This definitely is not how it works. There are a ton of companies in Irvine for example that vastly underpay their developers compared to the cost of living in the area. And if you were to assume that's how it works, then companies should be offering salary increases for RTO which is very obviously not happening.

Companies that underpay compared to cost of living exist everywhere, even in the cheap places. They usually end up with the people who can't get or don't want a better paying job.

And yes, companies should be paying salary increases for RTO if they hired on the promise of remote work. Not doing that will just means you now offer worse compensation compared to job conditions and are going to lose some people to greener pastures. Which might be a factor in Microsoft's timing: less job mobility right now