Working at home helped whip inflation
The U.S. inflation rate tumbled from June 2022 to June 2023. It was no slide down the Phillips curve of the sort that textbooks attribute to tighter monetary policy.
Instead, inflation fell 6 percentage points as unemployment stayed low. It is thus a mistake to credit this episode to the Federal Reserve’s departure from low interest rates. The timing is also wrong for a story that credits the central bank.
From March 2022 to July 2023, the Fed raised its policy rate by 5 points. That’s a lot of tightening, but Milton Friedman taught us that monetary policy operates with “long and variable lags." For inflation, the lags usually range from nine months to two years. Three developments explain the disinflation.
The first is the lasting shift to remote work triggered by the pandemic. According to my research, full workdays at home were 28% of all paid workdays in June 2023, four times the estimated share for 2019. This shift has had surprisingly benign, even positive, effects on productivity.
Most people enjoy remote work because it’s convenient. The arrangement allows them to save time and money on commutes, and it affords more flexibility during the workday. On average, Americans value the option to work from home two or three days a week at 8% of pay.
Employees initially reaped the benefits of remote work, because their wages reflected pre-pandemic conditions and expectations. Over time, pay adjusted and employers adapted, eventually allowing them to benefit from slower wage growth. My research quantifies this source of wage-growth moderation.
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