People are still working from home. Does it matter?

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Nary a day goes by without some company saying that it is time for people to return to the office, often featuring a mix of cajoling, threats and appeals. Even Zoom now wants its remote workers back.

Yet working from home remains a persistent phenomenon, long after the pandemic has faded away. What is the economic impact — if any?

That’s a topic that Goldman Sachs’ chief economist Jan Hatzius has tackled in his latest report. It’s naturally US-focused, but the findings should broadly apply elsewhere.

Hatzius estimates that the share of Americans that work from home at least part of the week has declined from a peak of 47 per cent during the Covid pandemic to about 20-25 per cent. However, this compares to a pre-pandemic average of 2.6 per cent, so it’s natural to assume this must have some kind of effect (zoomable version of the chart here).

As you’d expect, the WFH rate varies hugely between industries. In retail and hospitality, hybrid and remote jobs are relatively rare, while in tech and finance almost half the jobs have some WFH component.

No wonder midday midweek golfing has seen such a boom lately (zoomable version of the chart here).

Hatzius reckons that both underlying structural and more fleeting cyclical drivers are behind the persistence of WFH. Once the strong jobs market begins to reverse, he thinks remote work will fade as well — but only a little.

The pandemic caused several structural changes that have made remote work appealing to both firms and workers. The pandemic lockdowns spurred a wave of technological innovations that made teleworking easier and more widespread. The onset of remote work allowed workers to relocate away from offices with little to no short-term consequences, but these workers now face higher costs of returning to offices due to longer or more costly commutes. At the same time, survey data also shows that workers prefer the flexibility and work-life balance of remote work, signaling a lasting shift in work environment preferences.

Cyclical labor market tightness has also contributed to the persistence of remote work. The share of remote job openings increased rapidly with the onset of the pandemic and is now above 10%, roughly 2.5 times its pre-pandemic level. Using state-level panel data, we estimate that a 1pp increase in our jobs-worker gap is associated with a 0.3pp increase in remote work postings as a share of the local labor force, similar to our global economics team’s estimate based on cross-country data. Going forward, we expect that further labor market rebalancing will modestly weaken firms’ incentive to provide the remote work benefit and lead to a decline in the remote share of job openings from 11.5% to 10.8% in the next 3 years.

The most obvious area where this has an economic impact is on demand for offices.

Goldman Sachs notes that building access swipe data from Kastle Systems from 10 major US cities indicates that average office utilisation is still down almost 50 per cent from the pre-pandemic level.

However, because of typically long office leases, occupancy rates have only dipped a little so far (zoomable chart here).

Macroeconomically, the impact of falling office construction will be small, Goldman estimates, but given their forecasts of 267mn square feet of office space that will go vacant over the next few years it sounds like it will be a bloodbath for office landlords.

Our baseline analysis assuming further labor market rebalancing shows that remote work will likely exert 0.8pp of upward pressure on the office vacancy rate by 2024, an additional 2.3pp over 2025-2029, and another 1.8pp in 2030 and beyond. This is equivalent to an increase in vacant office space by 46 million sqft at the end of 2024, an additional 125 million sqft over 2025-2029, and another 96 million sqft in 2030 and beyond, a sizable impact compared to the 49 million sqft of new office construction completed in 2022. The increased vacant space from remote work is likely to crowd out new investment in office structures by $6.4 billion in 2024 and $6.0 billion in 2025.[3] We estimate the combined drag on annual GDP growth is likely to be small, with a decline of 0.03pp in 2024 and in 2025.

How will WFH affect consumer spending? Well, American splurges on “fun” stuff — nice restaurants, events, trips etc — have rebounded back to pre-pandemic levels, even though spending on personal care, laundry and new clothes remains depressed (which explains some of the things we smelled on our last trip on the NYC subway).

However, the most interesting aspect of WFH is how it has squeezed consumer spending out from downtown metropolitan areas and pushed it into the ‘burbs (zoomable version here).

In time, we’d assume it would also lead to a noticeable uptick in spending in second-tier cities, towns and regions, as more people relocate to cheaper or more liveable places (eg Oslo, Norway). But Goldman didn’t look at this, sadly.

But Hatzius and team did look at the most heavily-discussed aspect of WFH: how does it affect productivity? The answer, sadly, was ¯_ (ツ)_/¯

In theory, WFH could either lower or raise productivity. On the one hand, remote work may lower productivity by reducing workers’ ability to learn from their peers, interfering with workers’ ability to focus on work-related tasks, and reducing creativity and innovation. On the other hand, WFH may increase workers’ productivity by offering shorter commuting times, more flexible scheduling, and a quieter working environment. Firms can also repurpose office-related expenses to other more productive uses. The technological innovations spurred by the shift to remote work could generate positive spillover effects throughout the economy.

In previous research, we found that WFH adoption was positively correlated with post-pandemic productivity outcomes in the industry cross-section. This cautions against a “return to normal” explanation of last year’s productivity weakness. However, economic studies disagree on the productivity effects of remote work. The lack of consensus is likely driven by differences in how the studies measure productivity and the types of tasks and industries they study. Earlier work that used survey data with a self-assessed measure of productivity or experimental evidence in an industry that involved routine tasks (e.g. call centers) tended to find positive impacts of remote work.

More recent studies that measure productivity through complex performance metrics and draw evidence from industries involving high-cognitive tasks (e.g. IT services) reveal more negative effects. One limitation of the academic studies is that they have largely focused on how remote work can affect productivity through changing workers’ performance. But remote work can also have effects on economy-wide productivity through other channels, such as helping firms reduce office expenses and spurring technological innovations. In previous research, we estimated that remote work and other pandemic changes boosted private-sector productivity by roughly 3% once these channels are considered, though we continue to see considerable uncertainty around these estimates.

FWIW, having started working from home before it became cool, this Alphaville writer thinks that offices are actually underrated, but commuting in most major cities is the absolute worst. More people would probably merrily come in more often if it didn’t mean being squeezed into someone’s pungent armpit for an hour every morning.