Steven J. Davis is a Senior Fellow at Hoover Institution and at the Stanford Institute for Economic Policy Research. He also hosts the Economics, Applied podcast. He spoke to SSRN about applied economics, sticky wages, and his research on the changing world of work.

Q: To kick off, could you explain a little bit about Applied Economics? We asked ChatGPT, and it said it involves a focus on empirical analysis, policy relevance, problem solving, impact evaluation, and an emphasis on real world applications. Does the AI have that about right?

SD: That description is pretty close, and there’s a reason I named my podcast Economics, Applied. I find applied economics and related fields to be extremely interesting intellectually. I also feel some compulsion to devote my time and energies to topics and questions that are relevant to the real world. Partly because academics have privileged positions, I try to focus on applied issues rather than economic analysis merely for the sake of my own entertainment. Also, the power and ability to develop new and insightful theoretical abstractions, which is how I think about good economic theory, is a rare skill. I don’t see myself in the very small set of people who have that skill, which is another reason I tend to focus on applied research.

Q: I really enjoyed your recent podcast episode about labour markets, and the question you explored was fascinating – when labour markets were so tight after the Covid-19 period, why didn’t wages go up?

SD: In fact, in real terms, they actually fell… My podcast guest  Ayşegül Şahin, in her work describes how we suddenly appreciated the flexibility and the personal autonomy and time savings that come with working from home two or three days a week, more so than we did before the pandemic. 

My view is slightly different, which is: we always wanted that personal autonomy and flexibility in time savings but we thought it wasn’t practical, or feasible in most jobs. What happened in the wake of the pandemic – not for everyone, but for many people –  was we were forced to try work from home for a period of time. As a consequence, we learned that in certain jobs, for certain tasks, remote work is effective, maybe even a little bit more effective than working on site. We have compelling survey evidence, across many countries, especially on the worker side, but to a more limited extent on the manager side, that there were a great number of workers and managers who said, ‘Wow, this works better than I would have expected’. That’s not to say it always works great, or that it necessarily works better than working on site, but it works a lot better than expected in many cases.

If you can be roughly as productive doing some of your tasks like grading papers, or preparing lectures, for instance, when you’re working remotely, then maybe you can save 90 minutes or so of commuting two or so days a week. That’s what we learned, we learned through experimentation, and we also learned by doing. Most of us got better at operating in remote mode. For example, we now know how to use Zoom effectively. If you think back to the spring of 2020, there was all kinds of confusion. But we got past that. That’s one example of learning by doing. The technologies that support remote work also got better. There was a big market incentive to make them better, and you can see a response on the innovation front in a paper I co-authored about the pace and direction of newly filed patent applications: (COVID-19 Shifted Patent Applications Toward Technologies that Support Working from Home by Nicholas Bloom, Steven J. Davis, Yulia Zhestkova :: SSRN).  The expanded market for technologies that support remote work spurred innovative efforts to make remote work more effective. 

Those things came together, in my view, to make this thing we always wanted, which is personal autonomy, flexibility, and avoiding the commute, which saves time and money. 

There’s been an explosion in working arrangements available to many workers. Before the pandemic, it’s like you go to the ice cream store and you can choose between chocolate and vanilla. Now you’re in the ice cream store and it’s like Baskin-Robbins, with 32 flavours on offer. Some people now work remotely almost all the time. Most employees still have traditional arrangements that involve working mainly or entirely at their employer’s place of business. But there’s a very wide range of hybrid working arrangements as well. That’s a huge shift in how many of us work and live.

People talk in terms of ‘The Great Resignation’, a term that I don’t like. It gets things wrong in suggesting that people are resigning and leaving work, but that’s not what happened; they resigned from one job and went to another job, and the job they went to, in many cases, was much more appealing in terms of the working arrangements on offer.

Q: Part of the way I think about it is that we virtualized jobs years ago. I’ve worked in places with software developers, plugged into screens, wearing headphones and doing everything they can to have no human interactions at all… So then the pandemic comes along and we realised it makes no difference whether my laptop is in the Starbucks, or in the office…

SD: You’ve put your finger on something important, which is the technological developments that made abrupt, large scale shifts to remote work feasible. Email is one of them, but perhaps even more important is the rise of video-conferencing technologies of such a quality that you could have a meeting – which isn’t quite as good as in person – but is pretty close for small scale meetings. You also had the rise of the Cloud that made it possible for people to readily share documents and other working materials online, without having to be in the same physical location, or even without accessing the same computer; If the pandemic had come along with the same transmissibility and lethality characteristics twenty years earlier, I don’t think we would have seen the same kind of response.

Q: We all may have opinions and anecdotes about the impact of working from home, but you do this fantastic survey on people’s experience of work, The Survey of Working Arrangements and Attitudes (SWAA). Can you tell us a little bit about the SWAA and the kind of listening post it creates for you?

SD: Nick Bloom, Jose Maria Barrero and I have been running the monthly SWAA since May 2020. We initiated the survey because we wanted to understand what was going on with the tremendous gyrations in the labour market back then. Traditional government surveys weren’t really providing much information because they weren’t designed to operate in a world with so many remote workers. We became persuaded early on by our survey, and another survey that I helped design, called the ‘Survey of Business Uncertainty’ which surveys senior executives at US companies, rather than workers.

Both those surveys, and what we learned from them, persuaded us quite early on, certainly by early summer 2020, that we were never going to return fully to the pre-pandemic status quo. That was a controversial view at the time, but it motivated us to put the resources into running the survey monthly. We ask questions about standard demographic and employment labour market status that you would find in other standard surveys, but we also ask questions about the nature of working arrangements, commuting time, and attitudes to work. Because we design the survey, we get to change the questions as we see fit, which is exciting as a researcher.  We’re able to go from the conception of an idea to designing questions, fielding the questions to several thousand survey respondents, and analyzing the data within a month. That’s extremely exciting from a research perspective. We also cooperate with other researchers to conduct a Global Survey of Working Arrangements across more than 30 countries at roughly an annual frequency.  

Q: Back in 2021, in your paper, Why Working from Home Will Stick , you estimated that about 20% of working days would be at home. In a more recent paper, that number is more like 30%. So it’s growing even faster than you’d initially imagined…

A: It’s closer to 30% according to our Survey of Working Arrangements and Attitudes.  However, it’s worth noting that no one really knows exactly how much work from home is happening. We have a short report out on this looking at five  different survey measures. (See our report, “How Much Work from Home Is There in the United States?”) The SWAA and the Census Household Pulse Survey both yield WFH rates of just below 30%. The Current Population Survey that many people consider the gold standard, but has some problems, gives much lower numbers. The American Time Use Survey yields WFH numbers in between those of the CPS on one side and the SWAA and HPS on the other side. So, we don’t know the exact extent of work from home. But I think it’s fair to say that our early assessments back in early 2021 were fairly close to the mark, or if anything maybe a little bit understated. 

Q: I’m interested in this idea of remote work and privilege, It feels as though, against the backdrop of rising inequality, flexible working is yet another privilege that is given to people based on education, wealth, the sophistication of people’s jobs…

SD: It is a privilege to be able to work remotely, but there’s two additional observations in this respect that are important to make. First, it’s clear in the wage data that some of this privilege has been offset by slower wage growth among the professional class, the office class and so on, the people who get to work from home a lot. Their wage growth has been quite a bit slower than those who do customer oriented, face to face jobs, who tend to earn less. It’s been quite slow since 2021, and that’s a reversal of the pre-pandemic pattern that had prevailed, more or less, for decades where those in the upper parts of the wage distribution saw their wages rise faster than those at the lower end of the wage distribution. Just the reverse has happened since 2020, and in my view, a big part of the reason is that employers and workers both recognize that it’s a privilege to work from home, and that’s part of your overall compensation package. So, you get more of the thing you want in the form of working from home, but you give up a little bit in terms of wage growth. 

There’s also an interesting relationship between attitudes towards work from home, and where you sit in the corporate hierarchy, and that was especially true in the first couple of years after the pandemic. People who are way up near the top of the corporate hierarchy tend to like coming to the office a lot. Partly that’s because of sincere beliefs that onsite work is beneficial. The thinking is this is how I got to the top, and for others who want to get to the top, they need to take the same kind of path I did. But it’s also because when you’re the boss, it’s fun to come to the office, at least in terms of status. You have a lot of responsibility, but everybody is looking up to you, and you’re the top dog and there’s a lot of status associated with that. Whereas, if you’re in the middle or the bottom of the hierarchy, it’s not so much fun to come to the office and have your boss breathing down your neck. It’s true that working remotely is a privilege. It’s also the case that the shift in some organisations towards more remote work means these status hierarchies are less onerous for those who aren’t at the top.

Q: There’s been some discussion in the UK Media that schools, who face a very challenging time attracting and retaining teachers because of issues such as long hours and low pay, also have the challenge that having a job where you have to be in the workplace every day is seen as low status, compared to jobs where you can work more flexible hours…

SD: I don’t know the UK situation very well, so I would be reluctant to speak to that, but I think it was the case in the United States, and perhaps in the UK as well, that the pandemic experience for elementary and secondary school teachers was not a happy one. There were worries about contagion, which in hindsight appeared to have been overblown when it comes to young children, but nonetheless, people were teaching in a mode (remote) that works poorly for children.

I started this conversation earlier by saying we learned in some jobs and some tasks, that working remotely works quite well, but teaching young kids how to read and how to do arithmetic is in not that bucket. There were many teachers who wanted to teach, but they were extremely frustrated by the experience of trying to teach online, and that can be demoralizing. 

Q: So to move to a very different topic. In your paper Sticky Wages on the Layoff Margin,  you interview people and discover that many would rather take a pay cut than face the stress and the upheaval of being laid off. However, employers are extremely reluctant to provide that option during pay negotiations – it seems almost taboo… 

SD: Let me start by making an observation. Economists have been speculating about, and making claims about, the reluctance of workers to accept wage cuts, at least since John Maynard Keynes. In his General Theory of Employment, Interest and Money he asserts there (without evidence ) that workers don’t like wage cuts and therefore it’s foolish to try to cut “money wages”, as he calls them. And there are large branches of Keynesian economics, and the leading models of the day in terms of business cycle fluctuations, and monetary policy, that are predicated on the idea that wages are sticky, downward. We want to know why, but I don’t think we fully know why. 

There are other theories that ignore wage stickiness, and pretend that it doesn’t matter, and that’s not a completely crazy thing. It’s not so easy to figure out how and when wage stickiness might actually matter for decisions about how much people work and how much effort they put forth per hour of work. So, we’re just trying to say, look, let’s go see what people actually say, when you ask them: ‘What do you think about this trade off?’

In our particular sample, we approach people who just lost their jobs, and who qualified for unemployment insurance benefits, in the state of Illinois during a period with low inflation and tight labour markets. More than half of these job losers were willing to accept small pay cuts on the order of 5 to 10% to keep their job, and something close to a third, were willing to accept a 25% pay cut. The contribution of that paper is in part, just to document that and say, ‘Woah – contrary to widespread views that workers really resist pay cuts, that doesn’t seem to be the case in this sample, for many workers.’

Now, how can you nonetheless have absence of these pay cuts being offered? Well there are many theories on offer, that have been around for a while. It’s just that in my view, they haven’t been very systematically evaluated against the evidence, partly because we didn’t have much evidence on what workers thought.

This study looks into what workers think, and I’ll give you an idea of how one class of theories could have potentially explained our results, and it’s motivated by a very interesting case study by Krueger and Mas of an episode in history of Firestone, the tire manufacturing company.

Think about the production of tires in a tire manufacturing plant. You want the tires to be put together safely because if they’re not they can later blow out when somebody’s driving and cause a potentially fatal accident. There was a period of labour strife at Firestone, and in the wake of that labour strife, there were many Firestone tires that were blowing out on the road. The National Transportation Safety Board concluded that there were excess injuries and fatalities because of defective Firestone tires, and Krueger and Mas did their own independent analysis on this matter and concluded that, indeed, there were excess injuries and fatalities due to defective Firestone tires. Due to their careful empirical work, they traced the high defect rate to tires manufactured at one particular Firestone plant. This was during the wake of a corporate ownership change and employees were told that there would be a change to the union contract at the next renewal, and it may not be so generous in terms of wages and working arrangements. 

Think about that setting. You only need a very small number of disgruntled workers who are going to sabotage, or not work carefully enough, because they’re unhappy to make the employers say look, 90% of our workers would be willing to take a 5% pay cut to keep their job, but there’s a few workers who will be really annoyed, and they can cause great damage to the company. If we can’t figure out who those few are in advance, and we can’t fire them selectively, it may be that the best thing we can do is to lay off some people rather than cut anyone’s wages, even though most of the people we lay off would be happy to take a small wage cut to keep their jobs. So that’s just one example. 

What our paper says is that the class of theories that has dominated macro-labour economics in recent decades cannot fully explain our facts. We’re trying to say, look, there’s a weakness in this class of theories. If you want to fully explain why layoffs happen, you need to start looking at theories that highlight interdependencies across workers – either through the production process, as in the Firestone example, or it could be through compensation, as with collective bargaining arrangements, that require some kind of horizontal similarity in the treatment of workers, so you can’t easily have tailored wage cuts and so on.

There are theories out there that are consistent with our findings. It’s just that those theories, in my view, have been somewhat shunted to the side in recent decades in favor of other theories that struggle to explain all the facts that we put on the table.

Q: There’s a lot of concern about trust in science at the moment, and sometimes that means people are quite hostile to the idea of sharing non peer-reviewed, early stage research as we do on SSRN. How do you think about the role of preprints in the scientific record?

A: In economics, preprints are essential because the publication process is ridiculously long. It would really slow the progress of research in the field if we didn’t have some early dissemination vehicles. There are many available, and I think SSRN is, to your credit, the broadest of these pre-print distribution vehicles, at least in economics. That’s extremely valuable. I also think the scholarly journals are sometimes slow to recognize good ideas and to take them up, and so there’s something of a market test that works through pre-prints. If you have a working paper and it gets lots of citations and starts influencing what people think and write and how they conduct their own research, that’s a way to cut through what might be hostile referees. So, on balance, I think the preprint process is quite healthy. 

For those who are in the position of trying to disseminate research to the broader public, including journalists, if something’s not gone through a peer-reviewed process then they need to do their own vetting. Journalists and popularizers are not experts but that doesn’t prevent them from calling on other people who are experts and saying, ‘Hey, what do you think of this paper, it’s not published yet but the results sound really interesting’. I’m putting the onus on the journalists, popularizers, and disseminators of research: Do your homework. Just because it’s in a peer reviewed journal, it doesn’t mean it’s right, and just because it’s not in a peer reviewed journal doesn’t mean it’s wrong. There’s really no substitute for trying to provide your own critical lens, which I think is a good general lesson for life, not just research findings.

Q: If people want to learn more about your research, are there any papers that you’ve shared on SSRN and recently or elsewhere online that we can point people to? 

SD: Please do check out my podcast Economics, Applied, I’m also about to release a new paper, which should be on SSRN soon, it’s called Application Flows, written with Brenda Samaniego de la Parra. It uses micro data on applications and job vacancies, linked to the employer side clients who are all operating on a particular job board platform, for jobs such as, software design, engineering, financial analysis – hard skill jobs. That’s one thing, but I have lots of other stuff in the pipeline. We have a recent paper on the evolution of work from home written last fall, that tries to take stock of what we’ve learned from the outpouring of research in this area during the past four years. That’s a very good paper for a general audience as its broadly accessible for people who are specialists in the field.

SSRN Writes: The Hoover Institution has released a short video on the issue of working from home, you find it online at “The Great Work-from-Home Divide,” or check it out below: