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Spending habits and cost of living

09 Apr 2010

The spending patterns of different nationalities can vary enormously. Philippa Robinson, Product Research Manager at ECA, explains how these can be reflected in expatriate salaries.

People spend their salaries in all manner of ways. Some money, necessarily, has to go on tax and social security; some goes on a mortgage or rent, pension schemes and savings. Finally, there is the money that gets spent on day-to-day living.
When people go on assignment, though, the way they spend their earnings will change. They may be subject to a different tax system and accommodation costs may be borne or subsidised by the company. Home obligations like pensions and savings are likely to continue, but day-to-day spending will change – sometimes significantly – because of differences in prices, availability of goods and, to an extent, the expatriate’s (and family’s) ability or otherwise to assimilate into a new culture and style of living.
It is to reflect the changes in day-to-day spending that companies use cost of living indices – but there are a number of ways in which these can be applied. Some companies apply the index to a fixed proportion of home net salary and apply this throughout their policy. Others vary the amount to be indexed to provide a more personalised approach to salary calculation. In this case, factors including both the nationality of the assignee and the size of the family are taken into account, and companies using this approach are likely to use spendable tables.

What are spendable income tables?

ECA’s spendable income tables indicate to companies the proportion of salary to which the cost of living index may be applied. The tables are derived with reference to household expenditure surveys published by government statistics offices. These surveys provide details of how family spending is split between goods and services, housing and savings.
ECA's 'index spendable' covers day-to-day goods and services expenditure – for example food and meals out, alcohol, personal care and services, clothing, electrical goods, car running and maintenance, i.e. items in the ECA shopping basket. The remaining expenditure – ‘other spendable’ – includes items such as furniture, holidays, jewellery, education, car purchase and utilities.
Housing is treated separately and includes rent and mortgage repayments, household insurance and taxes, repairs and maintenance. Savings are also treated separately. Both of these elements of expenditure are considered to be home country obligations, and as such are not indexed for assignment salaries.


Consumption patterns

Household expenditure surveys are also used to determine consumption patterns which give the amount, or ‘quantity’, of each item that a particular nationality consumes. This information, combined with price data collected by ECA, is used to produce our cost of living indices. Accordingly, each item in the index is given a weight reflecting its relative importance in the expatriate’s home country consumption pattern.

Consumer habits

The division of the household budget between index and other spendable, housing and savings depends on the size and income level of the family. For instance, as income increases, the spending on basic needs (i.e. index spendable) shrinks in proportion to overall spending, while the proportion spent on other items increases.

Culture plays a significant role in a country’s index because the weight allocated to each item is based on local consumption patterns

Nationality also affects spending patterns, which vary widely around the world. These variations occur due to a combination of factors: income, population characteristics, climate, culture and consumer tastes. The differences in spending patterns affect both indices and spendable tables.
Culture plays a significant role in a country’s index because the weight allocated to each item is based on local consumption patterns. For instance, in China rice is a more widely eaten staple food than potatoes, which is reflected by the weight given to these two items in ECA’s shopping basket. Likewise, potatoes have a comparatively high weighting in Ireland’s index, pasta in Italy’s and bread in France’s.
Not only do consumption patterns vary from country to country, but they are ever changing. Throughout the world, particularly in Europe and Asia, the most significant demographic phenomenon is an aging population, a shift which is likely to impact on future spending patterns. In many Asian countries, the combination of changing demographics, rapid economic growth, changes in social attitudes and an increase in the proportion of urban residents is likely to cause a significant shift in consumption patterns. And this demographic change is taking place in parallel with a rise in real household incomes across the Asian region.


Variations in consumption patterns need to be taken into consideration when calculating an appropriate index for an expatriate assignment. While absolute spending on food may rise as incomes increase, a smaller share of expenditure as a proportion of indexed spendable is devoted to food. High-income countries such as the USA and the UK spend a smaller proportion of income on food, while low-income countries such as Poland, Philippines and Hungary spend a much higher proportion on food.


Motoring is another area where we see big differences. In countries such as the UK and Singapore, which impose high rates of fuel duty, running a car is costly and motoring expenditure high. Conversely, although petrol is expensive in Hong Kong, expenditure on private motoring is low because the good public transport system provides a reasonable alternative.

High-income countries spend a smaller proportion of income on food


There is even more variation in housing costs across the globe. Such disparities can be seen in the chart below, which incorporates data taken from ECA’s accommodation reports.
Housing expenditure varies by country, family size and income level. Low income households tend to spend a greater proportion of their income on housing costs, either in the form of mortgage or rental payments and property maintenance. Single people can spend a higher proportion of income on housing than couples with the same household income. In the USA, for example, housing costs as a percentage of net income can vary from 20% for couples at junior manager level down to 15% at senior manager level (50-140 ECA points), and from 23% down to 15% for single people.


Possibly the most complex component of net income is savings. This is the amount of household disposable income remaining after household consumption expenditure has been accounted for.
It should be highlighted here that ECA’s analysis of household expenditure surveys differs from statistics derived from national accounts. The latter’s analysis includes households of all family types and sizes in the country whereas ECA’s research concentrates on higher income earners – those that are likely to be expatriated, and by family type.
Nevertheless, whether referencing the measures used by institutions such as the OECD (which look at national accounts), or ECA’s data, household savings rates vary enormously between countries. This is partly due to institutional differences, such as the extent to which old-age pensions are funded by governments rather than through personal savings and the extent to which governments provide health insurance.
Alternatives to using spendable tables in the home-based approach ECA’s Expatriate Salary Management Survey 2009 shows that 55% of companies surveyed apply spendable income tables. The vast majority of those using spendable income tables take into account family size (87%) and apply the same approach in all locations (94%).
Where variations occur, this may be due to the assignment being to a hardship country, where not all goods and services are available and so the index is applied to a lower proportion of home net pay; another situation where an alternative approach may be adopted is when the family has stayed at home and remittances are made.
One alternative method is to apply the cost of living index to a fixed percentage of home country net. Typically this percentage is around 55% to 60% although in some cases it goes down to 30%. Another approach is to apply the index to a fixed percentage of home country gross and our research shows this can range widely from around 35% to 100%. Other methods include varying the percentage applied to net according to family status or indexing a fixed cash amount of home country net.

Changing costs

The last couple of years have seen economic turmoil that has not only affected national economies but individual households. Housing prices slumped. Petrol prices increased sharply then decreased just as sharply and are now climbing again. Food prices fell in many countries but these, too, are now starting to rise again. Price changes such as these inevitably affect household spending. The recession saw households cutting back on luxuries as they became more cautious in their spending and therefore modified their consumption.

For this very reason spendable income tables are extremely useful because they can be used to reflect both the short-term changes in consumption and expenditure and the longer term trends.

ECA’s spendable tables are in the cost of living calculator in MyECA. The calculator allows users to determine spendable income for a single salary or to produce a table covering a range of salaries.

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