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What is a "cost of living" increase?

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Quick Answer

A cost of living increase is an increment in pay that is implemented with the intent to maintain the purchasing power of an employee's salary in the wake of inflation. Cost of living increases are also called cost of living adjustments, cost of living allowances and escalator clauses.

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What is a "cost of living" increase?
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Full Answer

In the absence of a cost of living increase, workers are left with a diminished amount of actual spending money. This diminished amount of money is caused by the declining value of currency experienced during periods of inflation. In the United States, cost of living increases are generally calculated using the consumer price index. The CPI estimates the amount that a person must spend in order to achieve a particular level of comfort. It is compiled by the Bureau of Labor Statistics.

The cost of living is the amount of money required to sustain a certain standard of living. Some of the factors affecting a person's standard of living include income, employment quality and availability, housing expenses, inflation rate and taxes. In 2015, the countries with the highest cost of living are Switzerland, Norway and Venezuela, while the countries with the lowest cost of living are India, Nepal and Pakistan, according to Business Insider.

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