Is Remote Work Contributing to Higher Inflation?

A lot of different factors have contributed to sky-high inflation this year. Surging gas prices, lots of stimulus over the last two years, and pent-up demand as a result of the pandemic are just a few of the big ones to call out. Inflation has led to rising bond yields and forced the Federal Reserve to aggressively raise interest rates, both of which have rocked the market this year.

But now, a lesser-known culprit behind inflation has emerged: remote work. That’s right, all of the people now choosing to work from the confines of their homes could actually be driving prices higher, at least according to BlackRock CEO Larry Fink. Could Fink be right? Let’s take a look.

Productivity is on the decline this year

If you work at a desk or spend the bulk of your job on your computer, then there is a good chance that you started working at home during the pandemic, a trend that has likely spilled over to the present.

According to a study from the large consulting firm McKinsey earlier this year, 58% of Americans are working from home at least one day per week, while 35% of the study’s respondents said they have the option to work remotely every week. Bosses might contend that the work is still getting done in a timely and efficient manner, and most workers seem to enjoy the flexibility.

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But economic data this year would paint a very different picture. Non-farm productivity fell year over year by 4.1% in the second quarter and by 7.4% in the first quarter. These declines are some of the largest ever recorded.

Non-farm productivity looks at the output of non-farm workers for the number of hours worked. So, let’s say you have an accountant doing tax returns. In one year, that accountant might work 40 hours per week and complete 20 tax returns per week on average. But if the following year, that accountant works 40 hours and only completes 18 tax returns on average per week, their productivity has declined. That’s a very simplistic example but should demonstrate the general idea.

How might less productivity contribute to inflation?

Well, we know there has been wage inflation this year due to the tight labor market and high levels of inflation, which has increased the cost of living. If a business has to pay its employees more and those employees produce less, then that business may need to hike prices to cover increased labor costs.

On the one hand, the combination of higher wages and a tight labor market may have given workers a sense of security. After all, if hiring is difficult and wages are higher, not only will an employee feel like they have more job security but they may be less worried about getting displaced from their current job because there are so many other jobs out there. This could lead to less productivity if the worker feels like they don’t need to work as hard to maintain their job or make more money elsewhere.

On the other hand, the Economic Policy Institute says that between 1979 and 2019, while net productivity increased by close to 60%, worker compensation only grew by about 16%. Additionally, wage inflation this year has still not kept pace with the rise in inflation, so perhaps compensation is simply catching up to productivity right now.

The verdict

Due to the conflicting economic data, it’s really hard to tell right now if remote work is a driver of inflation. For instance, gross domestic product has fallen in both of the first two quarters of 2022, indicating a technical recession. If consumption is down, that can certainly impact output more negatively.

Jason Furman, a Harvard economics professor, also pointed out to Marketplace that companies have spent a lot of time trying to improve the morale of their employees, especially as mental health has become more of a prominent issue since the pandemic started. This may have inadvertently lowered productivity.

Ultimately, I think it’s too early to make a declaration one way or the other, or know what the situation would be like if more people were working in the office. More people returning to the office could create more demand at the pump because of increased travel, and more people at the office could lead to higher restaurant and bar prices with people going out more. I think there are plenty of merits for both working in the office and working remotely.

While remote work may be leading to some amount of higher inflation, it does not strike me as the main culprit, at least with the data available right now.

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