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Earlier this week, the Economist Intelligence Unit released its biannual list of the world's most expensive cities.
In June, the Mercer consulting firm published a similar list. In the same month, the consulting firm ECA International published its own version. Many other companies do the same thing all year long.
But before you click on the next title "Most Expensive City" to see if your home is successful, there are some things you need to know: who these lists are for, what are the criteria that they use and how to determine the cost of living that applies to you.
List after list
These lists are not designed for locals. They are designed for multinational companies looking to place expatriate employees. These rankings are used as a tool to determine the amount of remuneration of foreign workers.
These rankings are used as a tool to determine how many foreign workers should be paid
For example, if you are a hiring manager who wants to send an badyst to Kuala Lumpur, you need to know how much it costs to live there to pay the worker fairly. It is easier to consult a ready-made list than to do one's own research in the field.
Most companies that use these lists place professionals or highly qualified executives who can earn more than the average local salary. This important factor plays a huge role in the way these lists are established and, therefore, the cities that are ranked higher in the rankings.
The exact criteria vary, but the compilation of these lists has great similarities. Field researchers in hundreds of cities collect prices for various items and services that constitute a "basket of products". This may include errands, haircuts, movie tickets, clothing, electronics and furniture.
Some, but not all, companies will also include rental or car costs. (This is why a country like Singapore appears so often on these lists: owning a car is very expensive, which adds considerably to the list.) 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 UIU, for example, converts all currencies into US dollars and compares each basket to New York. This basket is much cheaper or more expensive and determines the city's place on the list.
"It's a kind of tool for foreign companies that have expatriates in different locations," says Robert Wood, senior economist at EIU. "It's a tool to help them in terms of salaries for expats."
In other words, these are the most expensive cities in the world, but for a specific group of people.
Some type of spender
For global companies and their expatriate workers, these lists are very useful. One of the main objectives is to give expatriates an idea of how much they will spend – and how much they should pay – depending on the lifestyle and consumption habits they want to keep in a new country. .
"It's not really a whole population, it's really a clbad of international executives and professionals," says Vince Cordova, a Mercer consultant. These expatriates do not necessarily receive the price of a local national. They go to outlets where expatriates normally shop. "
According to Cordova, the key to remember is that the prices in these lists are based on certain products of a certain quality and intended for some people from another market and another country. In other words, expatriates "will try to reproduce a certain profile of expenses".
What can you do?
So, if you are not an expatriate in an executive compensation program, how can you determine the cost of a city for you?
Unfortunately, the top 10 rankings do not often apply here. You just have to do your homework and ask: why do you want to live there? What are you going to do there? What kind of life do you want to lead? Will you live alone, with your family, children, a partner, friends?
All of these factors determine the cost of your city experience.
"The answer is not easy," says Lawrence White, professor of economics at New York University. "You really have to do your research: where would I like to live in this city? How important is the proximity of public transport? Is there a sales tax? Does the sales tax apply to everything? Is food taxed or exempt? Are the clothes taxed?
Use your own methodologies that apply to you and not to a group of rarefied people.
"Look what's happening in your own currency in your own country," says EIU's Wood. "If some prices rise faster than others, and what does that say about consumption habits."
The truth is that if you want to live in a city, any big city, expect to pay for it, whether you are a professional expatriate or not. On the other hand, with all the amenities and connections that cities bring, you may get what you pay for – no matter where the city is on a list.
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