VIDEO | The Important Distinction Between Cost of Living and Cost of Labor
By The C3 Team
Making the right salary decisions starts with understanding what is driving them.
Distinguishing between cost of living and market adjustments is key to building a fair and sustainable compensation strategy.
In our latest video, C3’s Jen Givens walks through the difference and explains how nonprofits can use both to make more informed and strategic salary budget decisions.
VIDEO TRANSCRIPT
Hi, I’m Jen Givens, Consulting Principal with C3 Nonprofit Consulting Group. C3 exists to partner with the world’s most impactful organizations to navigate people and culture solutions. Our vision: a society in which nonprofit employment is synonymous with meaningful work, thriving culture, and competitive, fair, and sustainable pay.
When you’re planning salary budgets, it’s important to distinguish between the cost of living and the cost of labor because they influence pay decisions in very different ways. Cost of living reflects the day-to-day essentials – housing, groceries, transportation, health care, and more. When inflation rises, the cost of living goes up.
A cost-of-living adjustment, otherwise known as COLA, moves salaries in response to inflation with the goal of helping employees maintain their purchasing power. COLA is one important input into the salary budget planning, but it’s not the only factor. Organizations also weigh overall financial health, strategic priorities, and internal equity.
Cost of labor, on the other hand, is about what the external market is paying for specific jobs. It is driven by supply and demand for talent, competition among employers, and in shifts in skills, scope, or responsibilities required for the role. Market adjustments respond to these labor market dynamics rather than inflation directly.
In many organizations, cost-of-labor adjustments happen alongside updates to the salary structure or pay ranges. For example, adjusting ranges upward to reflect current market data and then making targeted increases for roles or individuals who have fallen behind. When you make a COLA adjustment, you are primarily aligning salaries with inflation.
When you make a market adjustment, you are aligning salaries with how pay levels are moving in the broader labor market. Both matter, but serve very different purposes.
Being clear about the distinction helps you decide how to allocate your salary budgets, and where to focus adjustments for the greatest impact.
