Canada’s inflation rate at the time of writing is at a 30-year high, reaching 5.7% — the highest rate since August 1991. With skyrocketing prices, you may be considering giving your employees a cost of living raise to stay in line with industry standards and keep top talent in your workplace. However, before you start handing out raises and special benefits packages, do your research — the type of industry, position, and the province or territory you’re operating in may ultimately decide on the cost of living adjustment (COLA) for your area.

Read on to learn what the cost of living raise means, how it affects your employees’ lifestyle, why you should consider raising wages in high COL areas, and the best strategies for issuing salary adjustments.

What is a cost of living raise?

The cost of living raise or cost of living adjustment (COLA) is an increase in income based on how much money the employee needs to maintain their standard of living during inflation. Employers use this adjustment for salaries, commissions, and benefits packages. For example, if your employees live in Vancouver and the cost of living increases by 5%, you could increase your employees’ wages by 5% to make up the difference.

What is the difference between cost of living and inflation?

The terms cost of living and inflation are often used interchangeably, but they’re not the same.

How is the cost of living measured?

The Consumer Price Index (CPI) is used to compile information and measure the changing prices of goods and services in Canada. The CPI has a set amount of goods and services being constantly price-checked so they can calculate the changes over 12 months and level out monthly fluctuations. Every province and territory uses this method to measure COL.

The Labour Force Survey (LFS) is used in conjunction with the CPI to help set minimum wages according to the monthly survey of the Canadian labour market. They calculate the regional, provincial, territorial, and national unemployment and employment rates. Government bodies use this information to make crucial decisions regarding:

How does COL affect your employees’ lifestyle?

Inflation affects almost everyone, and it affects everyone differently. Many people feel the hard-hitting effects when inflation leads to an increase in the cost of living. For example, rising costs hurt the middle class, but low-income earners get hit the hardest. This is because employees’ lifestyle depends on their income and expenses. The fast-rising prices of groceries, gas, and utilities means people save less money for extracurricular spending. So to compensate, consumers switch to cheaper brands, put more effort into finding deals and buy less. Many of those with a higher standard of living and not a high enough income may also consider leaving their jobs to find better-paying work.

Why you may want to consider raising wages in high COL areas?

The rising cost of everything doesn’t stop at groceries, gasoline, childcare, and housing — the cost of labour is also steadily increasing to keep up with demand and staffing needs. Moreover, the high demand for labourers gives workers the upper hand when asking for raises. In most cases, as inflation rises, wages across industries also rise to meet adjustments based on the cost of living. Without salary increment to counteract inflation or cost of living adjustment, your employees are likely to move on to jobs that pay more in the current job market. It is thus worth considering that business owners increase compensation packages and customize them to retain their top employees and attract new talent.

Here’s an example:

The pandemic created massive job losses in 2020. However, with the rise in remote positions, the unemployment rate has been declining steadily to a point where Canada now has a labour shortage making for fierce competition when looking for talented candidates to fill key roles. As a result, employers are paying higher salaries than ever before to stay competitive.

The three highest COL Canadian provinces are:

The three lowest COL Canadian provinces are:

How to determine the COL wage increase?

Not all companies hand out a cost of living wage increase. This benefit is entirely dependent on company or government preference. However, if you don’t want to risk losing valuable employees, offering a cost of living increase is in your best interest. In today’s market, any employer who fights wage increases or only gives raises when forced will eventually lose their staff because the employer has made them feel undervalued.

Calculating a cost of living raise differs from company to company, since there isn’t an official metric for determining a salary increase concerning the cost of living. Many organizations use the Consumer Price Index to decide how much to raise their employees’ salaries. For example, let’s say your employee had an annual income of $60,000 before inflation rose by 5%. To give them a cost of living pay adjustment, you would increase their yearly income like this:

$60,000 x 0.05 = $3000

$60,000 + $3000 = $63,000

Your employee’s new annual salary with the cost of living pay adjustment would be $63,000.

Pay adjustments for relocating to high COL areas

If you’re thinking about relocating an employee who doesn’t work remotely to a high COL area, you may want to include a cost of living adjustment in their benefits package. For example, an employee transferring from your company location in the outskirts of Saskatchewan to your new location in downtown Toronto will have a significantly higher cost of living, meaning their current wage drops well below their standard of living. You can use a province’s cost of living index when deciding on salaries in new locations.

Best strategies for issuing COL adjustments

Here are five strategies for issuing cost of living pay adjustments.

1. Offer regular raises

Regularly boosting your employees’ salaries is good for company morale and employee retention. Base your raises on quality of work, added responsibilities, inflation rates, and competitor wages. Offering competitive salaries reduces the likelihood of losing your employees to your competitors. But at the same time, increases are rewards, so only provide regular increases when there’s a reason. Handing out raises without the employee earning it encourages expectations for future increases without having to work hard for them.

2. Keep salaries in line with the COL

Employers need to stay on top of inflation hikes and the rising cost of living. Offering a reasonable and competitive salary looks good to your current employees and potential new prospects. In addition, staying on top of inflation rates by adjusting salaries instills trust and value in your employees, allowing them to better afford basic life necessities without asking for a raise.

3.  Know the market rates

Researching market rates in your area helps determine the salaries of positions similar to the ones you offer. When the market rate rises in your industry, you may want to offer a cost of living adjustment for those same positions.

4. Issue COL pay adjustments according to location

When you have employees working across Canada, adjust their raises according to location. For example, say you have an employee working in Calgary and another in Winnipeg, and the cost of living is higher for your employee in Calgary. Therefore, the Calgary employee will receive a higher pay adjustment than your employee in Winnipeg. You may use this consideration when hiring new employees and issuing COL pay adjustments. Research is always helpful when determining a base salary according to the area.

5. Set boundaries

If you have employees who operate entirely remotely, they can move wherever they wish without it affecting their job. Make it clear that cost of living pay adjustments may not be awarded for remote employees who choose to relocate.