Transcript

Charles Gerena: I'm Charles Gerena, online editor for the Research Department at the Federal Reserve Bank of Richmond.

Thank you for listening to "Speaking of the Economy." If you missed any of the episodes since we launched last fall, you can find them on the Richmond Fed's website or Apple Podcasts.

Long before the COVID-19 pandemic required sending millions of people home to work, there was a little something called telework or telecommuting. We wrote about this trend way back in 2007 and it had been touted for decades before that. Today, we'll talk about the future of alternative work arrangements in light of the pandemic with two of our economists.

My guests are Sonya Waddell and Andy Bauer. Sonya is a vice president and economist with responsibility for the Regional and Community Analysis team within the Research Department. She sets the strategic direction for various data products, surveys, and other regional and local analysis. Andy is vice president and regional executive at the Richmond Fed's Baltimore branch. He gathers economic intelligence on three parts of the Fifth Federal Reserve District: the District of Columbia, Maryland and the majority of West Virginia.

Thanks for being here, Sonya and Andy.

Sonya Waddell: Thanks for having us.

Andy Bauer: It's a pleasure to be here.

Gerena: Let's rewind to a time when everyone wasn't talking about coronaviruses and vaccines. What was the prevalence of telework in the years leading up to the COVID-19 pandemic? I'll toss this question to Sonya since you recently spoke about this topic during a presentation to the chamber of commerce in Danville, Virginia.

Waddell: Thanks, Charles.

There has been a slow, steady increase in working from home for the last few decades, but it has been slow. Even in 2018, the Bureau of Labor Statistics' American Time Use Survey indicated that workers supplied less than 5 percent of full workdays from home.

COVID induced a huge jump. According to the BLS, the percent of employed people working at home on days they worked rose from 22 percent in 2019 to 42 percent in 2020. So, it nearly doubled.

Obviously, I think that many of us have seen this in our own lives, too. Andy and I have both started going back to the office recently. But I think it's safe to say that we both work at home a lot more now than we did in 2019.

Gerena: To follow up, why did employees want to work outside of the office before the pandemic, and why did employers want to offer that option?

Waddell: For employees, I think it has always been about flexibility — the flexibility to save time on the commute, or work without the interruptions of an office, or even to meet the cable guy.

I think that before the pandemic, employers were more skeptical about an employee's ability to work from home, either with respect to productivity or to things like team building or innovation. Of course, this varied considerably by employer. But I think before the pandemic, telework was viewed more as a perk of a job than a standard work environment.

This is one of the things that I think changed. In their survey of working arrangements, economists Nick Bloom, Steve Davis, and Jose Barrero discovered a shift in attitudes about remote work among their survey participants.

Gerena: This is my last history question, I promise. Did telework meet these expectations?

Waddell: I think it did, on some level. Attitudes about remote work have shifted.

Every month, we survey around 250 manufacturers and service providers across the Fifth District. In a few different months this year, we added questions about remote work.

In August, we asked a question of our Fifth District survey panel: "What are your biggest concerns about remote work?" Almost 70 percent of businesses did not express any concerns at all. Given our industry mix, I'm going to guess that we would have had far fewer firms expressing no concern about remote work prior to the pandemic.

However, I think that there is a concern, not just about productivity but even more about fostering culture and innovation in a completely remote environment. That comes out in our surveys as well. In this particular August question, 25 percent of firms said that their biggest concern was around maintaining work culture. The next biggest areas of concern were maintaining worker productivity (14 percent), administering mentorship or training programs (almost 12 percent), and then things like safeguarding networks from cyber threats and fostering innovation (which were both around 8 percent of firms responding that they were concerned about that).

This is not actually too dissimilar from results that we had in a survey we did in March of this year. There, too, the biggest concern seemed to be around maintaining work culture and administering mentorship programs.

Gerena: Obviously, the pandemic made telework a necessary part of doing business for many companies. To what degree did businesses in the Fifth District make this shift?

Bauer: Based on the conversations with my business contacts, those firms that were able to go remote did so. I don't recall a business that stayed in the office or onsite unless their activities were deemed essential. And even then, some of the staff at those businesses — office personnel for a construction company, for example — worked remotely.

Waddell: Our survey results corroborate what Andy has observed. In our March survey, on average, firms reported that only 5 percent of their workforce was operating remotely before the pandemic. But in March 2021, that percentage rose to about 24 percent. We are asking this same question again in September, so we'll see what firms tell us. But there isn't a lot to indicate that remote work will return to where it was pre-pandemic.

Gerena: Andy, tell us more about what business managers and executives have told you about maintaining remote work in some form going forward.

Bauer: This has been a very interesting conversation that has changed over time. At the end of last year and early this year, many talked about how the "new normal" would involve a lot of telecommuting. Companies wouldn't need offices or not nearly as much as they did. This would permanently change downtown central business districts as a result.

However, I think that sentiment has changed amongst the companies I have talked with. Now, there is more of an impetus of getting people back together in person, staying virtual only when really necessary and where it makes sense. Yes, there will be more flexibility going forward and a hybrid approach to the office. But there has definitely been a change where there has been a greater focus on the benefits of being in the office and a lot more discussion about what's being missed or what's being lost by just being in this virtual world.

Waddell: I agree with Andy. As I mentioned before, for respondents to our surveys, the average share of workers that were fully remote went from 5 percent pre-pandemic to 24 percent in March 2021. The average expectation was for around 11 percent of workers to be fully remote post-pandemic. So, that translates into more than we saw pre-pandemic, but not where we were in the height of the pandemic.

Hybrid is also an important concept. In the March 2021 survey, respondents anticipated that 82 percent of their workforce would be onsite, on average. As I said, they expected only 11 percent of employees to be fully remote but also 7 percent in a hybrid arrangement. If we think of hybrid as about half time from home, then we'd see around 15 percent of employee time spent remote.

I also agree with Andy that just about everyone says more flexibility will be the norm going forward. For certain types of industries — and particularly in certain occupations within those industries, such as a worker in a manufacturing plant — there isn't much substitute for in-person work. In fact, that comes out in our surveys, too — manufacturers report a much higher percentage of onsite work during and post-pandemic. But for industries that can operate with remote staff, it seems that the norm is moving towards a more hybrid model for employees.

Bauer: You see personal preferences at play. Many workers got a taste of not commuting and a greater work/life balance and they're not eager to give that up. Nobody misses sitting in traffic.

More importantly, I don't think anyone knows with certainty where this is going to land. In the coming months, some firms may find that productivity and innovation are really lagging and decide to bring workers back. Perhaps the labor market will shift, such that workers can't be quite as choosy about jobs and are less able to demand flexibility. Or it could be the case that firms may find that there are cost savings from reduced office space that they want to take advantage of and shift to a more remote steady state.

Gerena: I guess will see if this gets all sorted out in the fall, once the school year starts and we're past the summer vacation season and the expiration of expanded unemployment benefits.

For now, though, it sounds like the same things are both motivating and discouraging telework. Is there anything different this time around?

Waddell: I think there are two big differences between now and pre-pandemic.

First, there is the shortage of workers that we keep hearing about. We have over 3 million fewer workers in the labor force than we did in February 2020 and not quite 3 million more unemployed. Meanwhile, we are still 5.7 million jobs below where we were pre-pandemic and job postings are at an all-time high. There are people out there, but they are not working and the worker shortage at all levels is the number one complaint businesses make today. We heard this in 2019 as well, of course, but the clamor feels louder today.

Thus, businesses are doing all they can to attract workers, and flexible work arrangements are on the list of demands that workers have. And workers have the power to demand it.

Second, and very importantly, we have had this mass experiment of sorts that forced us to learn how to work remote. In other words, workers can demand flexible work arrangements now because we know how it works. Firms, employees and customers have invested in the technology to make remote work work. I'm not sure we ever would have figured this out without sending everyone home, or at least we wouldn't have figured it out nearly as quickly.

Bauer: In the past, the challenge with going virtual was in part technological — having the communications bandwidth to support online meetings and connections to an office network. But the concerns that managers had about telework decades ago continue to persist, specifically around a loss of productivity and connectedness to the firm.

Having worked 16 months remotely, the business case has been made that telework is a viable alternative in many situations. However, I am not sure that ultimately we know how much telework is optimal.

What has been done to date has been done out of necessity. It could be the case that there are costs of going virtual that have not been felt. For example, what collaborative ideas didn't happen because we didn't have those unscheduled interactions following a meeting or conversations during lunch? What impromptu moments of mentoring didn't take place because they didn't rise to the level of scheduling a Zoom call? How attached will workers feel to a firm when they have little interaction with their colleagues — will attrition be the same or greater? How much of the maintenance of productivity (if there wasn't a drop) was a result of systems and relationships that were built by being in-person prior to the pandemic? Will those systems and relationships be maintained in a virtual world, especially when new people come on board?

Gerena: As many businesses consider or move forward on adopting either an all-remote workforce or a hybrid model, have you heard any concerns about the equity implications? After all, not every business can afford to offer a work-at-home option nor is every employee able to take advantage of one if it were offered.

Waddell: This is not a question that we have asked directly of our survey participants, but I can see how this would be a concern for employers. How do you manage equity in a workforce where some workers can be at home — like managers or administrators — and some can't — teachers, nurses, plant workers, law enforcement. Some employers have certainly done more during the pandemic, like offering hazard pay or bonuses for the essential workers that have had to be in-person during the pandemic. But over the long-term, this is something employers will have to contend with.

From my own experience, Charles, there also can be opportunities that arise from simply being in the office. I remember when I was just out of college, working as a research associate in a consulting firm, I happened to be the only RA in the office at 8 AM when they suddenly needed someone to work on an important client project. That gave me an opportunity that no one else got only because I was in the office. I don't think I was unique in that. How many times have we all walked around a floor looking for someone who can help on something, or had an innovation come out of a conversation that creates opportunities for those who are in the room?

I'm not sure if this is an employer concern or an employee concern. But I think that this is also something we will need to think about as we move forward in a hybrid work environment.

Bauer: Charles, generally I haven't heard as much of those concerns until recently.

I asked somebody just this week if there were any issues with the policy of having some people being able to have a more of a remote posture and others being in the office. By the nature of their work, some people – perhaps there are IT and security issues or it could be that their handling important financial documents — are required to be in the office where other people aren't. This person told me there's definitely a sense of inequity amongst the workers. In their estimation, what will happen is that once those jobs open up, those people that would have to be in the office will look to fill those positions that can be remote. It's going to create a little bit of friction in the office.

So, I agree with Sonya that there is a lot of inequity with respect to remote workers versus essential or in-person, and this is something that we're going to have to think about going forward.

There is also a lot of inequities with respect to how education is funded in this country and how the acquisition of education and skills is unequal. At the end of the day, those with IT skills and other positions are able to go remote.

Gerena: It definitely sounds like there is a lot of possibilities there.

What other ramifications will this shift towards telework have, and will they be permanent? For example, what happens to pay differentials by location? What about local and regional markets for office space?

Bauer: The shift to telework will be interesting to see how it impacts labor markets and property markets.

Telework expands the labor market such that, for those occupations for which teleworking is suited, the labor market becomes national or even international. Someone who used to do accounting in the head office in a major city can now work from anywhere there is stable Internet connection. That gives the worker flexibility and also gives firms more options. It opens up possibilities for workers in more remote locations as well and gives firms a greater pool of potential workers to choose from.

Depending on how prevalent teleworking becomes, it could have an impact on local and residential as well as commercial real estate prices and wages. I think we've seen during the pandemic — and specifically in more rural markets and coastal markets — a huge increase in demand for residential properties. For example, in our District on the shore and a lot of those beach areas, there has been a huge surge in demand for homes. You've seen residential prices go up as a result.

In downtown markets, you've seen softness in commercial real estate prices, which [led to] an increased amount of subletting. I think it's going to be some time to see, depending on how firms decide what ultimately their footprint is going to be in central business districts. It's going to take a while to see how commercial real estate prices pan out.

Waddell: This is such a good question, and I pretty much agree with Andy. I think that the implications could be pretty far reaching.

Certainly, there are a lot of employers now who are trying to understand differential pay across the region and different state tax laws, all of the implications of having workers and their firms working across the country or even the world. There are a lot of employers who are trying to figure that out now for the first time.

Like Andy said, there is a real potential for a shift of economic activity. A lot of cities are facing a loss of revenue in their downtown areas and a lot of that revenue was shifting to the suburbs. We might see a permanent of economic activity within regions, maybe from downtowns to away from downtowns. Do we see a shift of people further out where cost of living is lower or the ease of living is higher? Or, depending on how this plays out, people might move to whatever part of the country they want to move to, regardless of where their job is.

This is not really what we are seeing right now. But right now, a lot of firms are operating in a hybrid environment where people spend some time at home and some time at work. If, for example, you have to hire remote workers to compete for talent and high-speed Internet, like Andy said, becomes ubiquitous, then we might see more fully remote work and a changing dynamic in the distribution of households and economic activity.

In the words of an economist, the definition of "agglomeration" — the process that more or less fuels the growth of densely populated cities — might become less about physical proximity. But, that, of course, remains to be seen.

Bauer: I'd like to just add that's a really good point about agglomeration. Cities exist for a reason, and we think it's because there are external benefits from firms locating close to one another and having workers in close proximity. Because communication costs are lower now and we're able to connect virtually, those agglomeration effects are going to be somehow dissipated or not as strong. It's going to be interesting to watch over time to see how much that's true. I think its something economists will be studying for quite some time.

Gerena: Well, Sonya and Andy, thank you for sharing your insights and analysis with us.

Waddell: Thank you, Charles.

Bauer: Thanks, Charles.