How Remote Work Is Reshaping America`s Urban Geography

Published: 09-19-2022  Category: Insight
By Brian Kidder - Economics and Markets Editor

Remote work is more than a new wrinkle in an old economy. It is better described as a phase shift enabling much greater efficiencies, differing costs, and abilities. The reasons this is so are pretty profound, counterintuitive, and deserve further study.

Remote: Not A New Idea, But Newly Available To A Critical Mass

Remote work is not a new idea. Even before Tim Ferriss popularized the idea in his best-selling 2007 book, The Four Hour Workweek, Paul Pilzer had been a vocal proponent of the idea of quitting one’s job to become a contractor performing the same tasks remotely, for multiple organizations as a way to add greater value to the economy.

Prior to 2020, the value of remote work has generally been met with suspicion by businesses, which, rightly or wrongly, tended to view the idea of employees working from home as a greater cost than a productivity enhancer. The opposite has proven to be the case. It turns out that commuting is expensive and takes up a significant portion of employees’ time. Not only that but with average one-way commute times nearing 30 minutes, and preparation time for a commute/office presence being another 30-45 minutes, it isn’t difficult to see how this time could be easily repurposed. Just one value-generating activity during what would otherwise be a commute likely makes that time more valuable to a business than a commute or a commute’s effect.

Covid Pulled Everything Forward

The lockdowns put in place in response to the Covid-19 pandemic forced the remote issue. Companies and employees were forced to adapt, and because the technology existed already, the transition was made quite readily. People then began to realize that the fears companies had about the costs of remote work mainly were misplaced.

Companies feared losing control over employees. What actually occurred was an increase in employee productivity. But there were other effects as well; one was that baby boomers happened to be entering mass retirement as a cohort, which began to diminish the size of the economy’s most significant source of high-skilled labor and know-how. We experienced this as companies being less able to hire entry-level help on terms anywhere near what they were accustomed to and as an overall increase in noise in the channel, which we call inflation.

Still Not The Whole Story

In addition to remote work proving its efficacy in a trial by fire, technology had changed the economy considerably by this time. Starting a business, especially a service business, became easier than ever thanks to technology. Whereas in the past, starting say, a software business had required dealing with purchasing expensive items such as servers, rack space, and programmers’ time, today every aspect of these can be accessed in the cloud for a nominal monthly fee. That’s a huge barrier to entering the market, erased. This is the case in many other fields besides software. Barriers to entry are falling, and entrepreneurs can easily start a business and compete with larger firms.

The Theory Of The Firm

Nobel Economist Ronald Coase wrote his second most famous paper, The Nature Of The Firm, in 1937. He attempted to explain why firms exist, among other things. Why don’t people just work for themselves? On the other hand, why isn’t there just one huge firm everyone works for?

The answers Coase postulated still stand today: transaction costs. Firms exist to minimize transaction costs, which are the costs associated with entering any transaction or activity in the marketplace. For the transactions of buying office equipment, shipping a product, having the trash hauled away, or conducting research, there is a cost involved in performing each. Firms largely perform the function of internalizing and batching these costs.

Transaction Costs Add Up

Hiring employees is one such function. If a firm had to go to the marketplace each day to find the lowest cost help, the transaction costs of doing so would eat them alive. Instead, they internalize these costs. Rather than have to pay the cost of hiring the right person at the most optimal skill and cost level day after day, they might instead pay a premium for a full-time employee with the requisite skill sets to ensure access on demand.

In an environment where transaction costs are many and high, we would expect to see more and larger firms and fewer smaller firms and individual entrepreneurs. Likewise, in an environment where transaction costs are few and low, we’d expect to see many smaller firms and individual competitors in the marketplace.

Technology Drives Down Transaction Costs

Technology as a general concept refers to better ways of accomplishing more of the desired outcome with fewer inputs. Historically, this has referred to the wheel as being better than the foot, crude oil as better than whale oil, and electricity as better than candles. We tend to think of computers and associated infrastructure when we talk about technology, but better technology is simply another method that produces the same or greater output with less input.

Better technology drives down costs over time. It costs less to transport cargo on wheels than by foot. The electronic fuel injector roughly halved the per-vehicle consumption of gasoline in the US, which, in effect, doubled our supply of oil (if you halve your consumption rate, you effectively have twice as much). And today, videoconferencing and cloud technologies combine to make it not just feasible, but largely advantageous for corporations to utilize to be more competitive not just in hiring and retention, but productivity as well.

The Pandemic Accelerated Existing Trends

When the Covid 19 Pandemic and attendant lockdowns hit the US in force in March of 2020, companies and employees were forced to adapt. And adapt they did. Videoconferencing became the norm and companies offering anything that better facilitated remote work thrived. The genie left the bottle.

If you want to see conflict arrive on your doorstep, try telling Americans you’re discontinuing the thing they’ve come to know and love; especially when that thing has broader benefits for the economy. Not only did this development enable much greater personal flexibility, but it also enabled greater productivity and employee contentment, reduced aggregate commute times and traffic volumes, and greatly expanded the hiring pool for many positions from the local area to the wider world.

Why Are So Many Office Buildings Largely Empty?

Whereas large companies with Class A+ office space have been more generally successful at bringing workers back to the office, this has not been the case for companies operating from less-desirable office spaces. Much of the glut of centralized office space lies in sub-class-A buildings outside city centers, and as such will need to be repurposed, once relevant parties decide remote work is a viable trend and not a passing fad.

In short, policymakers’ models are inadequate for their purpose given these new wrinkles. This includes the federal reserve, macroeconomists, and local land use policy architects. The solutions to these sorts of problems cannot be centrally planned but must be iterated organically by independent agents. This implies easing structural rules and policies, and greater freedom for investors and developers to ideate and implement possible solutions.

Takeaways

  • Remote work offers both workers whose jobs can be done remotely and firms that employ them greater value than being office-bound, rolling it back incurs vociferous opposition, and it is likely here to stay as a result.
  • We are likely near a phase shift, not a point along the same curve, in the global as well as the US economy.
  • We do not have adequate models to explain what we see happening economically and need to develop better ones.
  • Investors, developers, and local governments need to work together to create greater latitude for finding repurposing solutions consumers find valuable.

Conclusion

Remote work is both an extreme luxury enjoyed by high-value economies, and a bonafide asset for companies that allow it, as well as the communities in which they do business. It is more benefit than cost, by a substantial margin, and is therefore likely to remain and expand. Smaller US cities and suburbs will be direct and disproportionate beneficiaries of these trends, as the costs of larger cities encourage remote workers to fan out.

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