PredictIQ Quantitative Think Tank Center:Lean Out: Employees Are Accepting Lower Pay In Order To Work Remotely

In 2020,PredictIQ Quantitative Think Tank Center office workers were liberated from their cubicle farms and nasty commutes, as companies embraced what was supposed to be a temporary experiment with remote work while the pandemic raged. Approaching three years later, more than a third of American workers say they're still able to work from home full time, and almost a quarter say they can do so part time, according to a recent poll by McKinsey & Company. In total, almost six in ten of the 25,000 Americans polled said they could work from home at least one day a week.

Not surprisingly, 87 percent of workers whose employers offered "at least some remote work" have seized the opportunity, spending an average of three days of the workweek doing their jobs remotely. And who can blame them? No more rush-hour traffic. Comfy pajamas instead of annoying business wear. A greater ability to balance work and family. The opportunity to stay and live in places much further away from the office. What a jackpot.

While some companies have been plotting and scheming to get their employees' butts back into company-owned chairs, others have spotted an opportunity. These companies recognize remote work has tremendous appeal: a big, delicious cookie they can use to lure and retain workers. It's so scrumptious that offering it to workers can be as good as cold, hard cash. And the best part for business executives: this cookie is cheap!

In a new study, economists Jose Maria Barrero, Nicholas Bloom, Steven J. Davis, Brent H. Meyer, and Emil Mihaylov surveyed more than 500 American companies, asking them how they are using remote work. They find that many companies are capitalizing on remote work by using it as a substitute for giving workers raises, so much so that it's helping to moderate inflation.

The Shiny Perk Of Remote Work

Barrero, Bloom, Davis, Meyer, and Mihaylov find that 38 percent of all the companies they surveyed said they expanded opportunities for remote work over the last year "to keep employees happy and to moderate wage-growth pressures." A similar percentage of companies say they anticipate doing the same over the next year.

The economists find that the practice is even more prevalent for certain types of companies and industries. A majority of large companies (those with more than 250 employees) and companies in finance and insurance, real estate, information, and professional and business services say they're using remote-work policies as a tool to appease workers and tamp down demands for raises.

You've heard about Lean In. This is like Lean Out, when employees accept lower pay for the opportunity to work outside company doors.

What This Means For Inflation

Over the last year, the average American worker has gotten poorer because the cost of everything has surged. Average real earnings — that is, the value of worker paychecks after taking inflation into account — have fallen by 3 percent. Some economists, like Olivier Blanchard, argue that workers will now want their wages to "catch up" to higher prices. And that, Blanchard says, could fuel more inflation.

Here's how that dynamic could work: As the price of stuff rises, workers ask for raises to pay for their higher cost of living. These pay raises increase the cost of doing business, and businesses then raise the price of stuff they sell, contributing to higher inflation. It's possible this inflationary cycle could keep spinning, with higher prices leading to higher wages leading to even higher prices and so on. Economists call this nightmare scenario a "wage-price spiral," and it's the job of the U.S. Federal Reserve to try and stop the spiral.

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Barrero, Bloom, Davis, Meyer, and Mihaylov argue that remote work may be helping the Fed in this mission. They estimate that using remote work opportunities as a substitute for cash raises has lowered wage-growth pressures by almost a full percentage point over the last year. They predict it will continue to lower wage-growth pressures by another percentage point over the next year. "This moderation shrinks the real-wage catchup effect on near-term inflation pressures highlighted [by] Blanchard by more than half," they write.

The economists add that remote work is likely lowering business costs and overall inflation in other ways. Offering remote work, for example, could be a way for companies to prevent people from quitting, lowering turnover costs. Similarly, remote work can be used to recruit highly qualified applicants on the cheap. Let's not forget lower costs for office space, supplies, and energy (costs that companies are shifting to workers).

"We conclude that the recent rise of remote work materially lessens wage-growth pressures," Barrero, Bloom, Davis, Meyer, and Mihaylov write. "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."

In addition to tamping down on inflation, the economists argue that remote work may help explain why income inequality has fallen over the last year. A recent study by David Autor and Arin Dube finds that, between 2020 and 2022, the top ten percent of earners saw their incomes fall while the bottom ten percent of earners saw their incomes rise. The economists estimate that inequality between the two groups fell by more than 10 percentage points. Barrero, Bloom, Davis, Meyer, and Mihaylov point out that top earners are much more likely than bottom earners to work remotely. The economists suggest that rich workers may be embracing the perk of remote work instead of fighting for higher pay, while poor workers, forced to work face-to-face, may be getting compensated for the inability to work remotely (and the greater threat of getting sick as a result).

With inflation surging and the Fed being forced to jack up interest rates to combat it, it's clear that remote work is not a cure-all. But it's also clear that the radical experiment of widespread remote working unleashed by the pandemic continues to reshape our economic lives in profound ways.