So the results are in, the prices have all been totted up and the news is out. According to the Economist Intelligence Unit's Worldwide Cost of Living Survey, which I edit, Tokyo is the world's most expensive city. In fact Tokyo has long been the world's most expensive city in our survey. Until 5 years ago Tokyo had been the world's most expensive city for 14 uninterrupted years. The city regained top spot last year thanks to a surge in the value of the Japanese Yen, and despite decades of weak consumer confidence and low inflation. The city currently has a cost of living index of 161 when compared to New York – meaning that a shopping basket there is 61% more expensive. London is a little more comparable, but people moving from London to Tokyo still face a 31% hike in the cost of their shopping basket.
What does this mean for HR professionals? Tokyo is a global business centre. It is also one of China's neighbours, and therefore a potential hub for establishing a regional presence. Remunerating expatriates to account for this cost of living difference could present a significant uptick in salary costs if it is decided that Tokyo is the best place to send them. But the cost of living is not the sole driver when making these considerations. In fact it is only one of a host of considerations that need to be accounted for when looking at where to send professionals and what to pay them in different locations. For example Tokyo may have a high cost of living at the moment, but people living there benefit from a lower tax rate than New York and London. An executive earning US$100,000 can expect to pay just 24% in income taxes in Tokyo. This compares with 31% in London and 34% in New York. Taxation should always be considered when working out expatriate salaries.
Another factor is liveability and the attraction that a city will have to an expatriate when moving them abroad. Tokyo is a global hub with plenty to see and do and no significant challenges to liveability. There would be little non-financial incentive required to relocate an expatriate to Tokyo. Karachi, the world's cheapest city in our survey, with a cost of living of less than one-third of Tokyo (and half of New York) is among the worlds least liveable cities to live. Moving an expatriate to Karachi would entail the costly addition of a hardship allowance which would boost pay requirements by at least 20%. Even with this additional pay it would take more to convince an expatriate to up sticks to Karachi than to Tokyo. While the Australian cities of Sydney and Melbourne have seen the relative cost of living double over the last ten years, thanks to a strong Australian Dollar, they are also among the world's most liveable cities and would present far fewer challenges to an HR department looking to move talent there.
But the main driver of any relocating decision from an HR and from a business perspective lies in opportunity, both for the firm and for the expatriate themselves. While Japan maybe an expensive location to relocated to, it is also likely to present much stronger business and revenue opportunities than smaller and cheaper developing markets. Relocating to Karachi may be the cheapest option, but opportunities in Pakistan are scant compared to Japan or the emerging economies of China and India. Whilst both China and India may require some further "hardship" incentive, they remain significantly cheaper than Japan, London and, in most cases, New York. Shanghai, China's business centre, is only 1% more expensive than New York, with a more favourable tax regime to account for when moving staff. In India HR professionals looking to cut costs and exploit emerging opportunities can have their cake and eat it. Mumbai and New Delhi sit among the ten cheapest cities in the world, but India has become a focal point for multinationals looking to exploit the rapid growth and potential of the world's second most populous country.
Now all HR professionals need to do is convince their expatriates that a pay cut is necessary to achieve the same lifestyle in India than in London or New York, and this can present another problem entirely.
Jon Copestake is the editor of the report at the Economist Intelligence Unit
A free copy of the key findings of the latest report can be downloaded here: http://www.eiu.com/WCOL2011
