Normally, people live in the city they work in or in the burbs of that city. Their pay is tied to a local market rate, which has a relation to the cost of living in that area. There will always be people on the fringe who choose to drive over an hour each way each day to go to work. These people are competing for the same jobs as people who live in that area and are thus paid the market rate of that area.

In a 100% remote work case, there is no reason for a company to pay someone the higher rate of a more expensive area. If the person is neither working in a SF or NYC office nor living in these cities, that person’s market rate is that of wherever their home is and not the city where they used to work.

If the company was to open up hiring to people who are wherever these people live, the people they would hire would receive the rate of these markets, not NYC or SF. This is no different than if you hire someone in India for a remote job, you will not be paying them what you would pay someone in the US.

I worked in the compensation department of a large company a few years ago that was responsible for setting compensation policies and this regional thing was already in place. I doubt this is new for Google either, but these are fringe cases, which will probably become more and more common as jobs become more remote and many people choose to live in cheaper areas. If this continues, in a fully remote economy, we’ll probably experience a regional levelling in living costs and people would start getting paid more equally across different geographical and economy areas.