Variations amongst cost-of-living surveys are as much due to what is included in the surveys as to the research criteria used to come up with the figures. So how do companies go about getting the data and how does this influence how cities are ranked in terms of costliness? Elise Krentzel reports.

A number of the larger consultancies carry out cost-of-living surveys, which provide detailed information to help client companies create COLA (cost-of-living-allowance) standards for their expatriate employees. COLA is based on typical lifestyles specific to income and family size, not to the employee's specific lifestyle. Employees may spend more or less than the values on a COLA report, which are an indication of their lifestyle preferences.

When looking at what makes the research criteria viable and useful in these surveys, the methods used to track information are a good starting point.

What is the index based on?

Indexing can be divided into two approaches.

The first type compares spending habits and prices for goods and services from a home base city to a host city, while the second type compares spending habits and prices for goods and services from one host city to another.

With the first approach, the assumption is that expatriates spending habits will change once they are relocated because they will try to maintain their 'home' lifestyle. A Japanese person moving to Paris, for example, will most likely try to buy food similar to what he or she had in Japan, such as fresh fish, tofu and Japanese rice. However, the cost of some of these goods outside Japan will most likely be higher.

The second approach assumes that expatriates in Paris, whether they are originally from New York or Rio de Janeiro, will spend their money in the same way.

With both methods, items and sometimes prices of such goods in the shopping basket are compared against one another so as to arrive at a weight (value), which is then indexed according to the particular methodology of each consultancy.

The art of indexing

All consultancies use 'weights' to price and itemize individual items each of which has an importance relative to the other items in the overall category. These items form the basis of the goods and services indices, which compare prices of the same items in the home and host country.

Airinc, a US-based company that collects cost-of-living information, does not rely on local citizens to gather data.

"Our surveys are conducted by full-time Airinc staff members," says John Pfeiffer, Airinc's European regional manager based in Frankfurt. "Maintaining our own staff for data collection enables us to ensure consistency in data collection methods, and timely delivery of the information needed to run a client's international service program efficiently."

In each location, the Airinc surveyor completes a comprehensive 'pricing questionnaire' by collecting over 250 prices in all categories of goods and services. The retail outlets surveyed for price information are selected using information gathered on-site, obtained directly from expatriates and client company managers.

An integral aspect of Airinc's survey process includes extensive research into expatriate living patterns. Airinc's analysis of overseas living patterns indicates that, in many locations, expatriates change the types and quantity of the goods and services they consume. Domestic help, transportation, and recreation are good examples of expenditure categories where expatriates consistently alter the consumption patterns from location to location.

For example, it is rare that a Dutch person hires a live-in maid in the Netherlands, but if the same person were transferred to Singapore, domestic help in the host country is less expensive and considered to be a normal daily expenditure. A primary vehicle for documenting and analysing data on consumption patterns is a pattern-of-living questionnaire, which expatriates on assignment complete.

Typical goods in the basket

All the consultancies mentioned in this article agree on the main items in a shopping basket, usually 10 to 13 categories including food at home, food away, clothing, household supplies and services, medical care, car, recreation and entertainment (or sports), transportation, domestic help, telephone, alcohol and tobacco. Housing is a variable not always included in the COLA reports.

Pfeiffer further explained that Airinc also monitors exchange rates to ensure that allowance data is updated in the event of significant fluctuations in rates. The company conducts a housing survey employing the same method used with COLA. Items in the survey include: rent, utilities: electricity, gas, oil, water and refuse collection, insurance and where applicable: key money, local taxes, maintenance fees (condo fees), parking, pool maintenance and pest control.

As with Airinc's information, all of these elements can be included or excluded, or the subsidy levels modified, to reflect a client company's policy.

Mercer compares host cities

Yvonne Traber, international mobility manager with Mercer HR Consulting in Geneva, reports that Mercer's international basket is composed of nearly 200 products, which are representative of executive spending patterns. The basket of goods and services includes carefully selected items, consumed both at home and abroad, and covers 10 categories.

The Mercer survey, conducted twice a year, covers more than 250 major cities around the world. Each of these cities can be used as a base city and can be compared to any other city (host city).

Mercer employs field researchers and uses a detailed 20-page questionnaire to report the prices. Prices are gathered at three different shops frequented by expatriates: low-priced, medium-priced and high-priced stores. The questionnaires are completed simultaneously during the same period for all locations.

All the categories have different weightings calculated according to spending patterns.

When comparing some of the different national spending patterns, Mercer concluded that there are as many differences between individuals and regions within a country as there are from country to country. For example two people from Berlin are as different as a person from Seoul and a person from Vienna.

However, it is worthwhile considering another pattern the survey revealed - a convergence of spending patterns among the middle to top income earners in developed countries, which is probably the income bracket that most expatriates fall into.

Mercer's method of using average international weights reflects these trends, thus avoiding the need to have a different spending pattern and basket based on the expatriate's nationality.

ORC frequently updates worldwide basket

Siobhan Cummins, managing director of ORC International's London office, says most of ORC'sl compensation tables are produced four times a year.

"Two updates will reflect changes in price levels (for both home and host locations) and two will be currency updates," she explains. Locations with rapid inflation are priced more frequently, resulting in more updates.

The standard used to measure the costs of goods and services is known as the 'ORC international market basket', which comprises 13 categories of expenditures. Each category accounts for a percentage of goods and services spendable income. These percentages or 'weights' describe the relative proportion of the expenditure on the goods and services in that category.

ORC goods and services index

The ORC goods and services index is a number that expresses the relative cost of a market basket of items in the home country on a specific date, and the cost of the same or similar items in the host location on the same date. The marking of dates is one of ORC's 'unique' selling points.

ORC has pricing agents who live in each country. They are specially trained expatriates, who are not linked in any way with ORC's client companies. "We believe that this preserves the integrity of our data and ensures it is of the highest quality," explains Cummins.

ORC conducts full pricing twice per year, more frequently in high inflation or volatile locations. They collect approximately 735 prices in the home and the host location when they do the pricing.

Economist Intelligence Unit takes sensible approach

Bill Ridgers, editor of executive services of the Economist Intelligence Unit (EIU) in London, believes that EIU's indices reflect the most sensible approach to cost-of-living calculations that can be taken. The worldwide cost of living survey is not oriented toward any one nationality, but based upon a single set of international weights.

Each index assumes that employees will modify their spending patterns somewhat when transferred abroad. This is inherent in the division of each city's prices by the average of both cities' prices for each item in the index.

In some instances an index may be higher or lower than another index calculated according to a different formula.

Conclusion

How each consultancy gathers and tracks its cost-of-living information does not seem to impact the methodology of weighting an item in one of the 13 categories.

Though prices fluctuate and the cost of living varies from country to country, what matters most are the basic assumptions given, namely comparison of home city to host city (as done by Airinc and ORC) or host city to host city (as done by EIU and Mercer).

September 2003

Elise Krentzel is an Amsterdam-based freelance writer.