An underrated inflation buster: People accept lower wages if they can work from home

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Is remote work keeping inflation down? And if that’s the case, should we make sure it survives a downturn in the labour market? Those seem to be the questions posed by a U.S. study this year on working from home, and they seem particularly relevant when the Bank of Canada is talking about driving the unemployment rate up as a way to rein in price pressures.

The study comes from the National Bureau of Economic Research (NBER). Trying to get an idea of the correlation between wages and remote work, the researchers asked businesses whether they were using more opportunities to work from home as a way to keep workers happy and moderate wage-growth pressures. Thirty-eight per cent of respondents said yes, they were indeed dangling work-at-home options as alternatives to offering more money.

Looking for a more precise way to quantify the impact, the researchers used the data to calculate that expanding remote-work opportunities moderated wage-growth pressures by 0.9 per cent, or one-10th of a percentage point, over the year ended May, 2022, and that similar opportunities would do so by another one-10th of a percentage point over the coming year.

The percentages may seem tiny, but these days central bankers are clinging to tiny indications that their policies are working. The Bank of Canada, for example, has raised interest rates six times so far this year, taking its key rate from 0.25 per cent to 3.75 per cent, and in testimony at the House of Commons this week, Bank of Canada Governor Tiff Macklem indicated that more hikes were needed.

Earlier this month Mr. Macklem made it clear that he was eyeing the labour market as part of the inflation issue, saying the current level of joblessness (Canada’s unemployment rate was 5.2 per cent in October, and wages were running 5.6 per cent higher than a year earlier) was “not sustainable.” If more remote work means less pressure on wages, that would presumably be a desirable thing.

As well as the data from the NBER study, the past two years have provided ample evidence that many workers love skipping their commute and would make monetary trade-offs to continue working from home. One survey of 3,000 workers in so-called “top tier” companies, conducted in the summer of 2021, put some startling numbers to it.

The survey by Blind (an app that provides a platform for anonymous career-related posts) found that more than 60 per cent of workers at companies such as Apple, Amazon, Facebook and J.P. Morgan said they would prefer to permanently work from home rather than get a US$30,000-a-year raise.

Of course, there is the question of whether companies should take advantage of employees’ wishes to work from home so as to avoid raising their wages. Over the longer term, employers who go that route may eventually see talent lost to other companies; in the short term, however, there clearly seems to be a link between letting people work where they want and keeping inflation down.

So should central banks encourage companies to let employees make their own work arrangements? That seems to be a leap, and perhaps a debate they do not want to wade into at this point. What is clear, though, is that forcing people back to work will result in a flood of unhappy employees, some of whom are going to demand more money as compensation for getting back onto traffic-clogged highways or crowded subways.

Perhaps everyone is gambling that a well-timed recession will stop them from actually getting the raises they want. Still, in a world where talent is likely to differentiate successful companies from middling ones, that may be a shortsighted strategy. It might be better to move forward and explore alternative work arrangements instead.