What Is a Cost-of-Living Increase?
Certain companies give employees a single pay increase each year, while other companies give employees a merit pay increase and a cost-of-living increase. If you are among those people who receive cost-of-living pay increases, you may wonder how this increase is determined. Fortunately, understanding a cost-of-living increase is not difficult, once you know what it’s based on.
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Definition
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The Public and Commercial Services Union defines a cost-of-living increase as “a pay increase to offset the increased cost of day-to-day expenditures because of higher prices.”
Role
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Prices of common, necessary goods and services, like fuel for your car, electricity for your home and groceries for your family are always shifting upward. You may have noticed that just a few years ago, you spent less each time you went to the grocery store than you do now. This means that if you earned exactly what you earned from your job a few years ago, you’re ending up today with fewer dollars in your pocket after buying groceries and paying the bills. The cost-of-living increase is meant to keep you on par with such increases in costs of goods and services.
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Basis
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A common cost-of-living raise is 3 percent. Some companies choose to give employees a 3 percent cost-of-living increase each year, regardless of whether inflation was more or less than 3 percent. Others base their cost-of-living increases for employees on a cost-of-living index or retail price index. These indexes measure fluctuations in prices of consumer goods and services to come up with a figure that represents inflation.
Fluctuations
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Different indexes can be used to measure inflation nationwide, in a specific state and even in a specific city. Companies that adhere strictly to an index may give employees a 1 percent cost-of-living raise one year and a 3 percent raise another year.
Considerations
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If you receive a single raise each year from your job, and you want to know whether your raise is keeping up with inflation, consult the Department of Labor’s Employment Cost Index or the Consumer Price Index to find out how much inflation was for the year. Then, simply deduct the percentage amount of inflation from the percentage of your raise.
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References
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