How remote work can help the Federal Reserve fight inflation
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The pandemic-era surge in remote work could be an unlikely ally in the fight to tame stubbornly high inflation.
As many employees have benefited from commute-free workdays, less stress and better work-life balance, their employers have also benefited from remote work by paying lower wages than they would otherwise, according to a recent working paper co-authored by a group of five economists and published by the National Bureau of Economic Research.
Specifically, the researchers found that 38% of employers had expanded opportunities to work from home or another remote location in the 12 months to May to reduce what they called “growth pressures.” salaries” ; 41% expect to do so next year.
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In practice, this reduction can occur in several ways: employees may accept a smaller raise from their current employer as a compromise to work from home a few days a week, or take a new job at lower pay but with greater opportunity working remotely, according to Steven J. Davis, professor of economics at the University of Chicago Booth School of Business and co-author of the study.
(Other co-authors of the recent academic paper are Jose Maria Barrero of the Instituto Tecnologico Autonomo de Mexico, Nicholas Bloom of Stanford University, and Brent H. Meyer and Emil Mihaylov of the Federal Reserve Bank of Atlanta.)
“A significant amount” of slowing wage growth
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The researchers found that the expansion of remote work opportunities by employers led to a cumulative decline of 2 percentage points in wage growth over that two-year period — “a sizeable amount,” according to Davis.
This is the equivalent of, for example, getting a 5% raise instead of a 7% raise, he said. But this is not necessarily a loss of value for the employees; they may view remote work as a form of non-financial compensation, Davis added.
“The ability to work from home adds to the amenity value of a job,” he said. “Just as working in a nicer office would make a job more attractive.”
According to Julia Pollak, chief economist at ZipRecruiter, that amenity value can come from being able to do laundry or bake something during the workday. Basically, being productive in other aspects of an employee’s life besides work. Workers also save time commuting to the office, and that time saving has an associated value, she added.
“This improved quality of life also meant that they had to be paid less,” Pollak said.
Additionally, there may also be cost savings from working remotely. Employees who drive can reduce their gas expenses, for example. And workers who can move to a lower-cost geographic area or closer to family members to help save on childcare costs, for example, may feel less financial pressure to ask for a raise, Pollak added. .
“Workers seem to know what they want,” Pollak said. “They are extremely, extremely optimistic about remote work.”
About 63% of job seekers say they would prefer remote work — a number that has remained remarkably stable throughout 2022, Pollak said, citing data from the monthly ZipRecruiter survey.
Remote work makes Fed’s job a little easier
This wage capping dynamic is important in relation to one aspect of inflation: the fear of a so-called “wage-price spiral”.
This economic theory suggests that workers, faced with rapidly rising household prices, will ask their bosses for an increase in income to compensate for the financial pain – something they have the bargaining power to do in today’s red labor market. . In turn, companies raise the prices of their goods and services to compensate for higher labor costs, which in turn leads to increased inflation, additional increases, etc.
Of course, factors other than historically large wage increases are fueling inflation, which is currently at its highest since November 1981. The war in Ukraine has sent commodity prices such as oil soaring, and supply chains have not fully recovered from the pandemic. – related problems, eg.
But the rise of remote work, which has “significantly” reduced pressures on wage growth, also serves to ease some inflationary pressures, the paper said. In fact, the dynamic reduces the impact of the so-called “wage catch-up effect” on inflation by 54%, the researchers estimate. (The wage catch-up effect is essentially the dynamic of workers asking for a raise to keep up with inflation.)
That makes it modestly easier to get inflation under control without triggering a recession, the researchers say — a venture the Federal Reserve has begun in recent months. The central bank raises interest rates, and therefore borrowing costs for consumers and businesses, in an effort to slow the economy and keep prices in check.
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Employers can leverage remote work to limit salary growth not only with existing employees, but also when recruiting, Davis said. A San Francisco-based company might try hiring a full-time remote worker in Boise, Idaho, for example, so it can pay a lower salary based on geography, Davis said.
Of course, not everyone is able to work from home part-time or full-time. While 65% of bachelor’s degree holders can telecommute, that’s only true for 53% of those with a college education or less, according to the Pew Research Center. There’s also an income divide, Pew found — 67% of high-income workers can telecommute compared to 53% of low-income workers.