Big Macs and Wages To Go, Please: Comparing the Purchasing Power of Earnings Around the World

Abstract

The relocating employee’s main concern is that the current standard of living can be maintained or improved in the destination country. This means that their purchasing power cannot fall. However, comparing home- and destination-country prices based on the existing exchange rate would be inappropriate since exchange rates only reflect purchasing power parity (PPP) in the long term. Thus, an index for real wages and expenses should be created whereby these prices are converted into purchasing power equivalents for each country. Using an index based on the ‘perfect universal commodity’, the Big Mac hamburger, as a price deflator, the real wages and major relocation expenses for US employees in some of the biggest commercial cities around the world are considered in this chapter. A model is subsequently developed whereby real wages can be approximated based on the market status and geographic location of the destination country. The results indicate that US employees would generally be worse off moving overseas if they are to be paid destination-country wages to take up similar positions; moreover, major expenditure items such as accommodation and cars are also extremely expensive in certain foreign cities. These findings can be used by multinational companies (MNCs), their employees, as well as economic migrants to define equitable and attractive salary packages.

The diversity across countries in measured per capita income levels is literally too great to be believed. Compared to the 1980 average for what the World Bank calls the ‘industrialized market economies’… of US$10,000, India’s per capita income is $240, Haiti’s is $270, and so on for the rest of the very poorest countries. This is a difference of 40 in living standards! These latter figures are too low to sustain life in, say, England or the United States, so they cannot be taken at face value.

(Robert E. Lucas Jr, 1988, pp. 3–4)

Published in the Australian Journal of Labour Economics, vol. 2, pp. 53–68 (1998).