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Key Determinant of Pay: Location, Location, Location

Companies frequently employ workers all across the nation, but how do they decide what to pay their workers located in different regions? Should they focus on a set of fixed geographical pay offsets? In other words, if pay for a Software Developer is 30% higher in New York than Chicago, should the same pay difference exist for Financial Analysts? The answer is a resounding "no!"

By using fixed geographical pay offsets, a company will fail to reflect the true variations in labor markets for employees by region. For example, the typical Higher Education Administrator in Chicago earns a pay ~24% less than one in New York, while a typical Urban Planner in Chicago earns ~30% more.

In this blog, I will show this extreme variation in pay exists across numerous jobs and locations. The results highlight the key reasons why fixed geographical pay offsets across all jobs simply do not make sense.

Does the location of your job lead to higher pay? Use the free PayScale Salary Survey to find out.

Last fall we worked with U.S. News & World Report on a list of the top 30 jobs for 2009. These jobs range from Hairstylist to Veterinarian and provide a wide ranging set of skills, education, hours, and responsibilities. They are in the fields of Healthcare, Financial Services, Technology, and Education, among others.

Below is a table comparing pay for half of these jobs across several cities: Seattle, Boston, Chicago, Miami, and Phoenix. Since PayScale is based in Seattle, I chose the median pay of Seattle as the basis for comparison across the jobs.

Career
(Seattle Median Pay)
Boston Increase
Over Seattle
Chicago Increase
Over Seattle
Miami Increase
Over Seattle
Phoenix Increase
Over Seattle
Hairstylist/Cosmetologist
($42,800)
-18.0% -11.7% 30.6% -13.6%
Locksmith/Security Technician
($49,700)
14.9% 1.6% -19.9% -14.9%
Biomedical Equipment Technician
($54,100)
5.7% 3.0% -9.1% 16.6%
School Psychologist
($58,300)
16.1% 18.7% 3.4% 11.8%
Registered Nurse
($58,900)
30.9% 17.5% 16.8% 24.1%
Higher Education Administrator
($62,300)
48.8% 48.8% 44.6% 63.7%
Fundraiser
($68,200)
23.2% 17.9% 22.3% 1.9%
Landscape Architect
($69,100)
-8.1% -6.8% 15.3% -6.5%
Fire Fighter
($70,500)
-19.3% 1.7% -5.4% -12.3%
Veterinarian
($83,900)
9.3% 1.8% 13.0% 17.3%
Systems Analyst
($96,700)
9.6% 4.4% -7.3% -3.9%
Physician Assistant
($98,100)
-4.8% -12.7% -8.6% -2.2%
Engineer
($98,500)
-0.2% -10.3% -12.8% -8.0%
Optometrist
($101,000)
6.9% 3.0% -19.5% 7.9%
Management Consultant
($138,000)
15.9% 15.2% 5.1% -6.5%

For those of you who are visually inclined, here is a graphical representation of the difference in median pay across a random sample of 5 jobs:


increase over seattle

As you can see, there is large regional variation in pay across jobs:

  • Boston: Ranges from 19% below to 50% above Seattle
  • Chicago: Ranges from 13% below to 50% above Seattle
  • Miami: Ranges from 20% below to 45% above Seattle
  • Phoenix: Ranges from 15% below to 64% above Seattle

Given these broad ranges in pay, fixed geographical pay offsets will not accurately price various employees across regions. If a company chooses to follow fixed pay offsets, then they may overvalue certain employees or hire under-qualified workers (as good workers will not allow themselves to be undervalued).

For example, assume HR departments in Phoenix choose a fixed 10% mark-up in pay over Seattle. Locksmiths will be paid an amount almost 30% higher than their true market value. On the other hand, highly qualified Registered Nurses will drain out of Phoenix as they would be looking at a pay 11% below their true market value.

When location specific data for jobs are not available, falling back on a fixed geographical offset can be the only solution. However, that is certain to lead to incorrect market prices by 10% or more in many cases.

A better approach is for companies to price their employees by job and location. PayScale Professional can help employers gather this necessary information using up-to-date and accurate information from over 16 million profiles.

Pay differences across locations are not only an important consideration for HR departments and hiring managers, but individuals as well. When comparing job offers in two or more locations, a potential employee should factor the cost-of-living into their decision.

Here at PayScale, we offer a handy Cost-of-Living Calculator that enables you to compare pay from city to city. In addition, Kristina Cowen (a reporter for PayScale) answers some of your FAQ about cost of living comparisons.

As an example, consider a Certified Public Accountant (CPA) who is comparing a job offer in Birmingham, AL to one in Portland, OR. The job in Birmingham comes with a pay of $48,000, while the job in Portland offers a pay of $55,000. The applicant might be quick to choose the job in Portland; however he should first consider the difference in the cost of living in the two areas.

Portland is about 30% more expensive to live in than Birmingham and thus the pay in Portland should be $62,000 to compensate for this difference. This pay is much higher than the typical CPA receives in Portland as shown below:

Given this consideration, the job in Birmingham may be the better choice :-)

Are you curious about how your pay varies by location? Do you wonder how pay may differ across employers or positions? For powerful salary data and comparisons customized for your exact position, qualifications, and location, be sure to build a complete profile by taking PayScale's Full Salary Survey. Then use the "What If" features of "MyPayScale" to compare your pay against other locations.

Regards,

Katie Bardaro
Research Analyst, PayScale, Inc.

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