Inflation has been vexing monetary policymakers the world over in the past year. The rate of remote working may seem something that has little impact, but research from Chicago Booth suggests otherwise.
“The recent inflation surge caught many businesses and policymakers flat-footed. U.S. consumer prices rose 8.6 percent over the 12 months ending May 2022, a jump of several percentage points relative to previous years. Nominal wage growth failed to keep pace,” they explain. “After adjusting for CPI inflation, real average hourly earnings in the U.S. private sector fell 3.0 percent over the 12-month period ending May 2022.”
They argue that flexible working is generally something highly sought after in the workplace. For instance, a survey conducted in 2021 found that over 75% of workers would gladly sacrifice a pay rise if they could work flexibly more often than was common before Covid.
While we may assume that the current cost of living crisis will fundamentally change that, it’s not something that is emerging from employee data. Indeed, the recent Workmonitor from HR services provider Randstad found that the current macroeconomic circumstances are not changing employee demands which started during the pandemic: workers still want flexibility, value alignment, and a good work-life balance, with 61% of workers not accepting a job if it impacts work-life balance.
Battling inflation
The Chicago research believes, therefore, that offering this to workers could help to alleviate the pressures wage growth is having on inflation across the economy. This is particularly so as there are a growing number of roles that can, or indeed are, being performed entirely remotely.
They argue that remote working could further dampen wage costs by allowing companies to employ workers from low-wage parts of the country or world, although a second Chicago study suggests that employers actually pay much the same regardless of the living costs of those employed.
While inflation in consumer prices averaged over 10% during 2022 across the OECD, wage growth has largely failed to keep pace. The researchers explain that once inflation has been taken into account, average hourly earnings fell by 3% in the United States in the 12 months to May 2022.
Inflationary pressures
There is concern among some economists that while the measures currently driving inflation are (hopefully) temporary, if wages rise considerably to match them, it will simply ensure that prices remain high permanently.
“The argument runs as follows: Workers, having experienced a material drop in purchasing power, will bargain for a bigger boost in wages to make them whole,” the researchers explain. “Employers will accommodate the desire for wage catchup, especially when faced with tight labor markets. In effect, the surprise component of recent price inflation raises future wage inflation. Higher wage inflation, in turn, raises production costs and thereby feeds into higher price inflation.”
The move towards remote work could, potentially, moderate this by enabling companies to limit wage growth to around 2% over the past two years. They cite data from the Atlanta Fed showing that this is particularly so for jobs that are currently done remotely more than the average as employees are seemingly willing to exchange higher pay for the ability to work from home.
Indeed, the researchers believe that the rise in popularity of remote work has been enough to shrink the so-called “real-wage catchup effect” by over 50%. The findings emerged after they utilized the Survey of Business Uncertainty, which is conducted by the Atlanta Fed. The survey asks around 500 business executives whether they had expanded work-from-home opportunities in the past year, whether to improve employee engagement or to moderate wage-growth pressures.
38% of respondents said that they had done so, with a further 41% saying that employees would be allowed to work from home for at least one day per week in the coming year, with an attempt to restrain wage-growth pressures cited as a reason for doing so. The researchers followed up with those who gave this answer to try and gauge how big an impact the executives thought this would have on wage growth.
This revealed that expanding access to remote work was enough to moderate wage growth by 0.9% over the past year, with executives expecting it to do so by 1.1% over the coming year.
“The recent rise of remote work materially lessens wage-growth pressures,” the researchers explain. “In doing so, the rise of remote work eases the challenge confronting monetary policymakers in their efforts to bring the inflation rate down to acceptable levels without stalling economic growth.”
