The shift to remote working is tamping down wage growth by two per cent over two years, shrinking — by more than half — employees’ expectations of real-wage catchup amid rising inflation, according to a report by the Becker Friedman Institute at the University of Chicago.
It found while U.S. consumer prices rose 8.6 per cent between May 2021 and May 2022 — a jump of several percentage points relative to previous years — nominal wage growth failed to keep pace and, after adjusting for inflation, real average hourly earnings in the U.S. private sector fell three per cent over the same period. The report noted if employers had accommodated workers’ wage catchup requests, the resultant faster wage growth would raise production costs and feed into higher price inflation.
For policy-makers, a bigger wage catchup effect implies the need for tighter monetary policy to bring inflation down to a desired level, raising the likelihood of recession, said the report.
However, it found adjustments to compensation packages lagged amid the transition to higher levels of remote working in spring 2020. Since the shift to remote working wasn’t predicted, it was largely viewed by many business leaders and economists as a transitory development that would reverse course once effective vaccines against the coronavirus became widely available, meaning employers had little incentive to adjust compensation packages during that time.
Just 12.7 per cent of employers reported zero wage growth in the past year, pointing to the presence of nominal wage rigidity. Since April and May 2021, 38 per cent of employers have expanded opportunities to work from home or other remote locations to keep employees happy or to moderate wage-growth pressures. A similar number expect to do so in the coming year. This signals the U.S. economy is realizing a wage-growth restraint mechanism associated with the rise of remote work, said the report.
Two-fifths (41 per cent) of employers indicated they intend to allow employees to work from home or other remote locations at least one day a week to restrain wage-growth pressures over the next 12 months. And when asked just how much wage-growth moderation these employers expected to achieve by expanding remote work options, all respondents — including those that aren’t using remote work as a strategy to restrain wage growth — cited a cumulative wage-growth moderation of two per cent over two years centred on April and May 2022.