A Look at the Impact of the Work-From-Home Revolution

In this article, I survey the state of remote work in the American economy and investigate the implications for workers, businesses and local economies. Comprehensive real-time survey data agree: Work from home is here to stay. The ability to offer remote or hybrid arrangements has become an important tool for employers to attract and retain talent, as workers value the flexibility that working from home affords them. Meanwhile, what has been a positive development to many workers poses significant challenges for urban cores that no longer benefit from the daily influx of commuters and their spending.

The shift to working from home (WFH) that occurred for a large part of the American population at the onset on the COVID-19 pandemic was a momentous event. A shift of such proportions had never been witnessed before in the labor market, though there was an increasing trend even before the pandemic hit: As seen in Figure 1, WFH rose from its 1970s’ level of only 0.5 percent of days worked being away from the worksite to 4.7 percent by March 2020. In May 2020, WFH peaked at 61.5 percent of workdays provided remotely.

Not only is the shift to WFH unprecedented, but it has also been persistent: In summer 2023, 28 percent of workdays were still done from home. WFH, however, looks quite different now than at the height of the pandemic. Hybrid models are considerably more popular as a work arrangement than being fully remote, with 40 percent of workers working from home an average of 2.5 days per week. This figure has the flavor of a long-run equilibrium, as it has barely changed since July 2022 and aligns well with employers' own projections.

There are good reasons to believe that a return to a world of fully on-site work is unlikely. For one, as many workers reorganized their lives around their home offices, they undertook significant investment to carry out their duties in a new environment. This includes not only buying new furniture and software but also adopting new skills and patterns of behavior. Businesses adapted as well, as they supported their remote workforce with capital investment and later welcomed employees back in a redesigned environment aimed at being safe and healthy. Both workers and businesses may find it costly to undo such investments to resume business as before. These investments, therefore, cement the status of working from home as a prominent feature of the American labor market.

Many of these investments have lowered the costs of WFH, while others raise the benefits. Among the former, teleconference software (which is now a far cry from the "calling in" challenges of the 2000s) comes to mind, but ergonomic office chairs may very well do as much to sustain workers' productivity when WFH. Network effects — or "we all use a technology precisely because we all use it" — are an example of the latter and only reinforce adoption of these cost-reducing forms of intangible capital.

Furthermore, many employees gained new appreciation for the flexibility WFH gives them: The survey data displayed in Figure 3 notes that only 18.4 percent of workers report desiring to WFH "rarely or never," compared to 28.5 percent wanting WFH five days a week and 53.1 percent wanting between one and four days per week.

Finally, the move to WFH often enabled households to move to another geographic location altogether, as noted in the 2022 paper "Work From Home Before and After the COVID-19 Outbreak." This provides another reinforcing factor for the persistence of WFH, as moving is expensive and difficult for many families and individuals.

Employers are taking notice, though not all are having the same reactions. Some express enthusiasm, others express concern. On average, however, American employers seem to have embraced the change and routinely use WFH arrangements as a recruiting tool:

• Between 30 percent and 60 percent of employers offer such arrangements to new hires.
• Even more (between 45 percent to 75 percent) offer such arrangements to retain current employees.

Nevertheless, survey data show that employers offer about half a day less WFH than employees desire. Also, the inability to offer desired work arrangements is cited by at least one in four employers as an obstacle to hiring low-skill workers and by 38.9 percent and 43.0 percent of employers hiring middle-skill or high-skill workers, respectively. Employers have also expanded the geographic scope when recruiting because of WFH technology, potentially attracting a larger and more diverse group of applicants.

Working From Home's Effect on the Economy

But is WFH good for the economy as a whole? The evidence is preliminary, as some aspects of the shift to WFH have yet to fully play out. On one hand, there is time reclaimed from commuting and preparing for work, with that time primarily reallocated to work (43.7 percent), in addition to personal time (45.1 percent) and children (11.1 percent).¹ Anecdotal evidence abounds on how the shift to WFH has enabled efficiency gains in how the workday is organized, from the timing and length of meetings to the use of workflow software that allows large teams to follow up on each other's progress remotely. And, naturally, there are potential output gains from having a better-rested, more thoroughly satisfied and ultimately happier workforce. This is something that several studies — some pre-dating the pandemic — have documented extensively.²

On the other hand, a few studies have raised concerns about prolonged and extended WFH periods, specifically when it comes to the mentoring and guidance provided to junior workers. The difference found in survey data and in some larger observational studies like the 2023 working paper "The Power of Proximity: Office Interactions Affect Online Feedback and Quits, Especially for Women and Younger Workers (PDF)" indicates a loss of mentoring time, though this is somewhat small (3-5 minutes per day, per mentee) and concentrated among younger and female workers.

Working From Home's Effect on Urban Cores

The real loser from the WFH revolution, however, is not any one single individual, although significant inequality along education levels in access to remote working is also borne out by the data. Where WFH is poised to wreak havoc is on urban cores. The office vacancy rate hovers around 16 percent currently versus 10 percent pre-pandemic. Downtowns are emptier because office buildings are vacant, and vacant buildings especially pose unique challenges for many cities already struggling with crime, homelessness and urban blight. As the value of commercial real estate drops and businesses struggle, the 2021 working paper "Why Working From Home Will Stick" estimates that the average city's tax base may drop by between 5 percent and 10 percent with respect to pre-pandemic levels.

Furthermore, as offices lay empty and cafeterias deserted, many businesses that used to rely on the steady flow of commuters are seeing their revenue sources dry up. The sandwich stands, food trucks, coffee shops, shoe repairs, dry cleaners and other parts of that microcosm of small entrepreneurship that revolved around "the office" will need to evolve or else risk considerable suffering under the new WFH equilibrium.

Though this may seem a rather gloomy scenario, it's important to note that whatever is being lost in the urban core areas is instead developing and flourishing in the city outskirts: Anecdotal evidence from business leaders paint a picture of employers swapping downtown high rises with suburban work campuses closer to where their employees live. The total change in well-being — or "welfare," as economists use when measuring societal happiness — is unclear. Only time will tell if growth in the suburbs will make up for shrinking downtown business districts.

What is certain, instead, is that the WFH revolution will redistribute resources among localities and individuals: More educated and geographically mobile workers can take advantage of the flexibility afforded by WFH, while less educated and mobile workers face significant adjustments. The WFH debate is likely to stay awhile with decision-makers in the public and private domain alike.

Claudia Macaluso is an economist in the Research Department at the Federal Reserve Bank of Richmond.

To cite this Economic Brief, please use the following format: Macaluso, Claudia. (August 2023) "A Look at the Impact of the Work-From-Home Revolution." Federal Reserve Bank of Richmond Economic Brief, No. 23-28.

This article may be photocopied or reprinted in its entirety. Please credit the authors, source, and the Federal Reserve Bank of Richmond and include the italicized statement below.

Views expressed in this article are those of the authors and not necessarily those of the Federal Reserve Bank of Richmond or the Federal Reserve System.