Amid talk of a potential surge in wage growth, Atlanta Fed economists have attempted to quantify the monetary value of remote work and assess its effect on the labor market in this stage of the COVID-19 pandemic.
The new research shows wage growth has been moderated by 2 percent over two years by the amenity value of remote work, according to a July 2022 working paper, "The Shift to Remote Work Lessens Wage-Growth Pressures." Remote workers are willing to accept reduced wage gains in exchange for what they view as quality-of-life improvements, such as less stress from fewer commutes and more control over their use of time, the paper says, citing prior research.
This reduced wage-growth pressure is relevant to Fed policymakers, who are
looking for hints of a possible wage-price spiral as they determine the
optimal federal funds rate. Offering an optimistic view before adding an
important caveat, the authors note that
"[T]he rise of remote work eases the challenge confronting monetary
policymakers in their efforts to bring the inflation rate down to acceptable
levels without stalling economic growth. That said, we do not see our
evidence and analysis as grounds for complacency about near-term inflation
pressures or the challenges confronting monetary policy."
The policy-setting Federal Open Market Committee (FOMC) received in July reports of a 5.1 percent increase in average hourly earnings for the year ending in June, and of nominal wage growth continuing to be "rapid and broad-based," according to minutes of the July 26–27 meeting.
The paper was produced by a team of five that included José Maria Barrero of the Instituto Tecnológico Autónomo de México Business School; Nicholas Bloom of Stanford University; Steven J. Davis of the University of Chicago Booth School of Business and the Hoover Institution; Brent Meyer, an assistant vice president and economist in the research department of the Federal Reserve Bank of Atlanta; and Emil Mihaylov, a senior economic research analyst with the Atlanta Fed.
Adding voices to an ongoing discussion
The paper adds to a conversation under way among economists whose analyses consider the state of the labor market and its potential effect on wages and inflation. The portrayal in the first paper is cautiously optimistic, guarded in the second paper, and shown in the third paper as adapting to the shock of remote work. A fourth paper, released in June, challenges the underpinnings of a benchmark that factors into setting wages for more than 82 million US residents, the consumer price index (CPI).
The Case for a Cautiously Optimistic Outlook for US Inflation
The first of the four papers, "The Case for a Cautiously Optimistic Outlook for US Inflation,” was released in March. The coauthors are David Reifschneider, a former special adviser to then-Fed chair Janet Yellen, and David Wilcox, a senior fellow with the Peterson Institute for International Economics (PIIE), which released the paper.
The paper predicts wage gains will continue in 2022 "as workers push to make up for last year's fall in real wages in the context of a tight labor market." The authors cite two reasons labor costs likely will not rise high enough, and long enough, to impede Fed chair Jerome Powell's aim for a "softish landing” from inflation's current level. First, few signs point to the public being suddenly inclined to think inflation is intransigent, a situation that can become a self-fulfilling problem. Second, "and more important, any wage-price spiral would take time to develop, providing sufficient time for the FOMC to act to stop it."
Why I Worry about Inflation, Interest Rates, and Unemployment
The second paper, "Why I Worry about Inflation, Interest Rates, and Unemployment," was released on the heels of the first. Author Olivier Blanchard formerly served the International Monetary Fund as economic counselor and research director. Now, he's a senior fellow with PIIE and an emeritus professor at his alma mater, the Massachusetts Institute of Technology.
At the outset of his piece, Blanchard says he was prompted by the PIIE policy brief by Reifschneider and Wilcox. Blanchard offers a counterargument, contending workers will base wage demands on the currently high rates of short-run inflation, not on the comparatively low, long-term rates Reifschneider and Wilcox suggest.
Blanchard agrees with the characterization of inflation in the past, as presented by Reifschneider and Wilcox, but questions their premise that the past is a reliable guide for the future at this moment in time: "The issue, however, is how much the past few decades, characterized by stable inflation and nothing like COVID-19 or war shocks, are a reliable guide to the future. There are good reasons to doubt it." To eliminate any doubt over his position, Blanchard ended his paper with this observation: "To conclude, Reifschneider and Wilcox have done a great service in stating their assumptions about specification and forecasts. If the world had not changed, I would accept their conclusion."
Blanchard interrupted his review of Reifschneider's and Wilcox's analysis to bring Princeton University economist Alan Blinder into the conversation. Blanchard contended that Blinder's stated position on the Fed's ability to achieve a soft landing is substantially the same as that of Reifschneider and Wilcox, and Blanchard dismissed the entirety of the argument: "I am not convinced."
For his part, Blinder, a former vice chair of the Fed's Board of Governors, said in a February 11 presentation that he thinks a high inflation rate is transitory. Even if it's not transitory, and wages and inflation expectations appear to be on pace to become permanent, the Fed can engineer a "pretty soft" landing. Blinder reviewed 11 episodes dating to 1965 and concluded seven ended "pretty soft," one was "perfect," and three were hard with no attempt to make them soft. "So soft landings can't be all that hard to achieve," his last slide observed. Looking to the future, Blinder observed, "If inflation gets ingrained at 6, 7 percent, the Fed is going to have to clamp down and it'll try to make it a soft landing. We'll see how well they do. The history suggests it's not that super hard to do."
The Shift to Remote Work Lessens Wage-Growth Pressures
The third paper, "The Shift to Remote Work Lessens Wage-Growth Pressures," contends Blanchard may have underrepresented the potential impact of a world-changing event—the amenity value of remote work. The paper recognizes Blanchard's argument that employers will accommodate a catch-up in wages in response to tight labor conditions during recent price inflation, and that higher wages fuel higher price inflation that may prompt tighter monetary policy that could lead to recession.
But Blanchard's piece is just part of the story, the authors contend. "We are sympathetic to Blanchard's wage-catchup argument, but we think its application to current circumstances requires attention to the recent rise of remote work," the paper observes. The wage-growth moderation of 2 percentage points over a two-year period, centered on April/May 2022, " the real-wage catchup effect on near-term inflation pressured highlighted by Blanchard by more than half,” the paper says.
Previous research by Barrero, Bloom, and Davis determined the amenity value of remote work varies according to wages: between 1.7 percent of earnings for workers paid from $20,000 to $50,000 a year, and 6.8 percent for those paid $150,000 or more a year. This value is shared in equilibrium by employers and workers, according to work completed in 2021.
Comparing Past and Present Inflation
Still, the authors remind that the view expressed in "The Shift to Remote Work" is just one piece in the puzzle faced by central bankers: "Our evidence says only that the challenge is somewhat less daunting than suggested by Blanchard's analysis. Other evidence, however, says the challenge is more daunting. See Bolhuis, Cramer and Summers (2022)," referring to the paper, "Comparing Past and Present Inflation," released in June by the National Bureau of Economic Research. It was produced by Marijn Bolhuis, of the IMF, Judd Cramer, an independent researcher, and Lawrence Summers, a former Treasury secretary and president emeritus of Harvard University.
The paper expounds on a thread of Blanchard's argument, that the past is not a reliable guide to the future. The paper examines the CPI over the past five decades and determines it is not a reliable measurement of inflation over time. The CPI is of consequence in the wage growth discussion because the CPI is pervasive in the setting of wages for more than 82 million individuals whose wages or payments are tied to the index. This group includes workers covered by collective bargaining agreements, Social Security beneficiaries, military and Federal Civil Service retirees and survivors, and food stamp recipients. In addition, an unknowable number of contracts at multiple levels of government contain provisions tied to the CPI.
Yet the CPI of today gives a false comparison to the past, the paper contends. This is because the inputs in the CPI have been changed over time. The prime example the paper cites is the exchange in 1983 of homeownership costs for a new definition called "owner's equivalent rent," which sought to remove the investment aspect of housing and "isolate owner-occupiers' consumption of residential services.” Later changes to the CPI model are noted in a report by the Bureau of Labor Statistics. When the housing aspect of the model is adjusted, the paper observes, the core inflation rate at its peak in June 1980 is comparable to the core rate today.
All this prompts the authors to offer this thought on the federal funds rate: "To return to 2 percent CPI today, we thus need disinflation of a similar magnitude as Chairman Volcker achieved." The federal funds rate reached a record high of 20 percent in 1980, just over a year after Paul Volcker became chairman of the Board of the Federal Reserve System.
David Pendered
Staff writer for Economy Matters