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Cost-Of-Living Survey May Help Employers Adjust Pay

August 8, 2006
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Paying $3.47 for a cup of coffee is commonplace in Warsaw, but it is tantamount to highway robbery in Buenos Aires, where Argentineans generally plunk down $1.47 for their brew of choice. The price difference may not seem like that big a deal when it comes to a cup of java, but it can add up for big-ticket items and have quite an effect on the quality of life for expatriate workers.

One way that companies can ensure workers have comparable living standards—whether they’re in New York or New Delhi—is through careful management of cost-of-living allowances, says Rebecca Powers, a principal consultant for Mercer Human Resource Consulting. "Rapid currency fluctuations and sudden changes in the rental of real estate make it pressing for companies to be proactive in this area," she notes.

Mercer recently released the Worldwide Cost of Living Survey for 2006, which could help employers calculate fair allowances for expatriate workers. The study covers 144 cities and compares the cost of 200 items, such as food, housing and entertainment.

Several myths about the cost of living are busted by the report. Tokyo is not the world’s most expensive city to live in; that distinction belongs to Moscow. And no, deploying workers from an industrialized market to a developing nation does not always save money. The cost of living in Cleveland, Pittsburgh and Detroit is cheaper than that of Guatemala City.

According to the survey, four of the world’s 10 most expensive cities are in Asia. Seoul, South Korea, ranks No. 2, followed by Tokyo at No. 3, Hong Kong at No. 4, and Osaka, Japan, at No. 6.

London, which places No. 5 in the survey, is the most expensive European city. Swiss cities Geneva and Zurich; Copenhagen, Denmark; and Oslo, Norway, round out the top 10.

The Brazilian cities of Sao Paulo and Rio de Janeiro—the most expensive cities in Latin America—jumped dramatically, climbing from 119 and 124 to 34 and 40, respectively. The move, which happened during 2005, is largely attributed to an appreciation in Brazil’s currency, the real, relative to the U.S. dollar. Powers says that kind of ascension illustrates how important it is for companies to frequently conduct cost-of-living allowance reviews.

Infrequent assessments have put workers stationed in Europe in a tough spot, since there have been sharp fluctuations in the U.S. dollar against the euro.

"Purchasing power was changing very rapidly," Powers says. "Their standard of living varied with the currency exchange."

Though that situation has stabilized recently, companies had to initiate policies to extend expatriates better protection against currency fluctuations. Powers says that 40 percent of companies in North America now conduct allowance reviews on a case-by-case basis, which enables them to be more responsive to the needs of workers overseas.

One place where companies likely won’t sweat changes is in Asuncion, Paraguay, which ranked last on the list at No. 144 for a second year. Powers says that Mercer’s list is not meant to help companies determine where to station workers. Instead, it should be used to help organizations establish fair compensation practices.

"Companies are going to send workers to where the business opportunities are found, regardless of cost," Powers says. "To maximize their chances (of succeeding), they are going to have to hold on to talent. And one way of achieving this is by compensating them adequately."

Gina Ruiz

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