Tuesday, 13 February 2024

Willingness-to-pay for working from home

Jobs come with both monetary and non-monetary characteristics. The monetary characteristics include the salary or wage (obviously) and other monetary benefits. The non-monetary characteristics include how pleasant or unpleasant the job is, how clean or dirty, and how safe or risky. An important non-monetary characteristic of jobs that has become particularly important since the pandemic is the flexibility to work from home. However, it isn't clear whether working from home is a positive or negative characteristic. Many people prefer to work from home, but many others don't. Incidentally, I'm in the latter group, because we only have a small house, and working from home entails working at the dining room table.

Now, non-monetary characteristics of jobs can give rise to wage differences between jobs - what economists refer to as compensating differentials. Jobs with desirable non-monetary characteristics tend to have lower wages than jobs with undesirable monetary characteristics (for an extreme example, see here). One way of explaining this is that many fewer workers want to work in jobs that have undesirable characteristics, and that lower supply of labour leads to higher wages. In other words, workers are essentially compensated for taking on jobs with undesirable non-monetary characteristics.

What does a compensating differential look like for working from home? I wrote about this last year, but the research I referred to there didn't look specifically at compensating differentials. In contrast, this new article by Akshay Vij (University of South Australia) and co-authors, published in the Journal of Economic Behavior and Organization (open access, with non-technical summary on The Conversation), does. They use data from a survey of 1113 employees conducted in Australia in 2020-21, where:

Respondents with an on-site job that had some ability to be done remotely were presented with multiple stated preference experiments where they were offered a choice between job arrangements with different salaries, and differing degrees of flexibility with regards to when and where job tasks needed to be performed... Each respondent was shown 8 scenarios, and the job attributes were varied systematically across scenarios...

This is what economists refer to as a discrete choice experiment, since research participants are asked to make a discrete choice among alternatives, which have different characteristics. Since each research participant makes many such choices, that data can be used to extract the marginal willingness-to-pay for each of the characteristics. In this case, the characteristics included the 'flexibility to work remotely on some days', and the 'flexibility to work remotely at some hours'. So, this research essentially worked out how much workers were willing to pay (that is, how much salary or wage they were willing to give up) in order to have the ability to work remotely.

Vij et al. then used a latent class model to identify four different groups of research participants based on their different responses, as shown in Table 2 from the paper:

Each class represents a roughly equal share of the sample of research participants. However, only two of the groups (Class III and Class IV) value the ability to work remotely some of the time. Vij et al. summarise the results as:

Across our sample, the average worker is willing to forego roughly AUD$3000 - AUD$6000 in annual wages to have the ability to work remotely some workdays and/or workhours. Given that the average respondent in our sample earns roughly $73,000 in annual wages, this implies a compensating wage differential of 4 – 8 per cent. However, median values are lower at AUD$1000 - AUD$1800, or roughly 2 per cent of average annual wage, due to considerable heterogeneity across the four classes. Classes 1 and 2 together comprise 54.3 per cent of the sample population, and do not have a statistically significant preference for either the ability to work remotely some workdays and/or workhours, and therefore have a corresponding wage differential of $0. Class 3 is willing to forego roughly 3 - 5 per cent of average annual wages (AUD$2000 - AUD$4000) to have the ability to work remotely some workdays and/or workhours, and Class 4 is willing to forego 16 – 33 per cent (AUD$12,000 - AUD$24,000) for the same.

Interestingly, the different classes differ on their beliefs about remote work, and Vij et al. note that:

...we observe that Class 1 is less optimistic than the other classes about the quality and quantity of work that can be done remotely, explaining their lower marginal willingness to pay for the ability to work remotely, and Class 4 is most optimistic, explaining their higher marginal willingness to pay...

Next, we compare responses to attitudinal indicators measuring impacts on human relations. Here, Class 2 has significantly greater concerns than the other classes, explaining their lower marginal willingness to pay for the ability to work remotely. In particular, workers belonging to Class 2 are more concerned on average about the negative impacts on their relationships with their colleagues, supervisors and the firm as a whole, as well as opportunities for learning and career advancement.

When you think about the types of jobs that each class predominantly engages in (from Table 2 above), this makes a lot of sense. Class 1 is mostly clerical and administrative workers, but Class 2 is mostly managerial workers, and the latter probably rely more on interpersonal relationships in their work that would be negatively impacts by remote work. In contrast, Class 3 and 4 workers are mostly professional workers, likely to be more self-directed and in some cases fairly autonomous.

However, in light of recent increases in remote work, this was interesting:

Interestingly, in terms of experience with remote working, individuals belonging to Class 2 were more likely to have had greater experience with remote working arrangements prior to the pandemic than other classes...

And yet, those workers had a zero compensating differential for remote work. That is, they didn't value working from home. The survey was conducted in 2020/21, when many of us were experiencing large-scale remote work for the first time. As other workers gain more experience with remote work, I wonder whether the Class 3 and Class 4 workers will be as positively inclined towards remote work in the future. This is something that deserves further investigation.

Finally, in terms of demographics, there was little difference between the classes, although:

...we find that women are most likely to belong to Class 4, and have a significantly higher valuation for remote working. This is consistent with previous studies that have found that women value job flexibility more than men, due to greater caregiving and other responsibilities...

This has interesting implications for the gender wage gap. Since women are more likely to choose flexible work arrangements, and are willing to pay (through lower wages) for the flexibility that remote work provides, should a zero gender wage gap be the appropriate goal, or a zero gap accounting for differences in flexible work arrangements? Again, this is something that deserves further consideration.

Remote work isn't going away any time soon. Some of us might think that the flexibility is a good thing for all workers, but it is clear that not all workers themselves feel that way.

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