What would happen if all job offers had to be quoted post-tax and in PPP-adjusted dollars? (Thought Experiment on Compensation)

Today when you get a job offer from a company (in the U.S.), your salary is quoted in dollars. If you get a job offer for $100,000 and one for $120,000, you can easily compare the compensation levels.

But can you?

It is true that comparing the salary for two jobs in San Francisco is relatively straight-forward. But what if you had to compare a job offer in San Francisco with one in Plano, TX?

A $100,000 salary in Plano goes a lot further than a $120,000 salary in San Francisco. In fact, it probably goes further than a $200,000 salary in San Francisco.

Even within countries (like the U.S.), different regions are higher-cost and others are lower cost.

The Purchasing Power Parity (PPP) between cities can be drastically different. One simple way to see the difference is the price per square foot to purchase a home. The median price per square foot for a home in the U.S. is $123 but in San Francisco it is $810 (and Detroit is just $24). So it takes a lot more dough to live in San Francisco (or Manhattan) than most places.

Also, the tax rates can change substantially between regions and cities. The top income tax rate in California is 13.3%. The top income tax rate in the State of Washington is zero (the seven states with zero income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming). So even though Seattle is getting really expensive, you can save a lot of money by taking a job there instead of San Francisco.

So what would happen in there was a law that stated that all salaries need to be quoted in post-tax PPP-adjusted dollars?

Imagine that there was a law that forced every employer to quote both the absolute salary (like $120,000 in SF) and the after-tax PPP-adjusted salary (would transform to probably $50,000 in SF).

What would happen?

First thing that would happen is that many fewer people would want to work in places like San Francisco and New York City. While everyone intuitive knows that these places are high-tax and high-price, seeing the stark different on the job offer would make a significant number of people pause before taking a job.

The second think thing that would happen is that many employers would need to react to this. One way to react is to increase salaries. But the salaries in places like San Francisco are already much higher than most places and would likely need to go up another 50%+ to compensate. The more likely reaction is for employers to hire more people outside high-tax and high-PPP areas.

Long term, more people are going to start thinking about their income in “real” dollars — which means the dollars they have left over after living their life.

Photo by Pixabay on Pexels.com

4 thoughts on “What would happen if all job offers had to be quoted post-tax and in PPP-adjusted dollars? (Thought Experiment on Compensation)

  1. Ken Broad

    Brilliant thought experiment. California’s tax system is completely broken – it costs a fortune to live here, yet people with incomes required to live a basic life are taxed as if they are rich. Recent SJ Mercury News report revealed that 83% felt that the cost of housing was a very-to-extremely serious problem. Given CA relies upon 1% of taxpayers for roughly 50% of personal income taxes, the next recession will bring fiscal catastrophe.

    Reply
  2. Deborah Drake - Founders Unfound

    This blog post reminds me of an experience I had in a job interview back in 1998. I was looking to move from California to Washington State and secure myself a new position in advertising. Interestingly, when it came to salary negotiation for a job that I was being offered, the manager I would be working for pointed out to me that the salary being offered to me in Washington was better than California because Washington State did not have a state income income-tax. I think it would be wonderful if people had the sensibilities in salary negotiations to ask about pre and post-tax incomes before accepting offers. The question is, will people have the confidence and the courage to ask? When it is an employee’s market, they might more freely do so; and it would take personal self confidence to do it. When it is and employers market, and you want a job, or you need a job, then you might be less willing. I’m all for transparency and action, hopeful there can be pay equity and parity for gender as well as job responsibilities. A great post and thank you for the opportunity to comment.

    Reply
  3. keynesianrichard

    There is another layer of complication here: amenities are hard to measure, and yet have value to people. For two career couples, deep labor markets are important. Many people also value nice climate, cultural amenities (especially food), racial and ethnic diversity, proximity to an Ocean, etc. There is a reason the great cities of the world (London, New York, San Francisco, Hong Kong, Mumbai) are expensive relative to their countries’ incomes.

    Of course, lots of sorting does go on–for those who are indifferent to these amenities, lower cost places are better options. Minneapolis is probably the best value in American cities (salaries are high, costs are relatively low, and it has most of the above amenities), but I’ve reached an age where I no longer want to put up with brutal winters, and in Minneapolis, they are especially brutal.

    Reply
  4. Pete Zajonc

    Do job seekers value evaluating companies that report better practices of minimizing impacts, or even giving to the environment? How much pay parity is required to work in oil or coal these days, versus solar and wind?

    Reply

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