Remote Work and the Geography of Wages

Across the world, many workers are dissatisfied with their real wages and the cost of living, both of which are hot topics in economics.  Many workers complain that, even though their pay seems high, they have to spend every paycheck just to make ends meet.  One reason that high pay does not necessarily mean an improving quality of life is a rising cost of living, which is due to inflation.  And even though the rate of inflation may not seem especially high, many areas of spending are not factored into the official inflation rate…and tend to increase in price faster than inflation.

Geography of Wages

Traditionally, workers’ wages have been heavily influenced by location.  Crowded urban areas tend to feature higher pay, while rural areas tend to feature lower pay.  Many consider the quality of life to roughly average out: urban workers earn more, but have to pay more to live.  If people want to live in highly desirable areas, such as picturesque suburbs or vacation-destination towns, the cost of living will be very high due to high demand and relatively low supply.  This free market geography of wages makes it difficult for most workers to ever “get ahead” in terms of their quality of life.

Supply and Demand for Housing and Services Keeps “Real Wages” Stable

The laws of supply and demand work to keep quality of life similar for similarly-situated workers across market economies.  If workers migrate to new areas to earn higher wages, the increased demand for housing and services will quickly raise those prices, driving down workers’ purchasing power.  Only the first wave of workers reap meaningful benefits; those who arrive later will discover that their higher wages only purchase what they could previously purchase in their old location.  The increase in wages creates a wage-price spiral that inevitably erodes the purchasing power of raises.

Geography Lock of Low Wages

However, urban workers fare better despite this relative equality.  Workers making more money, even though their quality of life is similar, have the ability to more easily move from expensive places to inexpensive places.  For example, an urban worker can take his or her high nominal pay and move to a low-cost rural area, but a rural worker cannot take his or her low nominal pay and move to a high-cost urban area.  This prevents more workers than expected from quickly moving to expensive urban areas.  

Using Remote Work to Engage in Geographic Arbitrage (2020-2022)

Arbitrage is the ability to violate the law of “averaging out” and spend the higher nominal pay from an expensive location in an inexpensive location, increasing one’s purchasing power.  Essentially, it means that the same good or service can be purchased in one location for a lower price than in another.  The individual in the higher-price area has an advantage - he or she can use higher nominal income to buy goods for cheap in the lower-price area.  This helps explain much of the rapid exodus of white-collar remote workers from cities during the Covid pandemic.

During the pandemic, when millions of office workers went remote, many realized that they could take their urban or suburban pay and buy larger houses in rural areas.  Thousands of white collar employees in crowded cities like New York and San Francisco finally had their chance at owning a desirable house.  Thanks to new digital tools like Slack, Zoom, Google Meet, and Microsoft Teams, these workers could keep their urban jobs with urban pay while upgrading to real property ownership in a small town.

Erosion of Arbitrage (2023-present)

Unfortunately for remote workers who fled the cities for larger houses in rural areas and small suburbs, corporate offices soon came calling with return to office mandates.  Although workers wanted to shift away from urban living, companies did not.  Many needed to remain close to suppliers and manufacturing centers in cities.  Others did not want to lose money they were paying out on long-term fixed rental agreements for office space.  And, if they were paying for office space, they wanted workers to fill it.

Many companies argued that remote workers were proving not as productive as their in-office counterparts, giving a productivity rationale for ending remote work options.  This has sparked a heated debate over how white collar productivity is measured, with proponents of remote work arguing that their lack of commuting stress and better work-life balance makes them more energetic and productive.  Critics, however, argue that remote workers are less innovative and adaptive than those in the office, with their remoteness making them struggle with interpersonal connections and collaboration.

Keeping Remote Work as a Cost-Saving Option

Despite many companies viewing remote work as less productive than in-office work, some are keeping remote work options for certain workers to take advantage of lower costs.  Now that the start of the pandemic and rush into remote work is almost six years past, companies have adjusted payment plans for remote workers.  Remote workers are no longer automatically paid as much as those who come into the office Monday-through-Friday.  A substantial percentage of workers are accepting of this, and say they would take a pay cut (up to 25 percent) to keep working remotely.

Long-Term Effects of Remote Work Landscape on the Geography of Wages

The continuation of remote work, but for lower wages, keeps the traditional geography of wages stable: remote workers in suburbs and rural areas once again earn less than their city-living counterparts.  Recent years have seen many rural remote workers move back closer to cities, settling in the suburbs to enjoy closer proximity to urban amenities like cultural events, universities, concerts, sports venues, and entertainment.  This has created a “donut effect” around many large cities that saw an exodus of white collar workers between 2020 and 2022, with workers returning to grow the suburban rings around the city center.

As suburbs become more expensive due to remote workers wanting to be close to cities, it remains to be seen whether cost-conscious remote workers choose to move back into city centers (cheaper apartments) or into rural areas (cheaper houses).  The “donut effect” may weaken as workers take advantage of another round of arbitrage and seek cheaper housing.