Locality pay

Locality Pay: Definition, History, and Impact on Compensation

What Is Locality Pay?

Locality pay is a supplemental payment added to a base salary for eligible employees, primarily within the public sector, to account for differences in local labor market conditions and costs of living across various geographic areas. It is a critical component of [compensation and benefits] aimed at ensuring fair and competitive wages, especially for federal workers, by narrowing the wage gap between federal and non-federal employees in different regions. Locality pay helps government agencies improve recruitment and retention of skilled personnel in high-cost or high-wage areas where the standard federal pay scale might otherwise be uncompetitive.

History and Origin

The concept of adjusting pay based on geographic location for federal employees in the United States has roots extending back to the Civil War for blue-collar workers³⁷. However, a more formalized system for white-collar federal employees emerged with the passage of the Federal Employees Pay Comparability Act of 1990 (FEPCA). Before FEPCA, most General Schedule (GS)) employees received the same salary regardless of their work location, which often led to challenges in attracting and retaining talent in areas with higher prevailing wages.

FEPCA authorized annual locality-based pay adjustments starting in 1994, with the goal of reducing pay disparities between federal and private sector employees to no more than 5% within specific geographic areas³⁴, ³⁵, ³⁶. This legislative effort aimed to inject "market sensitivity" into federal pay scales³³. The implementation and ongoing adjustments of locality pay are overseen by entities like the Office of Personnel Management (OPM)), the Bureau of Labor Statistics (BLS)), the Federal Salary Council, and the President's Pay Agent. Despite the initial goal, fully closing the pay gap has proven challenging, and adjustments have been made annually in most years since 1994³¹, ³².

Key Takeaways

• Locality pay is an additional payment for federal employees to equalize purchasing power across different geographic areas.
• It aims to address the disparity between federal and non-federal salaries in specific labor markets.
• The system was formalized by the Federal Employees Pay Comparability Act of 1990 (FEPCA) and began implementation in 1994.
• The Office of Personnel Management (OPM) and the Bureau of Labor Statistics (BLS) play key roles in determining locality pay rates and geographic areas.
• Locality pay rates vary by designated Metropolitan Statistical Areas (MSAs)) and "Rest of U.S." regions.

Interpreting Locality Pay

Locality pay is typically expressed as a percentage that is added to an employee's base salary for their specific grade and step on the pay tables. A higher locality pay percentage indicates that the cost of labor or living in that specific geographic area is significantly higher compared to the "Rest of U.S." area, which serves as a baseline²⁹, ³⁰. For example, federal employees in high-cost areas like San Francisco or New York City receive higher locality pay adjustments than those in areas with lower living expenses, ensuring their compensation remains competitive and equitable²⁸. This adjustment is intended to help federal workers maintain similar purchasing power regardless of their work location²⁷.

Hypothetical Example

Consider a federal employee, Sarah, who works for a government agency. Her position is classified as a GS-11, Step 5.
If Sarah were located in a "Rest of U.S." locality area, her 2024 base salary might be, for example, $75,000.

However, Sarah is assigned to a region designated as a high-cost locality pay area, such as the Washington-Baltimore-Arlington, DC-MD-VA-WV-PA area. The locality pay adjustment for this area in 2025 might be 33.94%²⁶.

To calculate her total annual salary, the locality pay percentage is applied to her base salary:
Locality Pay Amount = Base Salary × Locality Pay Percentage
Locality Pay Amount = $75,000 × 0.3394 = $25,455

Total Annual Salary = Base Salary + Locality Pay Amount
Total Annual Salary = $75,000 + $25,455 = $100,455

This hypothetical example illustrates how locality pay significantly increases the total compensation for federal employees in areas with higher prevailing wages and living costs.

Practical Applications

Locality pay primarily applies to federal government employees under the General Schedule (GS) pay system, as well as certain other federal pay systems. The specific geographic boundaries for locality pay areas are defined by the President's Pay Agent, considering recommendations from the Federal Salary Council and data from the Bureau of Labor Statistics (BLS). ²⁴, ²⁵The BLS conducts extensive surveys, such as the Occupational Employment and Wage Statistics (OEWS) program, to gather wage data across various occupations and geographic regions, which informs these locality adjustments.
²¹, ²², ²³
The Office of Personnel Management (OPM) publishes detailed pay tables annually, including the specific locality pay percentages for each designated area across the United States. ²⁰These tables are crucial for federal agencies in budgeting and for employees in understanding their compensation. For example, in 2024, four new locality pay areas were established, including Fresno-Madera-Hanford, CA, and Reno-Fernley, NV, reflecting ongoing efforts to align federal pay with local market conditions. ¹⁹The Government Accountability Office (GAO) periodically reviews and reports on the methodology and effectiveness of the locality pay system, highlighting areas for potential reform or improvement.
¹⁶, ¹⁷, ¹⁸

Limitations and Criticisms

Despite its intention to create pay comparability, the locality pay system has faced several limitations and criticisms over the years. A primary critique is that the goal of reducing the pay gap between federal and non-federal employees to within 5% has largely not been met since its inception in 1994. ¹⁴, ¹⁵Factors such as actions by the President or Congress, and budgetary or methodological concerns raised by the President's Pay Agent and Federal Salary Council, have contributed to this persistence.
¹², ¹³
Critics also point to the methodology used to calculate the pay gap. Some argue that the current approach may not fully account for differences in job characteristics, benefits, or the overall compensation packages between the federal and private sectors. ¹⁰, ¹¹There have been debates regarding whether to include non-salary benefits, such as healthcare and retirement programs, when calculating the pay disparity, which could significantly alter the perceived wage gap. ⁹Furthermore, the narrowness of pay ranges for GS employees compared to broader non-federal pay ranges has been cited as a potential explanation for the persistent pay gap.
⁸

Locality Pay vs. Cost of Living Adjustment (COLA)

While both locality pay and a Cost of Living Adjustment (COLA) aim to help maintain purchasing power, they differ in their primary intent and application. Locality pay specifically addresses differences in prevailing wages and labor market conditions in distinct geographic areas, ensuring federal salaries are competitive with local private sector jobs for similar work. ⁷It is a percentage added to a base salary based on the economic characteristics of a specific metropolitan or non-metropolitan region.

In contrast, a COLA is typically an adjustment to wages, salaries, or benefits (like pensions or Social Security) to offset the effects of inflation. Its purpose is to maintain the real value of income over time, usually tied to changes in a broad economic indicator such as the Consumer Price Index (CPI). While locality pay accounts for where an employee works and the local wage market, a COLA primarily addresses when they are paid and the general erosion of purchasing power due to rising prices.

FAQs

Q1: Who is eligible for locality pay?

A1: Locality pay primarily applies to most federal employees paid under the General Schedule (GS) system. Certain other federal employees may also be eligible depending on their specific pay system and presidential authorization.
⁶

Q2: How are locality pay areas determined?

A2: Locality pay areas are defined by the President's Pay Agent, with recommendations from the Federal Salary Council. These areas often align with U.S. Office of Management and Budget's (OMB) Metropolitan Statistical Areas (MSAs)) and Combined Statistical Areas (CSAs), based on wage data collected by the Bureau of Labor Statistics (BLS)).
⁵

Q3: Does locality pay cover all areas of the U.S.?

A3: Yes, all areas of the U.S. fall into a locality pay area. Locations not covered by a specific metropolitan or combined statistical area are grouped under the "Rest of U.S." locality pay area, which receives a baseline locality adjustment.
³, ⁴

Q4: Is locality pay guaranteed to increase every year?

A4: While locality pay adjustments have been provided in most years since 1994, they are not guaranteed. The Federal Employees Pay Comparability Act of 1990 (FEPCA) outlines a process, but the President can propose an alternative pay plan based on economic conditions or national emergencies. ²The final rates are announced by the Office of Personnel Management (OPM)) typically late in the year for the following calendar year.¹