Americans’ new ability to work remotely could help explain why inflation-adjusted wage growth has been so disappointing over the past year, according to new research from a group of economists. The results are cold comfort for workers struggling to keep up with consumer prices, but they could be good news for inflation, at least for now.
Working from home is not a free perk for the company
The thinking goes, remote work has “amenity value,” much like a company car or a gym at the office. Remote and hybrid workers spend less time commuting and getting ready to get to the office, and they can benefit from being able to finish their tasks once their kids have gone to bed.
Unfortunately, it turns out these benefits don’t come free, and part of the 3% drop in real average hourly earnings over the past year may reflect the hidden cost of flexibility. Using new business survey data, economists led by Jose Maria Barrero and Nicholas Bloom estimated that the amenity value of remote work moderated wage growth by about 2 percentage points over two years.
In the world of monetary policy, that would be good news for Federal Reserve Chairman Jerome Powell, who is trying to contain the worst inflation in 40 years. Although wage growth is generally good, policymakers faced with soaring consumer prices are wary of a situation in which workers demand much higher wages to compensate for more expensive goods.
Such a scenario can trigger a toxic wage-price spiral, prompting companies to raise the cost of goods even further to meet higher labor costs. As frustrating as it is for workers to accept wages below the margin, it is incumbent upon each of Powell to bring this economy back to some semblance of stable prices for the sake of a sustainable labor market.
Certainly, one interpretation of falling real wages – the one that worries Powell the most – is that wages are adjusting with a lag and another big bump could be just around the corner. Olivier Blanchard, an economist at the Massachusetts Institute of Technology, highlighted this concern in an essay earlier this year:
For given labor market conditions, workers want a given real (expected) wage, regardless of what may have happened to real wages by accident in the past. If, after an episode where real inflation turned out to be higher than expected inflation, real wages turned out to be too low, they want to catch up.
The latest research paper suggests that there may be less room to catch up than one would expect and, therefore, less inflationary pressures on the horizon.
In their survey, Barrero and Bloom asked business leaders whether their company had in the past 12 months “expanded work-from-home (or other remote locations) opportunities to keep employees happy and moderate pressures on wage growth? If the answer was yes, the survey asked executives for their “best estimate” of how much that had moderated pressures on wage growth. Another pair of questions effectively asks the same question but for the next 12 months.
Clearly, some low-income workers saw bigger earnings gains than those near the top, but that makes sense in the Barrero-Bloom setting because many of those jobs have remained in person, even though many many white-collar jobs have shifted remotely during the pandemic. . The resulting narrowing of the pay gap should be given an asterisk, as many of those whose incomes jumped the most did so at the expense of a then-unknown virus.
None of this means Powell can take his eyes off the ball, of course. Relationships in the new document only hold as long as jobs remain remote, and the move to remote work is likely to happen as a one-time effect. For now, this may mean that the risk of a “catch-up” jump in wages appears low, but the risk of a spiral will persist as long as inflation continues to hit a four-decade high. The ability to skip the commute and work from home in sweatpants won’t make up for disappointing wages forever.
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This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Jonathan Levin has worked as a Bloomberg reporter in Latin America and the United States, covering finance, markets, and mergers and acquisitions. Most recently, he served as the company’s Miami office manager. He holds the CFA charter.
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