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Why Recruiters Should Understand the Difference Between Cost of Living and Cost of Labor

Charlie Franklin
April 20, 2022
4 mins

Candidates see things through a cost of living lens…

The Compa Team cares more about the cost of labor.

And Recruiters often find themselves right smack dab in the middle of both. 

If you focus on cost of living too much, you get tangled up in a back and forth with management. Focus on cost of labor? You could end up losing a perfect candidate over a few thousand dollars.

Can Recruiters please both parties? 

Keep reading to find out…

Cost of Labor and Cost of Living Can Coexist

Cost of labor is how much it costs to employ workers in a geographic area.

What does that really mean, you ask? In its simplest form, think of it as the “going rate” for a job. It’s dependent on supply and demand of the labor force in a location. The more talent that’s available, the lower the cost of labor for that job, and vice versa. 

It’s also what your Comp team uses to figure out things like pay guidelines or salary ranges.

In some cases, the labor market can dictate the monetary value of a job regardless of where that job is located. For example, we've all run across “hot jobs” that require premium pay because there is a scarcity of talent and/or competition for talent is high. For example: highly skilled and ultra-educated data scientists. They’re hard to find and I bet you’d pay a lot to get one (no matter where you needed the job to be).

Cost of living is how much it costs for a consumer to reside in a geographic area. 

You can think of it as “what it costs me to buy a basket of goods (i.e., stuff).” It’s dependent on external factors like the local housing market and taxes, groceries, transportation, etc., and typically reflects inflation. 

Places that are extremely expensive, like San Francisco or New York City, have a higher cost of living in part because of the desirability to live there. Higher cost of living also has to do with access to goods, or limited availability of those goods. For example, Hawaii has to import almost all of its consumer goods, which impacts prices and also results in a higher cost of living.

Both cost of labor and cost of living need to be taken into consideration when you make an offer.

But What About All the New Remote Jobs?

With so many people working remotely now (and many permanently), major cities with high costs of living are experiencing a mass exodus.

Because if a job can be done remotely, why live in an expensive city where half of your salary goes toward renting an 800 sq ft studio apartment? Sure, moving out of big urban areas leads to more disposable income for remote workers, but now we need to look at the other side of the coin: cost of labor.  

With cost of living reduced, how do we think about a labor market when jobs are “everywhere?” Will we end up shifting to regional or nationalized markets for many jobs? It’s possible - especially if a majority of white collar workers continue to work remotely. It might feel like a tricky conversation, but at the end of the day it comes down to one question:

How much is an organization willing to pay for a job

Because if there’s no competition from other companies and many qualified candidates, we have better bargaining power and more choice. But if there’s a lot of competition from other companies and a scarcity of talent, we may be forced to pay more to get what we need.

What’s a Recruiter to Do?

The answer to the dilemma isn’t easy but we’re convinced that ultimately, pay should reflect the market. 

Because it’s our best attraction and retention tool. And using Compa will help Recruiters narrow in on that market. To reinforce the work our friends in HR do, you need to remember that pay isn’t the only factor you can use to help differentiate a job or your company (in today’s market, compensation and benefits are table stakes - everybody's got 'em).

But you can up the ante by building a comprehensive picture for candidates, including what their experience (supported and flexible careers, help in managing well-being) and purpose (work that matters, belief in the vision, belonging) will be when they join your organization.

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