Now, more than ever, it seems that everything costs more. Gasoline prices hover near $4.00. A loaf of bread or pound of butter can easily cost $5.00. Bacon? $8.00?? Most of your employees are probably feeling the squeeze (as we all are!) and many may be thinking, “I need a raise.” They might hear that the Consumer Price Index (CPI) has gone up and be hoping you’ll give them a cost-of-living adjustment (COLA).
Although that may sound logical, the CPI is not the same as labor market inflation, or vice versa.
The Consumer Price Index (CPI), measured by the Bureau of Labor Statistics, is “the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.” Basically, the CPI measures the increase of average day-to-day living expenses.
A cost-of-living index measures the purchasing power of consumers in maintaining a certain standard of living, and is often used in comparing geographic differences. For example, it may be appropriate to provide a cost-of-living allowance to a relocating employee.
Although some government entities, like Social Security and federal retirement systems, do tie COLAs to the CPI, it just doesn’t make sense that, as an employer, you be responsible for maintaining your employees’ standards of living, particularly as employees all have different “standards.”
Ultimately, you want to be sure that you are not overpaying or underpaying your employees, each of which has significant financial consequences. Rather, you should base your pay decisions on your organization’s unique pay philosophy and internal indicators, as well as current, reliable labor market data.
– Sarah Johnson, Associate
CompTalk 