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The Cost of Living in Silicon Valley

Since the middle of the 20^th century, Silicon Valley has been a desirable place to live and work. The Mediterranean climate, proximity to ocean and mountains, variety of employment opportunities, and the overall quality of life has made this one of the most appealing locations on the planet. In addition to the high technology for which it is synonymous, the region is also an intellectual hub, with several world-class universities and dozens of other educational institutions located within the greater San Francisco Bay Area, and San Francisco itself arguably the cultural center of the West Coast north of Los Angeles.

In a region with these credentials and a state that boasts the eighth largest economy in the world — greater than most first-world nations (in terms of gross product according to 2005 World Bank data) — one might assume that the residents of California and of Silicon Valley in particular would be able to live in a manner commensurate with the abundant wealth generated here. But the reality is quite the opposite, for in an extreme example of supply and demand, the desire to live within this ideal region has helped to raise the cost of living to an exaggerated degree.

Nationally, there are two measures that track living costs, the cost of living index (COLI) and the consumer price index (CPI). While both of these measure the prices of consumer goods and services, the COLI is a snapshot in time of nearly 300 metropolitan regions throughout the United States, while the CPI captures data within any one of 32 regions (national, four census regions, and 27 metropolitan areas) over time. The COLI, therefore, allows data to be tracked geographically (comparing one region to another), and the CPI, historically (comparing a particular region at different points in time).

Based upon data obtained from the U.S. Bureau of Labor Statistics, the San Jose metropolitan statistical area (comprised of Santa Clara and San Benito Counties) has experienced a 55 percent increase in its consumer price index from January 1990 through April 2006. This breaks down to an average annual growth of 4.1 percent in the decade leading to the height of the dot-com boom in December 2001 and a smaller growth rate of 2.2 percent annually in the subsequent bust and recovery.

This reasonable rate of growth, however, looks only at the expense side of the equation. According to data provided by the California Employment Development Department, the average annual wages for all private industry sectors within Santa Clara County fell from $79,544 in 2000 to $72,612 in 2004, the most recent year for which data are available. This decrease of 9.3 percent in the income of Santa Clara County residents is in sharp contrast to the 9.7 percent increase in consumer price index over the same four-year period. Translated to real-world dollars, the average county resident was bringing home nearly $7,000 less in 2004 but having to pay almost $6,200 more in expenses. The resulting difference of $13,200 equates to a loss of about one-sixth of 2000’s average wage. (Estimate of expenses is based upon 80 percent of the annual wage for the respective year.)

When we compare Silicon Valley with the rest of the nation, it will come as no surprise that costs here are significantly higher than in most other regions of the United States. ACCRA, a research organization based in Arlington, VA, reported in May that the San Jose metro area has a cost of living 56 percent higher than the national average and is the fifth most expensive region in the U.S. relative to this measure. San Francisco, with an index score nearly 71 percent higher than the national average, is ranked second behind only New York City. If it were possible to drill down to small geographic ranges, the index would undoubtedly show even higher rates for the more developed regions of Silicon Valley.

Much of this inflated measure is due to housing in particular. In fact, all three of the Bay Area’s metro areas — San Jose, San Francisco, and Oakland — fall within the top ten most expensive regions within the category of housing, based upon weighted averages for median apartment rental and median house price. San Jose’s housing index is more than two and a half times the national average, while San Francisco's approaches three times the national mean.

Interestingly, a May 2006 study on poverty in California conducted by the Public Policy Institute of California found that if California's poverty rate were adjusted to reflect California’s higher rental costs, the rate of poverty within the state would rise from 13 to 16 percent, making it the third highest rate in the nation. As it is, the formal calculation for poverty nationwide is based upon the national average for cost of living — markedly lower from that found within the region or the state. Locally, Santa Clara County’s official poverty rate would jump from 9 to 15 percent if similarly adjusted for the exorbitant cost of housing.

This high cost of living, particularly relative to housing, impacts Silicon Valley’s employers, making it increasingly more difficult to recruit and retain workers. According to the February 2006 Bay Area Economic Forum publication, The Innovation Economy: Protecting the Talent Advantage, in Silicon Valley, “increases in the cost of living outpace increases in productivity.” This is an equation that cannot continue if the region hopes to maintain its standing as a premier center for technology and innovation.

For additional information on the consumer price index, please visit the Bureau of Labor Statistics online at www.bls.gov, and for information on the cost of living index, www.coli.org.