Many different factors have contributed to skyrocketing inflation this year. Soaring gasoline prices, numerous stimulus measures over the past two years, and pent-up demand as a result of the pandemic are just some of the major issues to report. Inflation has driven bond yields higher and forced the Federal Reserve to aggressively raise interest rates, two factors that have rattled the market this year.
But now a lesser-known inflation culprit has surfaced: remote work. That’s right, everyone who now chooses to work from home could actually drive up prices, at least according to black rock CEO Larry Fink. Could Fink be right? We’ll take a look.
Productivity is down this year
If you work at a desk or spend most of your work on your computer, chances are you started working from home during the pandemic, a trend that has likely carried over to this day. today.
According to a study by leading consulting firm McKinsey earlier this year, 58% of Americans work from home at least one day a week, while 35% of respondents in the study said they have the option to work remotely all week. . Bosses might claim that work is always done quickly and efficiently, and most workers seem to appreciate the flexibility.
But this year’s economic data would paint a very different picture. Non-farm productivity declined year over year by 4.1% in the second quarter and 7.4% in the first quarter. These declines are among the largest on record.
Non-farm productivity examines the output of non-farm workers for the number of hours worked. So let’s say you have an accountant who does tax returns. In a year, this accountant could work 40 hours a week and file 20 tax returns a week on average. But if the following year, this accountant works 40 hours and completes only 18 tax returns on average per week, his productivity has declined. This is a very simplistic example, but should demonstrate the general idea.
How could lower productivity contribute to inflation?
Well, we know that 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 needs to pay its employees more and they produce less, that business may need to raise prices to cover the 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 being bumped from their job. current, because there are so many other jobs. This could lead to lower productivity if the worker feels they don’t need to work as hard to keep their job or earn more money elsewhere.
On the other hand, the Economic Policy Institute claims that between 1979 and 2019, while net productivity increased by almost 60%, workers’ compensation only increased by around 16%. Also, wage inflation this year still hasn’t kept pace with rising inflation, so maybe compensation is just catching up with productivity right now.
Due to conflicting economic data, it’s really hard to say right now if remote work is a driver of inflation. For example, gross domestic product fell in the first two quarters of 2022, indicating a technical recession. If consumption is down, this can certainly have a more negative impact on production.
Jason Furman, professor of economics at Harvard, also pointed out Market that companies have spent a lot of time trying to improve employee morale, especially as mental health has become an increasingly 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 the other, or what the situation would be like if more 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 restaurant and bar prices as people go out more. I think there are a lot of advantages to working in the office and remotely.
While remote work may lead to some higher inflation, it doesn’t seem to me to be the main culprit, at least with the data currently available.