Tuesday, March 23, 2010

Comparison of Salaries Across Countries/Currencies

Most widely distributed news in conventional media about IIMs probably is the highest/average salaries at the end of campus placements.On a different note , not sure why the media shies away from posting similar news from IITs. Is it technocrats were never paid salaries that they can boast off ?.News papers and TVs distort it normally displaying Rupee denomination of US salaries, to attract eyeballs on the article.

Even when information is given in plain english , can we compare salaries across two countries in different currencies ?Consider the following info on average Salaries from one year postgraduate course in IIM A , for a Indian and overseas position [1]

Average Indian Salary - 20,16,000 INR
Average US Salary - 1,22,000 $

What did you do when you read the above salary . You should have multiplied the US salary by conversion rate ( at RS45/$ it comes to about 54, 90,000 ) and compared the two salaries in common currency say INR . At the first glace it looks like US position has a considerable advantage over the Indian one. By experience we know that cost of living is higher in US and these two salaries cannot be compared in a crude method as above. So now few Questions araise
  • How to quantify "cost of living" ?
  • How to compare salaries in more scientific way ?

How to quantify "cost of living" ?


On more googling i could find out a term called as Purchasing Power Parity - PPP

The purchasing power rate equalizes the purchasing power of different currencies in their home countries for a given basket of goods. Using a PPP basis is arguably more useful when comparing differences in living standards on the whole between nations.


Here basically we take a constant basket of good and services ,normally used by common man and compare its cost across the countries under examination and arrive at a factor called as PPP. This factor is NOT constant for all goods/services between two countries but varies substantially for many reasons .Some of few example are given below

1. Government intervention
This can happen when Govt to protect local industry , to contain inflation etc.
Ex : India has a import duty of 100% for automobiles imported in completly assembled form .This is enhance the local price advantage locally assembed/produced automobiles.On the other hand to deflate the ever growing inflation India has banned export of rice varieties other than basmathi.


2. Demand Supply
This might be due to demand /supply mismatch.
Ex Due to availability of cheap labour , services involving human labour is always
cheaper in India than in US. a Hair cut in a good saloon in India cost normally less Rs100 whereas it would have cost 20-30$ in US.( i havnt done a hair cut in US , jus heard it from friends )

But comparing a basket of goods/services a single factor is arrived at. I tried to google out the official PPP factors for various countries but couldn't find official info on that . I could find the charts showing nominal GDP values and PPP GDP values of varies countries, released by International Monetary Fund IMF .[2][3] On comparing the these two values for every country we could calculate the PPP of each country.Set of countries which have high immigrant Indian population are chosen and its PPP values are given below.

































CountryPPP Value
India2.725
US0.987
UK0.83
Australia0.78
Singapore1.3
Malaysia
1.733
Saudi Arabia1.26

So this quantifies the cost of living comparison across countries.

How to compare salaries in more scientific way ?

Lets take a nominal salary in INR and try to find its equivalent in other currencies by the following formula

Equivalent Salary of Country(X) = (Indian Salary / Currency Conversion rate)*( Indian PPP / PPP of Country(X))

Let us consider Indian Base salary as 10 Lakhs INR for our comparison.
$ equivalent in US of 10 Lakhs INR with similar living conditoins is calculated as ( 1$ = 45 INR)

( 10,00,000 / 45 ) * (2.725/0.987) = 61,353 $

So 10 Lakhs INR in India =
61,353 $ in USA

Similar conversion for 10 Lakh INR in varies countires in their respective currencies are given below










































Country Conversion RateEquivalent Salary
India NA 10,00,000 INR
US 45Rs/$ 61353 US $
UK 68Rs/Pound48,280 pounds
Australia 41.4 / Australian $ 84380 Austrailan Dollar
Singapore 32.5 64,890 Singapore Dollar
Malaysia 13.7 114770 Ringgits
Saudi 12 1,80,220 Riyal



This comparison makes sense when you intend to spend the same way in the two countries to maintain a similar lifestyle. If the intention is to save extensively by spending frugally and return to home country in due course ( as most emigrant population does ,) the above comparison makes no sense . Also there are other factors to consider such the tax rates in the working country , how is money brought in India considered etc .


Coming back the question of comparing avg salaries for a IIM A graduate

Average Indian Salary - 20,16,000 INR ( US Equivalent = 1,23,687 $)
Average US Salary - 1,22,000 $

Now the comparison makes sense.There less than 1% deviation among the two options and infact the Indian option is marginally better.

PS: I dont have practical knowledge of how this works out. If any one has first hand info on comparable salaries in the same company (from intra company transfers ) across different countries , they can validate/invalidate this theory.

17 comments:

  1. prem, neenga IT la iruka vendiya ale ila..sema analysis!!

    ReplyDelete
  2. This comparison does not makes sense without considering the tax factor. India 30%, US 30%, Europe - 40%, Aus - 40%, SG 4 - 8.5%.

    In that sense, since i am in SG here is my rough guess

    INR 10L , a person can save 5L.

    SGD 60K, a person can save 30k at very minimum.

    30K SGD = 9L , the equation of above SIngapore does will not work,..so will be other countries ?

    ReplyDelete
  3. @Manikanda Prabhu :
    Nice to have some first hand info.
    As i mentioned earlier "Also there are other factors to consider such the tax rates in the working country , how is money brought in India considered etc"
    TAX plays a important role and while considering Singapore we need take into account of tax rates also.

    Do you mean to say that 2,500 SD $ , you can lead a lifestyle in India with 41,000 INR .

    Do you have any official data to substantiate this comparision

    In India for a family of 5 ( 2 elders , 2 mid age and a kid ) with a posh home and mid range sedan might have a running cost of 50K in blr/chennai including tution fees, health care etc. What will be corresponding cost in Singapore ?

    ReplyDelete
  4. i dont have any official data., but 2500k is more than enough for a bachlor if he is getting 40K in India.

    for family of 5 , it is equal.

    if you need correct answer for wat we are discussing here, you can research on % of savings in diff country.

    you can only save 30% in Australia ( wild guess ) , 50% in US, 70% in SG, 80% in malaysia. 40% in Europe., this is considering the factor that, you get paid as per Market standards.

    ReplyDelete
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  6. Hello Prem,
    Can you help me with how much should be the salary of a person in european countries(Germany,Spain,etc)...which is same as having a salary of 25L in India

    ReplyDelete
  7. Although I'm not sure how frequently PPP values get changed, but it's nice way to do salary conversions.

    ReplyDelete
  8. how to calculate the PPP value from references 2 and 3

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