Page 167 - Special Topic Session (STS) - Volume 3

STS538 Ibrahim S Y.
hierarchical structure (IA-H and H), depends on the economic assumptions
regarding elasticity of demand or consumer preferences or behavior. At the
highest level of aggregation, the five components of the PAI are aggregated
arithmetically, as are the seven basic headings comprising the H component
are also aggregated arithmetically. However, under the assumption of
constant elasticity of substitution among the sub-components of the IA-H
component, a weighted geometric aggregation is used. In summary, the PAI
is defined by the following formula:
= ∗ ,

where RF denotes the “Rebasing Factor”, the theoretical pay level at the
base location (PAI of New York) at the beginning of a survey round, and COLI
is the cost-of-living index defined by:

= w IA−H (R , ω ) + w I + w I + w I + w OA OA
I
MI MI
i
i
PC PC
H H
That is, COLI is a weighted arithmetic average of the indices of the five
macro-components, where the weights and indices are as described above (Ri
and i are, respectively, the ratios and common expenditure weights
corresponding to the IA-H basic headings). It can be seen that the PAI has the
functional form of a multilateral Walsh formula for the IA-H component,
modified in two ways: use of expenditure shares derived from a subset of
locations participating in the comparison, rather than all locations, and the
appending of the four additive components, with all components assigned
weights for the duty station, not the base location.

4. Operational rules for salary setting
The PAI is applied for purposes of salary setting and adjustment through a
system of operational rules reflecting compensation policy considerations,
such as stability and predictability of salaries, as well as the moderation of the
disparity of salaries between high- and low-cost locations. Once purchasing
power parity (PPP) of salaries is established between the comparison duty
2
station and New York based on the PAI calculated from a cost-of-living survey,
a pay index is derived to determine salary. Between surveys, PPP is
approximated by updating both indices through different mechanisms: the
PAI is adjusted for movements in local currency exchange rates relative to the
US$; inflation as measured by CPIs (for the IA-H component); and movements
in the other component indices (H, PC, MI, and OA), which are adjusted by
other mechanisms. The pay index is adjusted in accordance with
compensation policy priorities.

2 The use of the term PPP here does not conceptually coincide with its use in other contexts
such as that of the ICP. For example, the PPP measure includes an OA component, the scope of
which includes non-consumption commitments, not usually included in PPPs, but relevant in
the context of compensation for UN staff.

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