Tech Wages After Covid

In a few of the tech-oriented slacks I’m a member of there’s been a lot of back-and-forth about what might happen to tech wages in a post-COVID (and during-COVID) world where lots of tech jobs (prominently including more and more major players like Twitter and Facebook) are moving to fully remote.

Before getting into this topic, I want to acknowledge what a privilege it is to even have a job right now. I really feel for all of the people who are out of jobs and who work in industries that are likely to be severely impacted by the current crisis until we have a widely available vaccine. I’m writing this because it’s a topic of interest and I’m trying to practice making public predictions on things I’m interested in.

Of ongoing interest in these discussions is whether or not tech salaries in hubs like San Francisco and New York will remain elevated above tech wages in the rest of the country. Lots of larger companies either implicitly or explicitly use a cost-of-living adjustment to scale wages up or down for remote workers depending on where they live. I want to use this blog post to think a little bit about what the economics of tech-wages might look like post-COVID.

In this post, I’ll be assuming that:

  • The economy eventually returns to full steam due to reaching some amount of “herd immunity” or the broad availability of a vaccine.
  • The shift to remote work (at least to some degree) is essentially permanent — I won’t make claims about what the “future of work” will be, but I’m assuming that there has been a permanent shift in the willingness to consider remote work for both contract- and full-time employees for tech jobs.
  • Market forces (supply and demand) largely set wages for tech workers, regardless of how much value they may add (or not) to a company’s bottom line
  • The majority of tech jobs are located in high-cost-of-living (HCOL) areas like New York City and San Francisco
  • The barriers to hiring overseas workers remain high, even in remote-work settings1Language, time zone, and legal hoops remain very real here!

There are a few first-order impacts of the shift to remote work (and the increase in perceived risk associated with living in dense cities):

  • Some amount of workers currently in HCOL areas will move out of HCOL areas to lower-cost-of-living areas2I’m ahead of the curve here, having moved to Mexico 18 months ago to exploit the difference between my US wage and the lower COL in Mexico.
    • I assume that large cities will still hold appeal for lots of people for lots of reasons, but my belief is that there’s a large group of people who want to move to somewhere that isn’t New York City or San Francisco but had stayed put because that’s where the jobs were.
  • Tech companies, as they shift to supporting remote-first working styles, will recruit from broader swathes of the country

So there are really two market effects here:

  • Workers have more jobs they can apply to — if more companies support remote work, there are more jobs you can apply to no matter where you live (New Yorkers can now apply to San Francisco-based jobs, and vice versa. Software engineers in Oklahoma can now apply to both.)
  • Companies have a larger pool of applicants that they can select from — rather than selecting only people who live in San Francisco, or New York, or Boise, companies can find employees from all of them.

As we surely all recall from our intermediate microeconomics theory course3surely, the change in wages will be determined by:

  • The magnitude of the shifts in terms of both supply (number of workers) and demand (number of companies hiring)
  • The price elasticity (slope) of the supply and demand curves

Under this simple model, one might suggest that wages for tech-workers will generally drop under this new paradigm — tech companies in HCOL areas are now hiring from a wider pool (downward wage pressure) and tech workers are moving from HCOL areas to LCOL areas (dropping the “reserve wage” that they need to take a job / maintain their lifestyle).

However, this model is, in my opinion, not very good because it assumes that tech workers are homogenous — that simple supply and demand exercise assumes that the goods on the market are homogenous and interchangeable. In the market for tech workers in the United States, that’s just simply not true. Tech workers are actually highly differentiated4it’s exactly this differentiation that stemmed the tide of tech offshoring that many feared would drive American tech workers to extinction. — tech companies will pay a premium for top-tier talent and that’s one reason why so many tech companies are based in SF and NYC: that’s where the top talent lives.

If we assume that tech talent is differentiated, my prediction for tech salaries is this:

  • The shift to more remote work will exacerbate inequality (wage differentials) both within any given industry and for the world as a whole.
  • Those at the top of the skill distribution will earn more because there are more companies competing to hire them
  • Those at the bottom of the skill distribution will earn less because they will face more competition from others in areas with lower cost-of-living who can underbid them.

The more specialized your skillset is, and the more in-demand those skills are, the higher the wage you’ll be able to command. While you’re probably facing additional competition from other super high-skilled workers, the additional competition for your skills and expertise will likely lift your wages.

However, if you’re on the lower end of the skill distribution (maybe you’re still earlier in your career), the more substitutable your skills are and the more downward wage pressure you’ll face. Companies will see no good reason to pay San Francisco salaries for mediocre web developers if they can get the same talent in Sheboygan for half the price.

What that means is that we’ll see the highest tech salaries go up, and the lowest tech salaries go down.

So what does that mean for you? It means you should make your skills as specialized and as valuable as you can! If you’ve been skating by as a mediocre software engineer, now’s a good time to think about upskilling so that your wages don’t get driven down by people living in lower cost-of-living areas. Or you should start hunting for properties in West Virginia!

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By michael