The labour market has undergone a massive upheaval since the pandemic, with the sudden shift to remote work, which has persisted even as the pandemic's effects wane. Or rather, some but not all sectors of the labour market have seen a sudden shift to remote work - I am yet to see a remote barista, for instance. Why has remote work persisted (in some sectors)? Clearly, this only happens if both workers and employers benefit. That is part of the premise of this new NBER Working Paper (ungated version here) by Jose Maria Barrero (Instituto Tecnologico Autonomo de Mexico) and co-authors.
Barrero et al. are focused on the effect of remote work on wage pressures. However, I think there is a more interesting story that sits alongside it, in relation to compensating wage differentials. Barrero et al. note that:
In equilibrium, workers and employers share the amenity-value gains arising from the shift to remote work. Since workers reap the direct benefits of the shift at any given wage, employer benefits take the form of wage-growth restraint during the transition to a new equilibrium with compensation packages that reflect the greater amenity value of higher remote work levels...The Nash bargaining benchmark, for example, says employers get half the surplus created by the rise of remote work.
This relates closely to search models of the labour market, where the surplus generated from a successful match between an employer and a worker is shared between both parties. The shares of the surplus that employer and worker receive depend on their relative bargaining power. In this case, remote work generates an additional surplus, which is shared between employer and worker. That additional surplus may arise from higher productivity of the worker at home, or from the worker spending more hours working (because they spend fewer hours commuting), or because the employer has to spend less on the work environment (because fewer employees are there on any given day, which this earlier post notes has also had an effect on the market for office real estate). How is this additional surplus shared? The additional value of production (or cost savings) are only partially passed onto the worker by the employer. The employer keeps a share for themselves.
This means that, although wages go up, they don't go up by as much as the additional value that is generated. This relates to the idea of a compensating differential, because workers are happy to accept a lower wage (or a lower increase in wages) when their job has positive non-monetary characteristics. To the extent that working from home is a positive non-monetary characteristic, workers would therefore accept a lower wage if their job includes more working from home.
And that is essentially what Barrero et al. find, using data from the Survey of Business Uncertainty (SBU) in April and May 2022. Specifically, they asked:
...each business executive in the SBU the following question: “Over the past 12 months, has your firm expanded the opportunities to work from home (or other remote locations) as a way to keep employees happy and to moderate wage-growth pressures?” According to the responses, 38 percent of firms did so in the previous 12 months... larger firms and firms in... Education, Healthcare & Social Assistance or in FIRE, Professional & Business Services, and Information are more likely to moderate wage-growth pressures by expanding remote work opportunities...
...we also ask: “Over the next 12 months, will your firm let employees work from home (or other remote locations) at least one day per week to restrain wage-growth pressures?” Forty-one percent of business executives respond “yes” to this question... the pattern of responses by firm size and across industry sectors to this forward-looking question is very similar to the response pattern for the backward-looking question.
Notice that the sectors that report high degrees of remote work are those that you mostly would expect (although healthcare may be a bit of a surprise, but there are a lot of administrative staff in that sector, and some primary healthcare can be delivered remotely). Barrero then ask about how much the firms can (or have) restrained wage growth, and find that:
On a size-weighted basis, we estimate that expanded remote-work opportunities moderated overall wage-growth pressures by 0.9 (0.1) percentage points over the 12-month period ending in April/May 2022. Looking forward, we estimate that expanded remote-work opportunities will moderate wage-growth pressures by another 1.1 (0.1) percentage points in the 12 months following April/May 2022. These estimates have good precision, as indicated by the standard errors reported in parentheses.
Notice that remove work has reduced the extent to which firms are increasing wages (at least, as reported by the firms themselves). And by sector:
Over the two years centered on April/May 2022, the unweighted mean wage-growth moderation effect is 1.3 percentage points among Goods Producers and 1.4 points among firms in Trade, Transportation & Warehousing, and Leisure & Hospitality. These sectors offer relatively few jobs that can be readily performed in remote mode. In contrast, the mean wage-growth moderation effect over two years is 2.7 points in Education, Healthcare, Social Services and Other Services and 3.0 percentage points in FIRE, Professional & Business Services and Information. Except for Healthcare, these sectors have a relatively high share of jobs that can be performed in remote mode...
This provides some evidence that it is remote work driving the lower wage increases, since the effects are greatest in sectors where remote work has become more common. Finally:
We also draw out two other interesting implications of our evidence. First, we estimate that the amenity-value shock associated with the recent rise of remote work lowers labor’s share of national income by 1.1 percentage points. Second, we provide evidence that the “unexpected compression” in the wage distribution since early 2020 is partly explained by the same amenity-value shock, which operates differentially across the earnings distribution.
In other words, the shift to remote work and the compensating differential will have some interesting effects on the measurement of inequality. The labour share of income, which many people equate with a measure of inequality between workers and owners of capital, will decrease. However, because most remote work jobs are relatively high-earning jobs, their smaller wage increases relative to lower-earning non-remote-work jobs will tend to decrease measured income inequality.
No doubt some governments will pat themselves on the back if inequality appears to decrease. However, it's not really much of an improvement if income inequality is reducing, but only because the non-monetary job characteristics of those at the top of the income distribution are improving. This highlights one of the limitations of income inequality as a measure of differences in personal wellbeing.
However, that isn't the story that Barrera et al. are trying to tell in their paper. They conclude that:
...the recent rise of remote work materially lessens wage-growth pressures. In doing so, the rise of remote work eases the challenge confronting monetary policy makers in their efforts to bring the inflation rate down to acceptable levels without stalling economic growth.
I guess that may be some good news. To the extent that remote work persists, and to the extent that central bankers are paying attention, we might expect that interest rates may not have to increase as much in order to bring inflation back under control.
[HT: Marginal Revolution]
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