You aren't actually paid based on cost of living, per se, but as that factors in so heavily, it can swing the value proportionally.
If I move back to Memphis, TN, I can make approximately half of what I make now in the DC area to live as comfortably as I do. Does that mean I'm worth half as much? No. Does it mean I should expect to make half as much? Pretty much, yeah.
Beyond meeting my basic needs (rent, food, whatever) then it's just a matter of how much expendable income does that salary leave me. I don't know if 'percentage of salary' is the best way to measure it, but it factors in.
Paying me 'market rate' in a place where a 3 bedroom 3 bath house can be had for $150k is a vastly different proposal when that same house is $450k in a different place. That is the 'cost-of-living' difference. Sure, I might add the same x amount of dollars of value to the company in both locations, but if I can't live comfortably in my market, then it doesn't matter.
Note, this argument ignores the competitiveness of the markets as well. There are naturally more potential developers in silicon valley than there are in Bumfuck, Nowhere. Supply and demand does factor here.
Lastly, except in situations of outsourcing, you're generally not paid based on where YOU are, but based on where the company (or the location you report to) is. If you're working remotely from Timbuktu while reporting to an office in Silicon Valley, you should expect SV (or near-to) rates. If you're telecommuting to the midwest, you should expect midwest pay.
The big difference there is in what it costs to replace you. If you're Linus Torvalds, that cost probably goes way up. If you're like most of us, that cost is probably a close approximation to 'whatever they can hire a local developer for', assuming there are local developers in the area with the skills you possess.
A radiologist makes $350k whether he's in Manhattan or Memphis. A hedge fund analyst makes comparable, whether he's in LA or Louisville. A BIGLAWyer makes comparable, whether he's in Chicago or Charlestown. They are paid for the value of services rendered, and the doctors, bankers, and lawyers I know seem perfectly content to maximize their income while minimizing their expenses. Only the programmers seem interested in making as little money as possible.
Put differently: a radiologist thinks about moving from Manhattan to Memphis and says "Boy, that $350k will let me live like a king down there!" Meanwhile, a programmer says "Boy, I only have to make $75k down there to live like I'm living up here for $150k!"
I just did some (admittedly) anecdotal job searches for radiology, and there's a $150k price difference between New York and Indiana.
I knew a few attorneys that have moved into the DC area to raise their rates (and one who commutes two hours in to DC because otherwise, his billable rate is halved.)
The positions people are paid also depend on the cost of living in the area. If the median income for an area is $28k vs. $50k, they're simply not able to afford legal services that cost twice the market. This might mean that lawyers in rural areas only work half as much at the same rate, but that means that without some clever accounting, their yearly income is still (approximately) halved.
I'm not saying that no such positions exist, but I know that doctors, lawyers and the like ARE subject to cost of living variance. I don't know of any position in any field that isn't at least somewhat affected by the median income of the municipality in which they operate.
Choice quote: "As in Medscape's 2011 survey, the highest-earning physicians practice in the North Central region, comprising Iowa, Missouri, Kansas, Nebraska, and South and North Dakota; the mean income of physicians there is $234,000. The next-highest earners were doctors in the Great Lakes region ($228,000). Physicians in the Northeast earned the least, at a mean of $204,000."
As for attorneys, I said BIGLAW. Not "get local joe bob out of jail." (But law does have a bifurcated career path, i.e. T14 or bust these days.)
I note your silence about hedge fund analysts.
Here are the people who are paid in accordance with COL: labor. Programmers seem to think of themselves as laborers, despite having the intellectual caliber to be professionals. Or maybe I am overestimating my tribe. Perhaps we just anemic right hemispheres in our brain, leading to savant-like abilities in the left, leading to the warm embrace of pathetic compensation.
First, let me start off by clarifying that I didn't imply that pay should be based on cost of living. Rather, that I believe it's more market forces at work, but that cost of living plays a huge factor in that.
From the article you linked, that statement is reinforced:
"There's less competition among physicians in smaller communities and rural areas," says Bohannon. "There isn't that same downward pressure on reimbursement that you have in metropolitan areas. Generally, smaller communities have to pay more to attract physicians."
This is the market at work. It doesn't matter what the cost of living is in those areas, what matters is the demand for the position.
I also can't ignore that that study is done against 'regions' so large that the cost of living within any of those regions probably swings wide in both directions. This is to say that a doctor in the "Northeast region" could either be in NYC, or way up in the Aidirondacks. Both New York state, both factoring into the ranges on the study, but huge differences in CoL. If you have something more specific, I'm happy to be proven wrong, but in my experience, I don't have anything to refute it.
Regarding BIGLaw, I wasn't referring to ambulance chasers either, but I concede that I don't personally know of any biglaw attorneys that have jumped locality. I also don't know anybody in hedge fund analysts, nor do I know anything about the job market.
Most of the software companies in Memphis are probably selling to relatively local customers, thus tying their income to the local markets. The software companies selling to everyone everywhere are in the big tech hubs.
You're probably not terribly wrong there if you're specifically speaking about software companies, but the largest employers in the area are multi-nationals.
FedEx is headquartered in Memphis, as is International Paper, AutoZone, etc.
Of course, they aren't exactly software companies.
If I move back to Memphis, TN, I can make approximately half of what I make now in the DC area to live as comfortably as I do. Does that mean I'm worth half as much? No. Does it mean I should expect to make half as much? Pretty much, yeah.
Beyond meeting my basic needs (rent, food, whatever) then it's just a matter of how much expendable income does that salary leave me. I don't know if 'percentage of salary' is the best way to measure it, but it factors in.
Paying me 'market rate' in a place where a 3 bedroom 3 bath house can be had for $150k is a vastly different proposal when that same house is $450k in a different place. That is the 'cost-of-living' difference. Sure, I might add the same x amount of dollars of value to the company in both locations, but if I can't live comfortably in my market, then it doesn't matter.
Note, this argument ignores the competitiveness of the markets as well. There are naturally more potential developers in silicon valley than there are in Bumfuck, Nowhere. Supply and demand does factor here.
Lastly, except in situations of outsourcing, you're generally not paid based on where YOU are, but based on where the company (or the location you report to) is. If you're working remotely from Timbuktu while reporting to an office in Silicon Valley, you should expect SV (or near-to) rates. If you're telecommuting to the midwest, you should expect midwest pay.
The big difference there is in what it costs to replace you. If you're Linus Torvalds, that cost probably goes way up. If you're like most of us, that cost is probably a close approximation to 'whatever they can hire a local developer for', assuming there are local developers in the area with the skills you possess.