Wednesday, March 7, 2012

Cost of Living Excluding Housing, Education, Healthcare and Transport

As the overall most expensive place to live, Tokyo has an overall cost of living index of 153.65, followed by Hong Kong with 144.18, and Zurich with 139.57. The overall index is comprised of 13 different basket groups. The assumption using the overall index is that everything is paid from the salary package. In addition, the cost of living calculations are weighted according to typical monthly international expatriate spending patterns. The Household Accommodation Basket for example, has a weighting of 30%, while the Groceries Basket has a weighting of 16.5%. That means that an international expatriate who, for example, earns 10,000 would typically spend 3,000 (30% of 10,000) on housing and 1,650 on groceries.

In many international assignments, basket groups such as housing, education, healthcare and transport are provided for by the employer, either in kind or in the form of an allowance over and above the salary. If we take these basket items out of the cost of living calculation, the cost of living indexes change accordingly. On this basis the current cost of living index for Tokyo becomes 58.63, Hong Kong 42.31 (dropping all the way to rank 187) and Zurich 64.51. For an expatriate, where these benefits are provided for them, Zurich is the most expensive city to live.

Switzerland and Japan dominate the rankings primarily due to their strong currencies which have made them relatively more expensive. Local inflation is far less of an influence on cost of living compared to changes in exchange rates. The impact of a strong currency is that imports become cheaper. For locally employed people, especially when purchasing imported goods and services, the cost of living may not seem to have a major negative impact. In fact overseas holidays become relatively cheap. However, it also means that Japan and Switzerland, as well as countries like Australia who have 6 cities in the top 50 based on overall cost of living, are relatively more expensive for those paying with foreign currency which impacts exports and the overall cost to an employer sending an assignee to work in these countries.

In addition to the impact of strong currencies, much of the developed world has historically embedded high cost of living structures that keep them amongst the most expensive places to live. Europe and America have 22 locations in the top 50 based on the overall cost of living index and 35 out of 50 places based on the cost of living excluding housing, education, healthcare and transport. The major factor contributing to this is the relatively higher level of pay in the developed world, particularly amongst lower level jobs. By contrast Africa, Asia-Pacific, the Middle East and South Asia have 28 places in the top 50 based on the overall cost of living index but only 15 out of 50 places based on the cost of living excluding housing, education, healthcare and transport, of the 15, 8 are in Australia and Japan.