Economics/Class Relations

Welcome to the Great Salary Convergence — a seismic shift in the way you’re going to get paid

By Aki Ito, Business Insider

Paying people based on where they live never made a ton of sense, but it’s the way salaries have always worked. You could do the same job with the same qualifications — but if you lived in Dallas or Minneapolis or St. Louis, you’d never earn the kind of big bucks on offer in big cities like San Francisco or New York. Geography came with a price.

But now, a seismic shift is taking place in the way Americans get paid. At first it seemed small and temporary. Early in the coronavirus pandemic, remote workers who fled the expensive coasts were allowed to keep their big-city paychecks. But a host of new data suggests that what looked like a short-term exception to the rule is fast becoming a new and permanent norm. As companies routinely hire for remote roles in cities and towns far beyond their headquarters, white-collar salaries across the country are getting tantalizingly close to those in San Francisco.

The phenomenon is strongest in tech, which has embraced remote work more than any other industry. According to Carta, a compensation platform used by tech startups, salaries in Washington, DC — which used to be 15% lower than those in San Francisco — are now virtually on par with the Bay Area. And thanks to big compensation jumps in Boston, Los Angeles, Boulder, Chicago, Austin, and Denver, salaries at tech startups in those cities are now within 10% of San Francisco levels as well.

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And it’s not just tech: The Great Salary Convergence is playing out across the white-collar workforce. In Austin, Charlotte, and Milwaukee, salaries for office jobs have soared by 20% or more since the end of 2019, according to LaborIQ, another compensation platform. During that same period, more than a dozen other metropolitan areas have seen pay jumps in the double digits. In San Jose, meanwhile, white-collar salaries in the heart of Silicon Valley have barely budged, increasing by a measly 1.7%.

“It’s the disruption that remote work has caused, where so many companies are hiring remotely,” Jay Denton, the chief labor market analyst at LaborIQ, told me. “So many industries and types of jobs have been affected by this.”

From local hiring to national hiring

Part of the reason salaries in smaller cities are rising to Silicon Valley levels is the flood of remote workers who arrived during the pandemic. As they used their big-city salaries to bid up the price of homes, local rents began to soar — which forced local employers to raise wages.

Another reason for the rising salaries is the way some companies have overhauled their approach to compensation as they’ve committed to remote work. If everyone is working from afar, they reasoned, does it really make sense to pay Steve in Cincinnati 40% less than Jessie in San Francisco? Reddit was among the earliest employers to go location-agnostic on its US salaries, paying everyone San Francisco-level wages regardless of location. Reddit’s chief people officer, Nellie Peshkov, told me last year that employees should be rewarded “for performance and not for location.”

But the biggest driver of higher salaries in mid-tier cities is the widespread shift from local hiring to national hiring. In 2019, according to Carta, tech startups made 65% of their hires in the state where they were headquartered and 35% out-of-state. But today, those ratios have flipped: 38% of hires are in-state and 62% are out-of-state. That means local employers in cities like Louisville and Des Moines are now competing for workers with companies from all over the country, including the ones with the biggest payrolls. And that’s especially true given the labor shortage, which has forced employers in Silicon Valley to cast a wider net for workers.

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“In San Jose, the unemployment rate is only 1.9%,” Denton, the LaborIQ analyst, told me. “There’s nobody there you can hire. Why up the ante on just the local talent when you can hire remotely across the US and potentially save a little bit of your budget?”

Denton sees this dynamic at play in the average salaries of more than 100 jobs that make up a typical corporation’s workforce. Nationally, salaries for those jobs have risen 7.5% since the end of 2019 — more than four times as fast as paychecks in Silicon Valley. And other cities are catching up even faster. Take Austin, a popular destination for many tech refugees during the pandemic. The average salary for a professional in Austin has jumped by an astonishing 24%, to $134,774. Charlotte (23%), Milwaukee (20%), Buffalo (18%), Indianapolis (15%), and Louisville (13%) have all seen big salary bumps as well.

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More jobs and higher rents

For workers in Austin or Charlotte, the Great Salary Convergence has been an obvious boon. They’re earning big paychecks without having to uproot their families or make the quality-of-life compromises that come with living in a city like San Francisco or New York. But their big new paychecks are also having a profound effect on their communities. As they buy and rent bigger homes, they’re enriching landlords and boosting property values for existing homeowners. And as they spend their extra disposable income at local restaurants and gyms and dentist offices, they create more local jobs and drive up local wages, which benefits residents who don’t have access to remote roles. “It gives them a choice about where they work and how they work,” says Liz Wilke, the principal economist at Gusto. “That’s a net good thing, to give people more opportunity.”

Economists call this phenomenon the multiplier effect. According to Enrico Moretti, an economist at the University of California at Berkeley, each new tech job in a community generates five additional jobs, both in occupations that require a lot of education (e.g., doctors) and in those that don’t (e.g., hairdressers). It’s this virtuous cycle that local governments have in mind when they dole out tax breaks to get businesses to build new offices and factories in their communities. During the pandemic, several cities put a new spin on these incentives by directly wooing remote workers to ditch the Bay Area and move to their towns. Some offered as much as $20,000 to willing relocators.

“Governments have been doing place-based economic development for many, many years, trying to get these income dollars into these places,” Wilke says. “And the expansion of remote work may actually turn out to be a very effective mechanism for that.”

But as we’ve learned from experience, there’s also a darker side to economic development. Even though local bars, say, are benefiting from the fatter paychecks of remote workers, local software companies are suddenly finding themselves forced to compete with big out-of-town companies, who are willing to pay top dollar to poach local employees. “It can be really difficult for businesses in those locations to compete,” says Denton, the LaborIQ analyst.

To make matters worse, big companies from the coasts can offer more than bigger salaries. “If they’re publicly traded, they might be offering stock that some of the smaller firms just don’t have,” Denton says. “They offer sign-on bonuses. They have unlimited PTO.”

The higher salaries for remote workers also fuels inflation, making it tough for everyone else to make ends meet. In Austin, where professional salaries have leapt the most since 2019, the value of the typical home has spiked by more than 70% to $676,906. That’s good news for existing homeowners — but it’s heartbreaking for the renters who can’t afford to live in Austin anymore. In today’s hyper-competitive housing market, even a white-collar professional who is well-paid by local standards doesn’t stand a chance against a remote worker armed with a big-city salary.

We’re still in the early stages of the Great Salary Convergence. In 15 of the 49 key metropolitan areas analyzed by Carta, compensation at tech startups is still more than 20% lower than San Francisco levels. And when you broaden it out to include all white-collar jobs, salaries for people in some smaller cities remain about half the amount of their Bay Area counterparts. But it’s startling to see how dramatically the pay gap between cities has shrunk in just two short years — and how that unprecedented shift is accompanied by sweeping changes to the way we live and work. As companies continue to detach your salary from your ZIP code, where you call home won’t matter nearly as much in determining what you earn. And we’ll all be left to reckon with what it means to live in an economy where all pay is San Francisco pay.

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