What is a cost‑of‑living raise?

A cost‑of‑living adjustment aligns employee compensation with inflation, typically measured using the Consumer Price Index (CPI). COLAs can adjust salaries, commissions or benefits, and employees typically receive them annually. For instance, if the Vancouver CPI rises 5%, matching wages with a 5% increase can help employees maintain their standard of living.

Why cost-of-living isn’t the same as inflation

The cost of living refers to essential expenses, such as food, housing, transportation and childcare, in a specific region. Inflation, however, reflects the overall decline in the value of money. So while CPI measures inflation, the cost of living considers regional affordability. In generally expensive cities like Toronto or Vancouver, a flat wage increase may not keep pace with local living costs.

Measuring the cost of living in Canada

Most employers rely on national tools, such as the Consumer Price Index (CPI) or the CPI-W (the index for urban wage earners), to estimate cost-of-living changes. These indexes track the average price changes of everyday household expenses over time. Year-over-year comparisons, especially from quarter to quarter, often guide salary adjustments because they reflect consistent seasonal trends.

But inflation alone doesn’t tell the whole story. Regional costs can vary drastically. Ontario’s Labour Force Survey or provincial budget data provide insight into how economic pressures are playing out at the community level, whether it’s rising rental costs in the GTA or transportation spikes in remote areas. By layering federal and provincial data, employers can align pay decisions with national trends and the actual conditions in which their teams live and work.

How rising costs affect employees

When everyday essentials like food, rent and transportation increase in price, your employees typically feel it fast. For example, some might skip meals to stretch their budget. Others might put off medical appointments or home repairs. Many take on second jobs just to afford to live, leaving them potentially burned out.

This financial strain can be evident at home and work. It can impact focus, productivity and engagement. Employees under pressure are more likely to make mistakes, call in sick or start scanning job boards. Offering a cost-of-living adjustment can help offset those pressures. It shows you’re paying attention and tells your team you value them and their work. That empathy can be the difference between someone staying with you long-term or quietly planning their exit.

Calculating when to give a COLA

Cost-of-living adjustments are a response to data. To decide when one’s warranted, employers can pay attention to a few key indicators:

CPI trends

Start with Canada’s Consumer Price Index (CPI), which tracks inflation across essential goods and services. If the CPI increases by 3% year-over-year, that’s your baseline signal; a 3% COLA keeps employee wages in line with rising costs. Many employers use Q3-to-Q3 CPI changes since they align with fiscal and budget planning cycles.

Example:

If the CPI shows consistent 4% growth over the last 12 months, and you’ve only increased wages by 2%, your workforce has effectively taken a 2% pay cut in real terms.

Labour market data

Use trusted salary guides and government resources to benchmark roles by industry, location and skill level. Labour market shifts, such as demand spikes for skilled trades or tech roles, can reveal wage gaps forming faster than inflation alone.

Example:

A national salary guide may indicate that junior accounting roles in Toronto have increased by 5% in median pay year-over-year. If your team has not reflected this, it may be time to adjust.

Peer wages in your sector and region

Keep an eye on what your competitors are offering, not just in terms of pay, but bonuses, benefits and flexibility. If similar roles in your area are paying more and indexing for inflation, you risk losing talent.

Example:

A retail chain offering a 3.5% COLA across its Ontario stores in response to rising rent and food prices can easily attract candidates from smaller businesses that are still holding the line at 1%.

External salary tools and insights

Resources like Indeed’s salary calculator and employer hiring trends give you a quick explanation of how wages shift in real time. They can help HR teams identify competitive gaps and prioritize where to adjust first. Together, these inputs form a bigger picture. If multiple indicators suggest that wages are not keeping pace, especially in high-turnover or in-demand roles, it may be time to take action.

Adjusting for relocation

When employees relocate to higher-cost regions, such as from rural Saskatchewan to downtown Toronto, their purchasing power can be affected, even if their salary remains the same. A cost-of-living adjustment ensures that relocated staff can maintain the same standard of living.

For example, a software developer earning $80,000 in Regina might need closer to $100,000 to afford rent, groceries and transit in Toronto. Use national cost-of-living indices or online calculators to compare expenses by city and adjust compensation accordingly. This not only ensures fair pay but also shows respect for your team’s real-world financial needs.

With the rise in remote positions, the unemployment rate has been declining steadily to a point where Canada now faces a labour shortage, resulting in fierce competition when seeking talented candidates to fill key roles. As a result, employers are paying higher salaries than ever before to stay competitive. Employees who are paid fairly are typically less likely to seek opportunities elsewhere.

The three highest COL Canadian provinces are:

• Ontario
• British Columbia
• Alberta

The three lowest COL Canadian provinces are:

• Quebec
• Newfoundland & Labrador
• New Brunswick

Best strategies for issuing COL adjustments

Here are five strategies for issuing cost-of-living pay adjustments. Organizations may implement COLAs as part of their compensation strategy to address inflation and maintain employee satisfaction.

Grant annual reviews linked to CPI and performance

Tie COLA increases to the Consumer Price Index, but factor in individual performance. This strategy ensures your approach is fair, merit-based and responsive to market realities.

Monitor inflation trends in your region and match them proactively

Don’t wait until people start leaving. Track local inflation data and adjust wages in real time to avoid falling behind.

Benchmark salaries against peers to stay competitive

Regularly compare your compensation packages to those of similar companies in your sector. Use salary insights from platforms like Indeed to validate your pay ranges.

Differentiate by location

A one-size-fits-all COLA rarely works. Customize adjustments by city or province to reflect the actual economic conditions, especially if your workforce is across multiple locations.

Clarify remote eligibility

Some companies limit COLAs for remote workers, particularly those who opt to reside in low-cost areas. Be transparent about your policy: Will a remote worker in Nova Scotia receive the same raise as someone in Vancouver? Set expectations early to avoid confusion or resentment.

Aligning wages with living costs supports employee wellbeing, morale and retention, while strengthening your employer brand. Use CPI, salary benchmarks and regional differences to time and tailor raises that reflect real-world economic pressures.