Pay are subject to demand and supply. If a company insist on co-located employees, pay is subject to demand and supply at that location. If company allows for remote work, pay is subject to global demand and supply of remote employees.
Exactly. If companies tried to do this then people could just get a virtual address in an expensive city say New York and go and live somewhere cheap, say Guatemala. Also let's say out of 10 big software companies 8 offer same pay wherever you are, 2 location based. Which one are you gonna work for?