A cost of living raise is typically based on the increase or decrease of the standard cost of living each year. The cost of living may include an increase in the cost of housing, utilities, taxes, health care and food. When these necessities cost more, an individual's income must be increased to accommodate these prices.
How a cost of living raise is calculated varies from company to company, as there is not an official metric used to determine a standard salary increase related to the cost of living. Some businesses may use the denoted price of living increase as listed by the Consumer Price Index CPI for the previous year when calculating an appropriate cost of living raise for employees.
Cost of living raises are typically only implemented when the cost of living rises and may not change when the cost of living decreases deflation. Another reason why employees may reason a cost of living salary increase is when they are transferred to a new city while working for the same company.
For example, an employee who is transferred from Florida to New York City will probably receive a raise because the cost of living is higher in New York City compared to Florida. A city or state's cost of living index can also be used when considering whether a salary offer is suitable for a new job in another location. Individuals who receive monthly or annual retirement income may also receive an increase in funds as a result of a rise in the cost of living.
This is because was the retirement income to stay the same, individuals would not be able to sustain their lifestyles on that income due to inflation. Standard of living is generally measured using per capita GDP.
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Most cost-of-living raises only go one way. There is no pay cut in the case of deflation. The recession did reduce inflation to zero in -- in fact the CPI went down slightly over In the private sector, contracts with cost-of-living raises have been disappearing over the past several decades. The reasons include the low level of annual inflation, the waning power of unions, and employees' focus on other benefits, like health insurance. The pay raises companies offer today are more likely to depend on productivity and profitability than on the level of inflation.
Employers want to avoid automatic pay increases. They would rather give a one-time bonus to counteract a year of higher inflation than be stuck with permanent increases. Public workers are more likely to be covered by cost-of-living raises. The usual method is to look at the evolution over time of per capita real income income adjusted for inflation.
More importantly, "real income does not account for such goods as health that are not purchased in the marketplace, for quality changes, for revolutionary technological change, and for increases in leisure," Costa maintains. An alternative technique for measuring living standards is to examine spending on recreation.
This technique assumes that, after providing for food, clothing, shelter, and other necessities of life, people will use some of whatever income is left over on purchasing recreation. As the proportion of income needed to meet necessities declines, people will have more money for vacations, radios, TVs, CDs, and other recreational goods and activities that strike their fancy. Rising recreational expenditures -- "the quintessential luxury goods" -- are seen as an indication of rising living standards.
She also looks at trends in inequality in recreational spending for those up and down the income ladder. She finds that changes in real total expenditures per capita are likely to underestimate the increase in living standards, particularly during times of innovation in consumer goods and reductions in working hours, such as the s, the s, and thes. In the late s, less than 2 percent of household spending was devoted to recreation; by the mids, recreation's share had risen to 4 percent, and by to 6 percent.
Recreational expenditures also tend to rise with income levels. Richer households spend proportionately more on luxuries, including recreation.
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