Does remote work contribute to higher inflation? | Smart Change: Personal Finance

(Bram Berkowitz)

Many different factors have contributed to skyrocketing inflation this year. Rising gas prices, many stimuli over the past two years and repressed demand due to the pandemic are just some of the big signs to report. Inflation led to higher bond yields and forced the Federal Reserve to aggressively raise interest rates, both of which rocked the market this year.

But now a lesser known culprit behind inflation has emerged: remote working. That’s right, all the people who now choose to work from the confines of their homes could actually raise their prices, at least according to Black rock Larry Fink CEO. Could Fink be right? Let’s take a look.

Productivity is down this year

If you work at your desk or spend most of your computer work, then there is a good chance you started working at home during the pandemic, a trend that has likely extended to the present day.

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According to a study by the large consulting firm McKinsey earlier this year, 58% of Americans work from home at least one day a week, while 35% of respondents said they have the ability to work remotely throughout their entire life. week. Bosses might argue that the work is still done in a timely and efficient manner and most workers seem to enjoy the flexibility.

Image source: Getty Images.

But this year’s economic data would paint a very different picture. Non-agricultural productivity decreased year-over-year by 4.1% in the second quarter and by 7.4% in the first quarter. These declines are among the largest ever recorded.

Non-agricultural productivity considers the output of non-agricultural workers by the number of hours worked. So, let’s assume you have an accountant who makes tax returns. In a year, that accountant could work 40 hours a week and complete an average of 20 tax returns a week. But if the following year, that accountant works 40 hours and only completes 18 tax returns on average per week, their productivity has dropped. This is a very simplistic example, but it should demonstrate the general idea.

How could lower productivity contribute to inflation?

Well, we know that this year there has been wage inflation due to the rigid labor market and high levels of inflation, which has caused the cost of living to rise. If a company has to pay its employees more and those employees produce less, then that company may have to raise prices to cover the rising cost of labor.

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

On the other hand, the Economic Policy Institute states that between 1979 and 2019, while net productivity increased by nearly 60%, workers’ wages only grew by about 16%. Also, wage inflation this year has not yet kept pace with rising inflation, so perhaps the offset is simply hitting productivity right now.

The verdict

Due to the conflicting economic data, it’s really hard to say right now if remote working is a driver of inflation. For example, gross domestic product declined in both the first two quarters of 2022, indicating a technical recession. If consumption is falling, this can certainly have a more negative impact on production.

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

Ultimately, I think it’s too early to make a statement one way or another, or to know what the situation would be like if multiple people worked in the office. More people returning to the office could create more demand at the pump due to increased travel, and more people in the office could lead to higher prices in restaurants and bars with people hanging out the most. I think there are a lot of merits for both office work and remote work.

While remote working may lead to increased inflation, it doesn’t seem like the main culprit to me, at least with the data available right now.

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