Earlier this week, the Economist Intelligence Unit published its biannual list of the most expensive cities in the world.
Last June, consulting firm Mercer released a similar list. That same month, consulting firm ECA International released its own version. Many other companies do the same thing all year round.
But before you click the next “most expensive city” headline to see if your home makes the cut, there are some things you should know: who these lists are actually for, the criteria they use and how to determine a cost of living that applies to you.
List after list
These lists aren’t designed for locals. They’re designed for multinational companies looking to place expatriate employees – such rankings are used as a tool to figure out how much overseas workers should be paid.
Such rankings are used as a tool to figure out how much overseas workers should be paid
For example, if you’re a hiring manager looking to send an analyst to Kuala Lumpur, you need to know how much it costs to live there so you are compensating that worker fairly. It’s easier to consult a ready-made list than to do your own research on the ground.
Most companies who use these lists are placing highly-skilled professionals or managers who are likely to earn more than the average local salary. This important factor plays a huge role in how these lists are made and, as a result, which cities are bumped higher up the ranking.
Exact criteria vary, but there are some broad similarities in compiling these lists. Researchers on the ground in hundreds of cities collect prices for various items and services that make up a “basket of goods”. This can include groceries, haircuts, cinema tickets, clothing, electronics and furniture.
Some, but not all, firms will also include rent or car costs. (That’s why a place like Singapore shows up so frequently on these lists – owning a car is very expensive there, so it bumps it up the list considerably.) Other factors, such as exchange rates and tax rates, can also play a role.
Then to rank these baskets of goods against each other, they use a standard measure – the EIU, for example, converts all currencies into US dollars and compares each basket to New York City. How much cheaper or more expensive that basket is determines the city’s place on the list.
“It is a sort of a tool to foreign companies who have expats in different locations,” says Robert Wood, principal economist at the EIU. “It is a tool to help them in terms of salaries for expats.”
In other words, they’re the most expensive cities in the world, but for a specific group of people.
A certain type of spender
For the global companies and their expat workers, these lists are very useful. One of the main goals is to give expats an idea of how much they’ll spend – and how much companies should pay – based on the kind of lifestyle and spending habits they’re looking to continue in a new country.
“It’s not really looking at a whole population – it’s really a class of international executives and professionals,” says Vince Cordova, a consultant at Mercer. These expats aren’t “necessarily getting the price of a local national. They’re going to outlets that expatriates normally shop in.”
The key to remember, Cordova says, is that the prices in these various lists are based on certain products of a certain quality aimed at certain people from another market and country. In other words, expats who are “going to look to replicate a certain spending profile”.
What you can do?
So if you’re not an expat on an executive pay package, how can you determine how expensive a city would be for you?
Unfortunately, top 10 rankings don’t often apply here. You just have to do your homework and ask: why do you want to live there? What do you plan to do there? What sort of lifestyle do you want to lead? Will you live alone, with family, children, a partner, friends?
All those factors determine how expensive your city experience will be.
“There’s no easy answer,” says Lawrence White, economics professor at New York University. “You’ve really got to do your research: where would I want to live in that city? How important is it to be close to public transportation? Is there a sales tax? Does the sales tax apply to everything? Is food taxed or is exempted? Is clothing taxed?”
Use your own methodologies that apply to you, and not a rarified group of people.
“Look at what’s going on in your own currency in your own country,” says the EIU’s Wood. “Whether some prices are rising more quickly than others, and what that says about consumer habits.” He points to things like transport or groceries, and then maybe comparing them to other cities in your country.
The truth is, if you want to live in a city, any big city, expect to pay for it, whether you’re a professional expat or not. On the other hand, with all the amenities and connections cities bring, you might be getting what you pay for – regardless of where the city falls on a list.
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