Remote employment may be the Federal Reserve’s unlikely ally as it aggressively hikes borrowing costs to rein in inflation that has remained stubbornly high.
Following a 0.75 percentage point hike at its policy meeting in June, the Fed lifted its benchmark interest rate last week. Officials are making this move in an effort to slow the economy and control the quickly rising cost of goods.
In the meantime, a recent working paper co-authored by a group of five economists and released by the National Bureau of Economic Research suggests that the work-from-home trend that emerged during the Covid epidemic may be aiding in containing inflation.
As many workers have benefited from commute-free workdays, less stress, and better work-life balance, their employers have also benefited from remote work by paying less than they otherwise might, the researchers said. This prevents higher wages from feeding into a so-called wage-price inflationary spiral.
In order to lessen what they called “wage-growth constraints,” researchers discovered that 38 percent of businesses expanded options to work from home or another remote location in the 12 months leading up to May; 41 percent plan to do so in the next year.
According to Steven J. Davis, an economics professor at the University of Chicago Booth School of Business and a co-author of the study, that reduction can actually take place in a few different ways, including employees accepting a smaller rise from their present company in exchange for working from home a few days a week or accepting a new job at a lower pay but with a better possibility to work remotely.
Nicholas Bloom of Stanford University, Brent H. Meyer, and Emil Mihaylov of the Federal Reserve Bank of Atlanta are the other co-authors of the latest academic study, together with Jose Maria Barrero of the Instituto Tecnologico Autonomo de Mexico.
According to the study, firms who offer more remote work options saw a cumulative drop in wage growth of 2 percentage points over the course of those two years, which Davis calls “a nontrivial number.”
He cited the example of receiving a 5 percent rise as opposed to a 7 percent raise as an illustration. Employees can view remote labour as a type of non-financial compensation, so it’s not necessarily a loss for them, said Davis.
“The opportunity to work from home adds to the amenity value of a job,” he recently told. “Just like working in a nicer office would make a job more desirable.”
According to Julia Pollak, chief economist of ZipRecruiter, that amenity value can come from being able to bake something or do a load of laundry during the workday—basically, being productive in areas of an employee’s life other from their job. Additionally, employees spend less time travelling to work, and this time savings has a value, she continued.
“That quality-of-life improvement also means they needed to be compensated less,” Pollak told CNBC.
Additionally, remote employment might result in cost reductions as well. For instance, employees that drive can cut back on their gas costs. Pollak noted that employees who can move to a less expensive location or closer to their families in order to reduce the expense of child care might not feel as pressured to request a raise.
“Workers seem to know what they want,” Pollak said. “They are extremely, extremely bullish on remote work.”
According to Pollak, who cited statistics from a monthly ZipRecruiter study, about 63 percent of job applicants said they would prefer remote employment. This percentage has been relatively steady throughout 2022.
Remote employment slightly eases Fed’s workload
Regarding one component of inflation, the worry of a so-called wage-price spiral, this pay limiting mechanism is crucial.
According to this economic theory, employees would ask their employers for a pay raise to ease the financial burden of quickly rising household costs since they have the bargaining leverage to do so in the current hot job market. In order to offset the increased labour expenses, businesses subsequently boost the pricing of their products and services. This process fuels inflation, which then fuels wage increases, and so on.
Of course, there are other factors contributing to inflation, which is already at its highest level since November 1981, besides unusually big salary increases. Oil prices have increased due to the conflict in Ukraine, and supply chains haven’t entirely recovered from pandemic-related problems, for example.
However, the research claims that the expansion of remote work, which has “materially” lessened constraints on pay growth, also helps to lessen some inflationary pressures. In fact, according to academics, the dynamic reduces the influence of the so-called salary catch-up effect on inflation by 54%. (The dynamic of workers asking for a raise to keep up with inflation is essentially the wage catch-up effect.)
According to academics, this slightly eases the challenge of controlling inflation without starting a recession, a task the Federal Reserve has started in recent months. In an effort to slow the economy and control prices, the central bank is hiking interest rates, which increases the cost of borrowing for both consumers and companies.
According to Davis, employers might be using remote work to limit pay growth among both existing employees and potential hires. In order to pay a lower salary based on location, a San Francisco-based company might try hiring a full-time remote worker in Boise, Idaho, Davis said.
It goes without saying that not everyone can work from home either part-time or full-time. According to the Pew Research Center, just 53% of those with some college education or less can telework, compared to 65% of people with a bachelor’s degree. According to Pew, there is also an income gap, with 67 percent of high-income workers being able to work from home compared to 53 percent of low-income workers.
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