Colin’s Corner

Working From Home

By Colin Toll

Introduction

In September 2021 the Australian Government Productivity Commission issued an interesting report on the concept of working from home which is often simply abbreviated to WFH.  I believe it is a worthwhile report that should be read widely by employers and employees. To this end I will submit a slightly edited version of the report’s Executive Summary in two parts. I have decided to split the report in the interest of brevity.

A forced experiment

The COVID‑19 pandemic forced many workers and firms — up to 40% of workers — to experiment with working from home. While the stay‑at‑home orders that forced this experiment have greatly eased across the developed world, the level of working from home is likely to remain much higher than it was before the pandemic.

This forced experiment showed that many people could do their jobs at home just as well as in the office. Workers really valued the time and money saved through not commuting, as well as the extra flexibility in their lives. And some firms can see potential productivity improvements and/or cost savings in a world of more work from home.

Who can work from home?

The ability for people to do their job from home is strongly tied to their occupation and the tasks they are required to perform. Working from home is particularly suited to office‑based workers such as managers, professionals, and clerical and administrative workers, where workers use computers, interact less with the public, do not perform outdoor work or physical activity, and do not work with immovable structures, materials or equipment.

Census data from 2016 shows that approximately 35% of workers had jobs that were amenable to working from home. This potential to work from home is associated with higher levels of education and higher incomes, and full‑time jobs.

Why didn’t these people work from home before the pandemic?

Prior to the pandemic, the technology allowing many people to work from home existed — but very few took it up. HILDA data show that, in 2019, around 8% of employees had a formal work‑from‑home arrangement and worked a median of one day per week from home. Overall, around 2% of total hours were worked from home.

A number of reasons can be advanced for low take‑up of work‑from‑home arrangements prior to the pandemic. Management practices and cultural norms in workplaces, and stigma associated with working from home, may have discouraged remote work. Firms would have been reluctant to invest in the technology and systems for large‑scale working from home, given uncertainty about its benefits.

A second experiment

While work from home during 2020 and 2021 was not typical of working from home prior to the pandemic, it was better than expected for many, and attitudes and norms have changed. Workers and firms are now embarking on a second wave of experimentation — negotiating, trialling, and adjusting — to see what best works for them.

While it is not possible (nor meaningful) to predict the outcomes of this experiment, understanding the economic forces that underpin this process can reveal some possible outcomes and help policy makers understand the change and be prepared for it.

What do workers want?

Most workers want to work from home, at least some of the time. About three‑quarters of workers surveyed considered that they were at least as productive working from home as from the office. Views from employers are broadly similar, if slightly less positive.

The primary benefit for workers is the avoided commute. In 2019, full‑time workers in Australian major cities spent an average of around 67 minutes per day commuting, which in terms of forgone earnings amounted to $49, not including vehicle costs. For those taking public transport, the average time value and transport cost totalled $57 per day.

But few workers prefer fully remote work, and most want to spend some time working from the office. There are actual or perceived costs to working from home, such as reduced opportunities for collaboration and networking, reduced face‑to‑face interaction with managers, and consequences for long‑term career prospects.

Nonetheless, many employees highly value the ability to work from home and are willing to change jobs or accept lower wages in order to continue working from home.

What do firms want?

Firm preferences are largely driven by the actual or perceived productivity and costs of working from home.

Working from home may increase co‑ordination costs, reduce serendipitous interactions and knowledge‑sharing, stymie creativity and decrease the effectiveness of collaborative processes. Separation from managers may also afford workers the opportunity to slack off.

On the other hand, workers may be more productive at home because they have better control over their time and enjoy better work–life balance. Firms will be able to tap into a larger pool of (more productive) labour. And while not strictly a productivity impact, workers have been shown to work longer hours when working from home during the pandemic.

Some firms may also be able to realise office rent savings. That said, firms may be locked into long‑term leases and may be reluctant to relinquish office space while they are still experimenting with working from home.

But not every firm is a fan of working from home. For example, according to the CEO of JP Morgan Chase, it ‘doesn’t work for people who want to hustle, doesn’t work for culture, doesn’t work for idea generation’.

Evidence is mixed on how working from home affects productivity for individuals in practice. But, over time, as firms and workers negotiate outcomes, learn and adapt, and become more effective at working from home, there are grounds for optimism at the economy‑wide level. In all likelihood, productivity will remain the same or improve under more widespread working from home.

How will these differences be reconciled in the short term?

Working from home unlocks a large potential benefit that accrues to workers in the first instance, due to the avoided commute. As such, workers generally prefer more work from home than firms (but more firms than workers prefer the fully remote model). But it is firms that determine work from home policies, at least in the short term.

We expect workers and firms to negotiate mutually agreeable outcomes. Many firms are likely to experiment with the hybrid model, where workers spend two to three days a week in the office and two to three days working from home. If all workers who could work from home did so two days per week, around 13% of all hours would be worked remotely.

The hybrid model is intuitively appealing, balancing the benefits of working in the office — being able to collaborate, innovate and interact with colleagues’ face‑to‑face — with the flexibility, quiet and lack of commuting associated with working from home. In practice, the hybrid model may be more difficult to execute well, due to increased management and coordination costs.

A small number of firms are adopting fully remote models. This has been observed among high‑tech firms (where use of collaborative technologies is commonplace and access to a global talent pool is important), as well as low‑skill jobs, such as call centres (where monitoring is easier, and collaboration is less important).

And in the long term?

Over time, workers can change jobs and choose those that better suit their preferences. Anecdotal evidence suggest that many people are already leaving their jobs to pursue the flexibility offered by remote work.

Workers may also be willing to accept lower wages to work from home. Survey data from the US suggests that the ability to work from home two or three days per week may be worth a 7% pay rise to workers, and about 40% of workers who currently work from home would seek another job if their current employer required a full return to the office. We consider that wage reductions are unlikely at the aggregate level.

Job switching and negotiation on wages provides firms with information about what attracts (desirable) workers. In this way, switching and negotiation set in motion a process of experimentation in which firms try different arrangements, observe outcomes, relinquish unsuitable arrangements and maintain those that yield desirable results.

And next Previews issue….

The next report will continue with a slightly edited version of the Productivity Commissions report cover issues such as health and wellbeing, government regulation, WH&S and the impact on CBD’s.