September 2013

How much buying power did starting salaries offer?

The relative buying power of the dollar in any two cities is very important when comparing the nominal dollar amounts of the salaries in those two cities. Those interested in this topic might, for example, ask about the "buying power" of a salary of $160,000 in Boston compared to a similar nominal salary in San Francisco. The question becomes, "Which location offers the most buying power?" The answer, and the dollars that accompany it, often translates into discretionary income and lifestyle options for new attorneys.

To illustrate purchasing power differentials, cities are ranked on the basis of a Buying Power Index (BPI). The BPI was calculated using New York City's median reported private practice salary for the Class of 2012 and cost of living as the benchmark. New York City's BPI is thus 1.00. BPI's for other cities show how much buying power the median reported law firm salary for the Class of 2012 in that city provides compared with the New York City median. The table below shows the BPI calculated for 84 cities for which at least 15 law firm salaries were reported for the Class of 2012 and for which cost of living information was available. It is evident that the buying power of the median salary in 60% of the cities listed exceeds that of New York's when relative costs of living are factored in. For example, the median reported law firm salary in Detroit, Pittsburgh, and Salt Lake City is about two-thirds that of New York's, but nonetheless each offers 45-50% more buying power than does the New York salary. As a second example, the buying power of the median reported salary in Raleigh, NC exceeds that of New York's even though the median salary is less than half that of New York.

The difference in purchasing power between $160,000 in San Francisco and $160,000 in Los Angeles can be determined. The BPI in San Francisco is 1.380; that in Los Angeles is 1.722. This means that the Los Angeles salary offers 25% more purchasing power than the identical salary in San Francisco [1.722/1.380] = 1.25 or 25%. Or, viewed the other way around, the San Francisco salary offered about 80% of the purchasing power of the Los Angeles salary [1.380/1.722] x 100 = 80%. Salaries in any two cities with similar salaries but different BPI's may be compared in this manner.

Likewise, the BPI can be used to compare any salary in a listed city (not just the median) with that for New York because the salary required to provide the same purchasing power as the $160,000 New York salary does not change. For example, in Atlanta, that figure is about $69,000. If the actual salary obtained in Atlanta is $100,000, it will purchase about 45% more than the $160,000 salary in New York [$100,000/$69,000] = 1.45 or 45%.

Median Reported Private Practice Salaries in Selected Cities
Ranked by Buying Power of the Salary — Class of 2012

* For ease of presentation, these figures have been rounded to the nearest $10.

Notes on Resources and Methodology for Calculating the Buying Power Index

The Buying Power Index (BPI) uses as its benchmark New York City's median starting salary and cost of living. Cost of living information was obtained from The Council for Community & Economic Research (C2ER) and its ACCRA Cost of Living Index for 2012. C2ER is a nonprofit professional organization of research staff of chambers of commerce, economic development organizations, and related organizations. C2ER obtains information through the participation of local Chambers of Commerce. C2ER uses this information to develop a cost of living index relative to a U.S. average of 100. The index measures differences in the costs of goods and services; C2ER does not attempt to incorporate tax differentials into its index. The index is not available for metropolitan areas whose Chamber(s) of Commerce do not participate.

These indices were used to create an adjusted cost of living index for each city, with New York City, rather than the U.S. average, set as 1.00. This adjusted index thus indicates the dollar amount equivalent to a dollar in New York when the cost of living differential is considered. For example, the ACCRA Cost of Living index for the Louisville, KY area is 90.8. Comparing this to New York's index of 225.3 means that $0.40 is needed in Louisville to obtain purchasing power equal to that of $1.00 in New York (90.8/225.3 = 0.403).

This adjusted index was then used to determine how the New York median private practice salary would have to be scaled to provide comparable purchasing power in each city. Using the Louisville example, the lower cost of living means that a salary of about $64,480 is equivalent in purchasing power terms to the $160,000 salary in New York ($160,000 x 0.403 = $64,483).

This purchasing power equivalent was then compared to the actual median reported private practice salary in each city to determine a BPI. The closer the BPI is to 1.00, the closer the salary comes to providing purchasing power on a parity with New York City. Continuing with the Louisville example, the BPI of 1.241 means that the salary has about 24% more purchasing power than the New York salary. However, a similar $76,500 median salary reported for Baltimore, MD provides just 93% of the purchasing power of New York's median because the cost of living is higher in Baltimore compared with Louisville, though still lower than that of New York. Other cities where the reported median does not provide the purchasing power of the New York salary include Jacksonville, FL and Albany, NY. In contrast, the purchasing power in nearly every city with a reported median of at least $90,000 exceeds that of New York.