult to determine the proper treatment of public goods, such as safety and education, and other broad concerns, such as health, water quality, and crime that would constitute a complete cost-of-living framework. "^[1]

Uses of cost of living indexes

A cost-of-living index is a useful way to consider welfare changes caused by changes in factors exogenous to the individual household, such as inflation, and the monetary, fiscal, and trade policies of governments. In economics inflation or price inflation is a rise in the general level of prices of goods and services over a period of time Monetary policy is the process by which the Government, Central bank, or monetary authority of a country controls (i the Supply of Money, Fiscal policy, taking the scope of Budgetary policy, refers to government policy that attempts to influence the direction of the economy through changes in government taxes Trade is the willing exchange of goods, services, or both Trade is also called Commerce. For the government of parliamentary systems see Executive (government. One drawback to simple price change measurement is a difficulty in measuring changes in the quality of goods.

Cost-of-living allowances (COLA)

Employment contracts, pension benefits, and government entitlements (such as Social Security) can be tied to a cost-of-living index, typically to the consumer price index (though such CPI increases may not meet the "indifference" objective if the increase is then reduced by income taxes). Social Security, in the United States currently refers to the federal Old-Age Survivors and Disability Insurance ( OASDI) program CPI redirects here For other uses see CPI (disambiguation. A consumer price index ( CPI) is a measure of the average price of consumer A cost-of-living allowance (COLA) adjusts salaries based on changes in a cost-of-living index. Salaries are typically adjusted annually. They may also be tied to a cost-of-living index that varies by geographic location if the employee moves.

Annual escalation clauses in employment contracts can specify retroactive or future percentage increases in worker pay which are not tied to any index. These negotiated increases in pay are colloquially referred to as cost-of-living adjustments or cost-of-living increases because of their similarity to increases tied to externally-determined indexes. Most economists and compensation analysts would consider the idea of predetermined future "cost of living increases" to be misleading for two reasons: (1) For most recent periods in the industrialized world, average wages have actually increased faster than most calculated cost-of-living indexes, reflecting the influence of rising productivity and worker bargaining power rather than simply living costs, and (2) most cost-of-living indexes (see above) are not forward-looking, but instead compare current or historical data. An economist is an expert in the Social science of Economics. Productivity in Economics refers to measures of output from production processes per unit of input Bargaining power is a concept related to the relative abilities of parties in a situation to exert influence over each other Additionally, simple arithmetic requires that any increase subject to income tax will necessarily have to exceed the inflation rate to result in an inflation adjusted after-tax salary level. Thus for real purchasing power (or any after-tax income) to merely keep up with inflation, gross income must increase faster than cost-of-living indexes.

Consequently, where using CPI as a proxy for a Cost-of-Living index may fall short is in accounting for subsequent income taxes on COLA increases. As a means for adjusting gross wages/salaries/incomes CPI calculations may fail to gross-up for 'progressive rate marginal taxes'. Indexed increases are generally taxed at the highest marginal tax rate, whereas the consumer expenditure market basket corresponds to the consumer's generally lower average tax rate. Market Basket is a grocery chain that serves southeast Texas and Louisiana. The widely recognized problem known as bracket-creep can also occur in countries where the marginal tax brackets themselves are not indexed - COLA increases simply place more dollars into higher tax rate brackets. (Only under a flat-rate tax system would a percentage gain on gross income translate into a comparable inflation-offsetting gain at the after tax level. )

Some salaries and pensions in the U. S. with a COLAs (they vary by type) include:

• Social Security
• Civil Service Retirement System (CSRS)^[2]
• Federal Employees Retirement System (FERS)^[2]

Pensions in Canada with a COLA include:

• Canadian Auto Workers union (CAW) Local 200 (Ontario)

Other uses of the term "cost-of-living allowance"

Stipends or extra pay provided to employees who are being temporarily relocated may also be called cost-of-living adjustments or cost-of-living allowances. Social security primarily refers to a Social insurance program providing social protection or protection against socially recognized conditions including poverty old The Civil Service Retirement System (CSRS originated in 1920 and has provided retirement disability and survivor benefits for most civilian employees in the US Federal government The Federal Employees Retirement System (or FERS) was enacted on June 6 1986 and effective January 1 1987 |current=|dissolved_date=|dissolved_state=|merged_into=|native_name=|current=|dissolved_date=|dissolved_state=|merged_into=|head=|footnotes Such adjustments are intended to offset changes in welfare due to geographic differences in the cost of living. Such adjustments might more accurately be described as a per diem allowance or tied to a specific item, as with housing allowances. Employees who are being permanently relocated are less likely to receive such allowances, but may receive a base salary adjustment to reflect local market conditions. A salary is a form of periodic payment from an Employer to an Employee, which may be specified in an Employment contract.

A cost-of-living allowance is frequently given to members of the U.S. military stationed at overseas bases. The United States Armed Forces are the overall unified military forces of the United States This is a list of links for US Army forts and installations organized by U For example, service members stationed in Japan receive a cost of living allowance of between $300 and $700 per month (depending on pay grade), in addition to their base pay. The United States Forces Japan ( USFJ, 在日米軍) refers to the various divisions of the United States Armed Forces that are stationed in Japan. A Pay grade is a unit in systems of monetary compensation for employment

See also

• Price index
• Consumer Price Index
• Inflation

References

External links

• Real Cost-of-Living Calculator from Leaving the Folks
• Cost-of-Living Calculator from American Institute for Economic Research (AIER)
• US Consumer Price Index FAQ

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