They’re Burying Their Heads In the Sand

Many economists are failing to see that remote work changes how workers interact with an economy. Because of this change, they’re msireading the signals about what’s actually happening in the economy and as a result, they’re taking the wrong actions.

In short, some of the economic signals used to measure an economy’s health have stopped making sense. And that’s because the world operates very differently now with 20 to 30% of the workforce shifting to remote work. 

The bottom line is that most measures of an economy should change because large portions of the workforce no longer do their job in person. But can you honestly say that anyone is doing a proper accounting of this new reality?

We’re not considering how remote work impacts our definition of “full employment”, how remote work fosters new competitive dynamics for human capital, and how it forces an evolution in the supply/demand dynamic of labor to drive wage growth. 

And worst of all, we’re not focused on how these fundamental changes to the labor market impact how we assess the total economic health of a national economy. Simply put, how we think about labor markets and their relationship to current inflation rates and a “recession” are impacted by our understanding of how remote work impacts the choices people and companies make.

In this article, I take a high level look at how remote work impacts the labor market and how its likely impacting our understanding of employment and wage growth. Then, I explore how misunderstanding these signals likely explain why so many people are on the fence about whether or not we’re in a recession.

Traditional Measurements of the Economy Miss the Consequences of a Macro-level Change in the Labor Market

What does it matter if 20%+ of the workforce shifts to remote-oriented jobs? 

Here’s the practical and recent example:

Many economists are saying that the US is not in a recession. They argue that despite 2 consecutive quarters of GDP contraction we’re not in a recession because there is strong job and wage growth. Historically speaking, that’s a fair point.

But looking closer, many economists seem to be confused by the national “employment” numbers. Why are we adding so many jobs despite all the other negative signals? 

They fail to consider the society-level shift caused by remote work and how remote work has helped achieve higher rates of employment than ever before.

The critical point here is that the shift to remote work likely has a near term positive impact on national employment rates. ie: more people are able to find jobs that match their skills because they are applying to a larger national job pool vs smaller, more local pools.

There is a massive difference between competing for a few jobs, from a few companies, that matches your skills in a smaller community vs competing for thousands of opportunities across a country.

The quieter detail that no one is talking about is how remote work also makes it possible for people to take on more than one job at the same time. It’s just easier to allocate time and work on other things when you’re not trapped in an office with a boss watching over your shoulder. Not everyone does this but it’s important to acknowledge that many are. And this little detail can definitely alter reported job growth numbers.

Remote work as an employment trend can also explain why many “location-dependent” and traditionally “blue collar” jobs remain unfilled. 

Think about it, in the past, if you couldn’t find a white-collar job you’d either move or if moving wasn’t an option, you’d end up working whatever job you could find. This provided a lot of able-bodied people to work in service industry-style jobs.

But now, these same people can stay in one place and they can apply for national jobs. This gives them a greater chance of finding “white-collar work”, worth more money than service sector jobs, and with a more flexible lifestyle. Ie: instead of being forced into blue-collar career paths, people are opting for remote, location-independent income paths.

So what does that tell us?

There is a major change in the job market as a result of remote work. And it’s fundamentally altering what full employment means. Anyone with a college degree who feels trapped in a blue-collar job is likely trying to pivot to a remote-oriented job.

The point is that now that more companies are hiring remote teams, we shouldn’t be surprised by changing employment numbers because of this significant change in behaviors. And we also  shouldn’t be surprised at certain sectors of the labor market remaining unfilled even after the Covid rebound.

What that really means is that we need to adjust the models used to measure the health of the economy.

When someone brags about how we’ve added so many jobs – it’s important to acknowledge that the reason is not necessarily because of a booming economy. It could be the result of the changes to the labor market and a more permanent change in what full employment looks like.

Think about it, traditionally, you’d sit and struggle to find the ideal job in your local community. Or you’d settle for something. But now, you have more opportunities to find employment at a national level. 

So shouldn’t that have an impact on waht full employment looks like? 


Economists Should Be Adjusting Their Assumptions From Work In-Person to Remote Work World

The question economists must now ask is:

At what point would we expect to see changes in employment rates from the adoption of remote work at a national scale?

ie: what is the incremental impact on labor force participation numbers as a greater X% of companies shift to remote work teams?

If 5, 10, or 20% of companies adopt remote work practices how would that impact the number of jobs added to an economy?

More broadly speaking, this shows how economists have failed to adapt their baseline assumptions for how the economy works in the post-covid, remote work world.

Let’s face it, a foundational assumption of the economy before Covid was that work was mostly done in person. But in the 2+ years since Covid, that important assumption is no longer valid. 

And as a result, this should lead to a change in all our fundamental models of how we measure the health of an economy.

Does it seem like has anyone adjusted their models for this new reality?

Remote Work Alters The Supply/Demand Equation of the Job Market And Forces Wage Growth

To understand why this should matter to economists, think about this trend from the company’s perspective. 

Many companies are incentivized to adopt remote hiring because it helps source more qualified leads. Ie: a national search is more likely to find more candidates with skill matches vs a local search. 

Remote work also creates an opportunity to arbitrage employee compensation costs by hiring candidates in lower cost of living locations. And remote work can reduce office capital expenditures. These are all positive reasons for change.

But remote work also means that companies are now competing for talent with other companies from all over the nation, not just within their local community. Ie: it means more competition for people with skills that are potentially scarce in their local communities.

Competition over a finite resource forces price increases. And in this case, price increases mean wage growth. The point is that there is a new supply/demand constraint in the labor market that didn’t exist before and that forces competition via wage increases.

This wage growth does not necessarily happen because there is too much money in the economy chasing too few workers. Although that’s definitely a contributing factor.

Wage growth right now is more likely a sign of new and  legitimate competition for human resources which force wage increases. (Over the longer term these jobs will open up to international competition which will see wages drop significantly – but that’s really a topic for another time). 

Wage Growth From Remote Work Combined With Other Macro Forces Is Confusing Economists

Let’s now think about this from the angle of whether or not we’re now in a recession. 

If a massive and new macro-level hiring trend is underway, could this explain why the labor market looks so strong while many growth industries rapidly contract?

Could the economy be reallocating resources (human capital and dollars) based on this new remote work trend while also entering a recession? 

What might seem like a signal of relative economic strength is actually just signaling a fundamental change in how labor markets allocate capital. The point being – we don’t yet know what a healthy employment rate would look like, nor how it would impact wage growth in an economy with steady state remote work.

With that in mind, now add inflation, large inventories, supply chain snarls, and credit expansion at the individual level to the mix. 

You have a tight job market that is driving wage growth which could be explained by remote work and simultaneously you have inflation with supply issues and contracting growth. ie: stagflation.

I guess what I’m trying to say is that it seems like right now, employment and wage growth is not the best signal for whether we’re entering a recession or not.

We really want to look for “recession” indicators in the “growth” sectors of the economy. The industries that directly drive forward GDP expansion. That’s going to be the tech industry for the most part. Which is directly influenced by the cost of capital and more specifically interest rates. ie: as the Fed increases interest rates, how capital is allocated changes. If interest rates rise, they cause investors to avoid riskier growth investments and the economy contracts.

Further – the tech industry has already gone through a lot of this transition to the remote work. They are by definition the frontier of what’s possible. And so they adopted the trend first. If anything, you can get a better signal on the health of the economy by following the employment trends of these industries because they’ve mostly transitioned to remote work already.

Where Should We Look For Signs Of A Recession?

So it’s important to follow that the growth industry is contracting as a result of rising interest rates. And right now, they are risk averse. 

We’re watching them as they undergo hiring freezes and layoffs. This, more than any other sign, is indicative that the engine of economic growth is slowing down, contracting, and indicating a recession.

The growth industry contraction is the canary in the coal mine while the rest of the economy adjusts to life with remote work. It’s your leading indicator that if the course remains the same then major contractions can be expected. You can’t grow your economy with the status quo. You need growth to carry the economy forward into new frontiers of prosperity.

So what’s the overarching point of all this?

If the Fed and the elected government are making decisions based on employment figures first, and other factors second, they are likely making choices based on bad data and a bad understanding of an economy in transition. 

We can no longer afford to ignore that “full employment” and normal wage growth likely look very different in a world with remote work than in a world without it. Unless and until they begin to focus on what this fundamental change to the economy means for 2nd and 3rd order consequences, they will continue to be “suprised” by outcomes.

Some relevant reading:

U.S. labor market defies recession fears as job growth surges in July | Reuters

Is remote work effective: We finally have the data | McKinsey

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