Purchasing power parity (PPP) and wages for a global talent pool
Quite often we feel the need for comparing wages in different countries when one is engaging with a global talent pool.
We face this need when we evaluate the costs of setting up a development centre in Australia or when we are discussing with a potential hire who is then based out of India. In such scenarios, purchasing power parity is a useful concept to make wage comparisons across different countries meaningful. It might be a slightly crude approach but it can be useful when you are looking for ball parks or quick evaluations.
The suggested approach is demonstrated with a case below.
As part of our expansion plans we are hiring candidates from across world to set up our business development activities. We are in talks with a candidate from Qatar. He desires to come back to India and work. He wanted to ensure that his pay in India would be equivalent to what he was being paid in Qatar so that he can maintain a similar standard of living.
He was getting 9000 Qatar riyals in Doha. When converted to Indian Rupees it comes around approx. INR 1,52,000.00/-. How much to offer in India was a new challenge for me. It is here that the concept of purchasing power parity becomes relevant.
PPP is used to compare the income levels in different countries. Put simply, it helps you decide how much Indian Rupee (or any other currency) is required in India to buy a product A which is available for 1 USD in USA. Normally, the purchasing power parity is calculated with USD as the base value. This makes it easy to understand and interpret the data of each country.
Now how does one solve the problem at hand?
The PPP conversion factor for Qatar and India is 0.7 and 0.3 respectively when pegged to USD. (Source: World Bank website
Now to calculate what would be the equivalent INR amount for 9,000 Qatari Riyals, the following steps are to be followed.
Monthly remuneration in Qatar = 9,000 Qatar Riyals
1 USD = 3.64 Qatari Riyal
Therefore 9,000 Qatari Riyal in USD = (9,000 / 3.64) = 2472 USD
9,000 Qatari Riyal in PPP USD = 2472 / 0.7 = 3532 USD
1 USD = 61.47 INR
3532 USD in INR = 3532 * 61.47 = 217,123.00
Adjusting for PPP in India = 217,123 * 0.3 = 65,136
This is an approximation. We might have to do additional correctives. But this is a reasonable estimation which we can use for quick decision making.