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Site Selection Analysis: When Does Cost of Living Come Into Play?

An area's cost of living is only part of its quality of life and is usually only considered after the primary site selection factors of location, labor, and costs have been satisfied.

Fall 2012
Most rankings of the top states in which to do business in the United States include the state's relative cost-of-living index score as a component. Some, such as the CNBC rankings, directly consider cost of living as a weighted criteria, while others, such as the Forbes annual review, include cost of living as a component of the overall category of quality of life.

Undoubtedly, cost of living is an important factor to be considered in making an informed site selection decision. However, decision-makers should understand how the cost-of-living index is calculated, what it means for their operations, and what limitations the index has as an evaluative tool. Finally, how much emphasis should be placed on cost of living as a factor in a site selection decision is often dependent on the type of project being considered and the resulting employment positions that will be required.

Comparing Locations
Cost of living is a measure of how much money is required in a particular location to sustain a certain standard of living. The measure generally takes into account the relative cost of basic living expenses such as housing, food, transportation, and healthcare. The cost-of-living index is set so that a score of 100 equals the U.S. average cost for the items considered. A location with a score in excess of 100 means that it requires additional earnings to maintain the same standard of living, while a score less than 100 means that a resident of that community can achieve the same result by making less than the national average.

As a real world comparison, New York City has a composite cost-of-living index of 233.5. Therefore, in general, a resident of New York City must make more than twice as much as his/her counterpart in Raleigh, North Carolina, which has a cost-of-living index of 88.5, in order to sustain the same standard of living.

One important component to a cost-of-living analysis that the index does not consider is a state or community's annual individual tax burden. This tax burden can vary greatly by location and has a direct impact on an employee's ability to acquire housing and healthcare, and pursue recreational activities. The local tax burden includes state and local income taxes, property taxes, and sales taxes and can vary greatly from state to state. For example, marginal individual income tax rates can range from in excess of 8 percent in some states to 0 percent for states that have eliminated the income tax altogether. This tax burden obviously has a direct impact on the ability of employees to maintain a certain standard of living given a static wage level and should be considered as part of a cost-of-living analysis.

Attracting a Quality Work Force
Where quality of life is an important factor in the site selection decision, a low cost-of-living index and a competitive individual tax climate can provide significant advantages between competing sites. Generally speaking, the cost-of-living index can serve as a proxy for the expected wage levels necessary to attract and retain a qualified work force. If it costs more to maintain a certain standard of living in an area, it is generally recognized directly by employers through increased wage levels across all tiers of the organization.

A low cost of living can also translate into a more stable and productive work force. Having access to quality and affordable housing, healthcare, and transportation is critically important to attracting and maintaining a quality work force. If employees must commute long distances to find affordable housing or shopping options, it is likely those employees will be less fulfilled and more likely to relocate when other options present themselves. Over time, the company may be forced to pay higher wages in order to attract and retain qualified employees.

Given that the cost of living index has a direct bearing on recruiting and retaining a qualified work force, one could jump to the conclusion that decision-makers in corporate site selections should always include a location's cost-of-living index as a significant factor in the overall site selection analysis. However, as with most factors, the cost-of-living index must be viewed in the context of the overall project parameters and weighted accordingly.

Putting Factors into Perspective
In most projects, cost of living or overall quality of life will not be the driving factor for the site selection decision. For example, labor availability, availability of necessary infrastructure, proximity to important markets, and cost of doing business will, in most cases, be of much more importance than an analysis of the cost of living or quality of life. However, in cases where those threshold criteria are satisfied in multiple locations, factors such as cost of living and quality of life can play an important role in differentiating potential locations.

Quality of life is generally a more important consideration for projects involving a headquarters facility or highly skilled employment positions. Many of today's highly educated, knowledge-based employees want to live and work in close proximity. They also desire access to an abundance of cultural and recreational opportunities. In these instances, quality of life is often a very important factor in the site selection analysis, as it is directly related to a company's ability to attract employees.

Conversely, when evaluating locations for business operations with comparatively lower wages, employers may place more of a premium on a community's affordability and weight a low cost of living more heavily. Thus, cost of living should generally be viewed and understood as a component of the overall quality of life analysis.

High Quality of Life
It is also important to understand what is driving a low overall cost of living number. For example, a community may have a very low-cost-of living index, but that may be driven in part by the lack of cultural or recreational activities that often spur and create competition for available housing; or a community may have a lack of housing or healthcare options that result in a low cost of living, but in reality residents are seeking these housing options or services outside the community. In these cases, a low cost-of-living index may actually be indicative of a lack of certain amenities required to attract and maintain a desired work force.

An interesting comparison is to separate cost of living from the overall quality-of-life comparison and then identify locations that have a low cost-of-living index and a high quality-of-life score when taking into account the other, often more subjective, components considered in the quality-of-life analysis. Locations that score high in quality of life while maintaining a manageable cost of living often represent desirable locations to operate and grow a business. The accompanying chart highlights four states that rank high in this comparison. It is interesting to note that each of these states also currently enjoys an unemployment rate significantly below the national average of 8.3 percent.

In Sum

As when evaluating most site selection factors, a company will need to find the right balance when considering cost of living as a component in its overall analysis. If all other site selection criteria can be met, the cost-of-living index can be a useful tool in differentiating communities and making a final location decision.


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