Related Links

• A Look at the Impact of the Work-From-Home Revolution, Economic Brief
• The Future of (Tele)Work, Speaking of the Economy
• Out of the Office, Into a Financial Crisis?, Econ Focus

Transcript

Tim Sablik: Hello, I'm Tim Sablik, a senior economics writer at the Richmond Fed. My guest today is Claudia Macaluso, an economist at the Richmond Fed. Claudia, welcome back to the show.

Claudia Macaluso: Thank you so much for having me.

Sablik: Today, we're going to be talking about the past, present and future of working from home. Before the pandemic, the overall share of days worked from home was gradually rising, but it remained pretty small. When the COVID-19 pandemic hit, working from home became far more widespread, particularly for office jobs.

You recently wrote an Economic Brief examining some of the research on this topic. Where do things stand now with remote work?

Macaluso: You said the past, present and future of working from home, and really there wasn't all that much past. Pre-COVID, the percentage of days worked from home — so, not on the premises of your employer — was very low, less than 5 percent. And we could see this from data on how Americans used to spend their day and where they used to spend their days.

During the COVID-19 pandemic, this changed dramatically. Work from home reached its peak in May 2020 and, at that point, 63 percent of workdays were provided remotely and the vast majority of that was from the worker's home. Just to stress, that was going from less than 5 percent to over 60 percent. That's a very, very large change that we don't usually see in the labor market.

Things then settled down quite a bit. In May 2023, which is some of the newest data we have, work from home had reached about 28 to 30 percent of workdays. Hybrid is definitely more popular than fully remote. Fully remote was more a thing of the pandemic.

Nationally, 40 percent of the workers work from home about 2.5 days per week. The most popular is the format of working from home on Monday and Friday but coming to premises Tuesday, Wednesday and Thursday.

With about two days per week working from home, the Fifth District — where the Federal Reserve Bank of Richmond is located — is a little bit below the national average. This is because we have a decent concentration of manufacturing firms. Some of those jobs just cannot be done from home.

Work from home arrangements have become a very important factor in hiring new employees and in retention. Right now, about one in eight vacancies is remote, or has a component of hybrid or working from home. Workers say that looking for work from home arrangements is the number three factor for quitting, right after pay and family considerations. So, it's very important.

We have seen that most employers offer some version of working from home, some version of flexibility. They do so both to new hires, but also to incumbents to prevent quitting. It can help retention.

Sablik: You mentioned there was this big jump in working from home at the beginning of the pandemic and it has come down a bit since then. There's been some debate over whether this change will stick — the days worked from home are still quite a bit elevated from where they were prior to the pandemic.

Do we have any clearer sense now of what the new normal will look like? Or, are we still trying to find an equilibrium?

Macaluso: It's been a very polarizing topic and I hesitate to say, "No yeah, we're at equilibrium, it's all done." That's almost never true with the economy, which is always dynamic, always moving.

But I think we do have a clearer sense now that work from home is here to stay. Some say it's the future. Some are ready to consign it to the dust bin of history. I think most of the signs point to some persistence.

It helps to distinguish between different types of working from home. Specifically, we need to distinguish what is working from home all the time, 100 percent remote work, from hybrid, which is working from home some of the time, and 0 percent remote work, so always working on premises.

Zero percent remote work has been, in fact, the reality for many workers during the pandemic, after the pandemic, and right now. Some jobs just cannot be performed at home. You should think of all the jobs that are interactive and are related to emergencies like health care workers or firefighters.

If we look at the rest of the jobs, about 40 percent are amenable to some working from home. In these jobs, we do not see any more 100 percent remote work. That, I would venture to say, is a thing of the past.

On the other hand, hybrid work is a thing of the future. It's been very, very successful and very, very popular, especially in the Monday/Friday versus Tuesday/Wednesday/Thursday format I was mentioning before. It looks like that is going to stick.

There's also something else that I want to mention — work from anywhere, which is a little bit different than working from home because it expands the geographic scope of employees. Traditionally, a firm's employees would be located somewhat close to the firm in question, mostly because of commuting to work. Now that this constraint has been relaxed — the commute to work does not need to happen all the time or doesn't need to happen at all — then firms have started to expand their geographic scope and attract candidates and employees from potentially much, much farther. This helps both the employees — which now don't have to pay the high rents of the cities — but also the firms who are able to recruit from a wider pool.

This is something that is coming up as an innovation in some states. It's mostly for college educated workers or for the type of tasks that require little interaction. You may want to think of programmers, for example, for the latter but also for executives for the former.

Sablik: You mentioned some of the benefits of working from home, which are a key factor when thinking about whether or not this new way of working will stick. What have researchers learned about the benefits of increased work from home?

Macaluso: My assessment, Tim, is that we are still learning. This is something that has seen quite a bit of interest from researchers and there has been some work. But most of it is preliminary because the data is slow to come out. There is plenty of anecdotal evidence but large-scale studies, very few of them. Let me tell you what we have when we put all of these different sources of data together.

I think the biggest benefit that has been persistent and that both workers and employers decide is the savings on commuting time. No one really enjoys spending time in traffic. Workers waste time sitting in their cars. The environment loses. During the pandemic, commuting time was about 30 minutes per day per worker. That's a tremendous amount if you think that, in fact, a good chunk of jobs were still on premises. But now it's about 30 minutes per week, which is still not negligible as anyone who commutes knows.

There has been some evidence also of morale improvements and happiness increases. Some of the evidence here comes from before the COVID-19 pandemic and points to something somewhat temporary. People are extra happy the first six to nine months they are working from home. Then, in most cases, some sort of reality check or loneliness, in fact, can kick in.

Firms that we have talked with at the Fed or that I have seen at conferences and forums cite the fact that most employees seem happier. And most employees who are surveyed do declare that they want to work from home, that they appreciate it, that it gives them more flexibility. So, there is this morale improvement aspect.

There has been remarkably little productivity cost. I mean, the economy kept running during the COVID-19 pandemic, much to the shock of many. In fact, many firms that kept a hybrid schedule do not report any productivity drops.

Perhaps some of this is due to specific investments that firms did, and workers as well. You can think of all the comfy office chairs that we bought for ourselves, and new audio systems and better screens and monitors that many of us invested in, once work from home became a reality. This could have counteracted some of the negative productivity effects and produced some productivity boost itself.

A specific group of people that is particularly a beneficiary of work from home is people who need more flexibility. This could be because of physical limitations or disabilities or because of care duties, whether it's children or the elderly. All the workers that had to juggle these care duties with their own limitations definitely have seen an improvement in both morale and productivity. This has been also very beneficial for firms from what I can see.

In another plus for firms, work from home eases somewhat wage pressures because it's another dimension of compensation. It can be something to trade off with the wage. Workers have shown in surveys that they value that — over 70 percent of workers is willing to take a wage cut for additional work from home time.

Sablik: Are there any important costs of this change that we've learned about from the last few years?

Macaluso: Nothing in life is all rosy, so there are also some costs.

There is more and more work coming out from the research community showing that work from home resulted in less time spent being mentored and mentoring. It's much more pronounced for female workers than for males. So, the proximity loss is a loss of human capital creation, potentially, through this reduced mentoring channel.

When you talk to CEOs and other executives, there is a strong need to find new ways for team building. These ways need to be intentional, they need to be well planned. In a world in which we do not get together at the coffee machine by chance, this intentional team building is especially important. It's especially important for young workers, for female workers, for workers who may not be as connected to the bigger group.

In a sense, the pandemic has forced us all to innovate. This is a phenomenon that economists refer to as "creative disruption" — something becomes broken and individuals and firms must adapt. None of this is particularly painless. It's more of a situation of "do or die." This is true in the way that production happens. This is true also in hiring, as we have seen in the especially strong labor market of the last few years. This forced innovation can be very costly for some firms and some workers outside the labor market.

Sablik: How do you weigh the costs and benefits together?

Macaluso: In the end, how is this all going to shake up is a little hard to say. This is an enormous change, much like the Industrial Revolution. Because of the technology adjustments that have been triggered, these are far reaching and they create winners and losers. It's not entirely clear how much of this winning and losing can be mediated just by prices, by market mechanisms.

In my view, this is a perfect place for policymakers to step up and manage this flow of innovation. We are seeing this with AI as well — all of these things intersect. Technology is coming into our work lives big time and it's here to stay. Sometimes it has externalities and unintended consequences. Some are good — more innovation, more creativity. Some are bad — it's called creative destruction, not creative walk in the park.

Sablik: Thinking about some of those larger, economywide impacts, a lot of people have noted that, traditionally, a lot of office jobs were done in offices in cities and they are now being done at least some of the time remotely. Have researchers learned anything more about what the impact of this increased remote work has been on cities?

Macaluso: Urban landscapes are the environments that are changing and possibly will be changing the most in all of this. It's called the "donut effect" sometimes — the hollowing out of the city center in favor of the more external rings, the more external layers of the city, the suburbia and maybe even smaller satellite cities around the main metro area.

The downtowns definitely have taken a hit, and this is more true in some areas of the country than others. Vacant buildings can pose unique challenges for those urban areas that are already struggling with urban blight, with homelessness, with crime.

We know that the office vacancy rate in 2023 is quite a bit elevated — it is around 17 percent and was about 10 percent pre-COVID, so it's almost double what it used to be. The sales activity and the value of commercial real estate in city centers have dropped and they have not recuperated from the pandemic.

This has created essentially a drop in the tax base. If there are no tenants, if there is no economic activity in the city center, in the city cores, then there is less to be taxed. This has been estimated to be up to a 10 percent drop since before COVID. For some cities, this is a big drop.

There is also possible further repercussions on landlords — no tenants means they don't get the rent and therefore they cannot pay their local banks. There is a sense in which we could see a bit of a domino effect. I don't see any clear signs of this snowballing right now, but it's also not something that can be excluded. It's certainly a place for policy to act.

The other thing that economists have been thinking about is the so-called "reverse multiplier effect." This is a theory that dates back to the early 2000s.

Cities can succeed by attracting high-wage workers, college-educated workers, tech workers. When you attract these people downtown, they bring with them the demand for services that are typically provided by non-college-educated workers. Think of this stream of office workers going downtown and dropping off their laundry, stopping at the shoe shine or the shoe repairer, taking lunchtime yoga classes, going to try new food trucks. So, this is the multiplier effect — you put in high-wage workers and they create more jobs for non-college-educated workers.

You can also have the reverse multiplier effect. When you take out the high-wage workers and they stay comfy at home talking to their computer, then all of those accessory services cease to have a reason to exist. There's no one to shine shoes for. There's no lunchtime yoga.

This is a theory that many see as a harbinger of very bad times ahead. It's true [that] we need a word of caution on how we reshuffle people. But it's also true that all these high-wage workers are now taking their lunchtime yoga classes and their food trucks and their laundry into the suburbs. Urban cores may lose, but it looks like suburbia and rural areas may gain. After a century of urban agglomeration, this may trigger a shift towards less metropolitan areas, less dense areas. So, it may be just a movement of jobs and workers, but not necessarily a loss. The total welfare change seems to be unclear for now, and it's something that I think many will be watching for.

Sablik: So, what will you be watching as we head into 2024?

Macaluso: It's a very exciting time to observe the labor market.

If I had to settle on two things, I would say I would watch for signs of the long run emerging, first its effects on inequality. We knew from the very early stages of work from home that this was much more prevalent for high-wage, college-educated and professional workers. This has stayed true. At the same time, fear of contagion, fear of illness — especially at the height of the pandemic, but also later on — are much more prevalent among the less wealthy and the less healthy. This will keep creating a wedge in access to jobs, access to remote jobs.

There's also a relatively large mismatch between what workers want and what employers want to supply, so there's a mismatch between work from home demand and supply. I'll be watching how this mismatch shrinks or expands for people at different places in the wage distribution.

And also the reverse job multiplier — will it be large? Will it spell the end of the successful downtowns? What about the success in the suburbs? I know that some corporations have moved their headquarters into the suburbs where it's cheaper, it's closer to their workers. Will that be pervasive, a long-run tendency, or just a few businesses?

Another thing I will be watching for, and I hope for, is the ability of the economy to expand job opportunities to previously untapped labor. These are people where they have limitations or disabilities, care duties of all kinds, or they might be geographically isolated. Because work from home can give more flexibility but also wider geographical scope to firms when they're hiring and recruiting, I hope to see a true expansion of job access for these previously isolated, marginalized workers.

Sablik: Claudia, thanks so much for joining me today.

Macaluso: Thank you so much for having me.

Sablik: Listeners can find a link to Claudia's Economic Brief as well as other related links on the show page. And if you enjoyed this episode, please consider leaving us a rating and review on your favorite podcast app.