The Real Value of a Software Engineer Salary: Where Do Paychecks Go Furthest?

When it comes to paychecks, a bigger number isn’t always better. What matters is the ability to use those salaries to buy useful things that enrich our lives: a comfortable home, safe transportation, an enriching education, a satisfying vacation and more.

Economists call this the “purchasing power” of salaries, or their “real value.” When it comes to cities, big differences in cost of living mean the same paycheck has a dramatically higher real value in some areas than others.

Consider pay for one of America’s hottest tech jobs: software engineers. In sunny San Diego, median pay for software engineers is around $107,980.[1] That’s about 17 percent higher than Atlanta at $92,300.[2] However, cost of living in San Diego is around 24.5 percent higher than in Atlanta, completely wiping out the salary advantage. Once cost of living is factored in, real salaries are actually higher in Atlanta.

In this post, we’ll show how 28 U.S. metro areas compare for the real value of tech salaries for three of the most popular jobs today:

Let’s Do the Numbers
We crunched the numbers using a combination of Glassdoor salary data and official cost of living figures from the federal government. For salaries, we calculated median salary in 28 metros based on salary reports from Glassdoor.[3]

For cost of living, we used a broad measure from the U.S. Bureau of Economic Analysis called “Regional Price Parities.”[4] It compares the average price level in each metro to the national average, which is set at 100. For example, if New York is 14.1 percent more expensive than the national average, it has a cost of living index of 114.1.[5] The “real” value of a salary is simply the ratio of median pay to that area’s cost of living index.[6]

Table 1. Cities with Highest Cost-of-Living-Adjusted Tech Salaries

  • Software Engineers: The top five cities where software engineer salaries go furthest are Seattle, San Jose, Raleigh, Portland and San Francisco. The highest raw median salaries were in San Jose and San Francisco, but those expensive areas were bumped down the list by less expensive Seattle, Raleigh and Portland. By contrast, the bottom five cities for software engineer real salaries are Kansas City, Washington D.C., Detroit, Orlando and Philadelphia.
  •  Programmer Analysts: The top five cities for real programmer analyst salaries are Denver, Raleigh, St. Louis, Kansas City, and Columbus. All of these are lower cost of living areas where, although salaries are below those in the San Francisco Bay Area, low cost of living stretches pay further. The bottom five cities for real programmer analyst salaries are San Diego, Baltimore, Boston, Minneapolis, and Los Angeles.
  • Systems Administrators: The top five cities for real system administrator salaries are San Jose, San Francisco, St. Louis, Kansas City and Atlanta. For these jobs, even once the San Francisco Bay Area’s high cost of living is accounted for, San Jose and San Francisco salaries go furthest. The bottom five cities for real systems administrator pay are Houston, Austin, San Diego, Tampa, and Orlando.

Why Cost of Living Matters
Another interesting pattern we found is that cost of living explains most differences in pay among cities. The figure below illustrates the link between cost of living and median salary for each of the three tech jobs we examined. Each dot represents a separate city. In every case, there’s a clear positive link between pay and living costs.

Once we control for job title, a simple linear regression of median salary on cost of living explains about 77 percent of differences in salary by city. The model suggests a one-unit increase in the cost of living index for a city is associated with a $720 per year pay raise—an important factor to keep in mind when comparing salary offers around the country.

Figure 1. Cost of Living Explains 77 Percent of Variation in Tech Salaries by Metro

Plot

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Footnotes:
[1] Based on Glassdoor salary data. By comparison, BLS salary data report a median salary for “Software Developers, Applications” in San Diego of $105,880 in 2014, a difference of just 1.9 percent. Source: http://www.bls.gov/oes/current/oessrcma.htm.

[2] Based on Glassdoor salary data. By comparison, BLS salary data report a nearly identical median salary for “Software Developers, Applications” in Atlanta of $92,440 in 2014, a difference of just 0.2 percent. Source: http://www.bls.gov/oes/current/oessrcma.htm

[3] Reported salaries from Glassdoor are inflation-adjusted figures from 2010 to the present, for full-time workers only. Any reported hourly wages are converted to annual salaries using an assumed 2-000-hour work year.

[4] See http://www.bea.gov/iTable/iTable.cfm?reqid=70&step=1&isuri=1&acrdn=6#reqid=70&step=1&isuri=1.

[5] We use 2012 BEA Regional Price Parities for this analysis, which is the most current year available.

[6] The formula for “real” salary in each area is Real Salary = (Nominal Salary)/(Cost of Living Index) x 100.