Superstar Cities Are (Probably) Immune From WFH
(Bloomberg Opinion) -- A decade ago, University of California at Berkeley economics professor Enrico Moretti wrote a book that in many ways came to define its era. “The New Geography of Jobs” described what Moretti called the “Great Divergence” between regions with large concentrations of highly educated workers in what he called the “innovation sector,” and the rest of the country. The divide first appeared in the 1980s and only grew in the decades that followed, with a few places in particular — the San Francisco Bay Area (which includes Silicon Valley), Boston, New York, Seattle — hogging more and more of the best jobs while rural areas and many smaller cities struggled. Drawing on research by himself and other economists, he showed that the agglomeration effects achieved by locating lots and lots of skilled workers in the same place had become one of the most powerful economic forces on earth.
The Covid-19 pandemic initially brought a great deglomeration, with offices shutting down and many workers relocating far from them. Now the return to the office is slowest precisely in those places that benefited most from the Great Divergence. During a visit earlier this month to the Bay Area, I sought out Moretti to find out where he thought things stood. We tried to set up an in-person meeting but, given the topic, I guess it was inevitable that it ended up happening via Zoom. What follows are edited excerpts from our conversation.
Justin Fox: How do agglomeration economics work when everybody’s working remotely?
Enrico Moretti: This is one of those cases where it’s much easier to make predictions for the long run than for the medium run. I wouldn’t expect that, in January, everybody will be in the office. I wouldn’t expect that even in the long run things will be exactly the same. But I think the notion that you read a lot in the media, that the workplace and cities have changed forever in profound ways, that’s a little bit naïve.
I think our link to the office will look a lot like in the past. There will be probably more work from home, but it might take the shape of one or two days a week, meaning that we still have to show up at the office three or four days. That’s fundamental because it means that for places like New York or San Francisco, if you want to have access to the types of careers and jobs and employers that are there, you still need to have a physical presence in the metro area. Maybe not next to your employer, given that you don’t have to commute every day, but in the same metro area.
I think we can adjudicate the question more definitively in a couple of years when we look at systematic government data on the prevalence of work from home. But for now I’ve looked at a new dataset that includes all the job openings in the U.S. day-by-day, sector-by-sector, company-by-company, and identifies the job openings that are advertised as 100% work from home. In the two years preceding February 2020, on average, the share of office jobs in the main U.S. metro areas that were 100% work from home was about 2%. In the three months following February 2020, the share essentially triples, it goes from 2% to 6%. Which tells me two things: First of all, that it tripled in three months. Amazing! But also that it remains a small share of all new job openings, a trivial share. It is more prevalent in tech, but even there it’s not the norm.
JF: If you look at white collar workers in general, according to Bureau of Labor Statistics data, most of them are back in the office already. In tech, it seems like the majority are still working remotely.
EM: I think the interesting question going forward is what [kinds of jobs] exactly will be 100% work-from-home. I can see tasks that are easily done remotely, and by people who don’t really mind working individually. But my hunch is that the higher-level positions, in particular the R&D, will go back to being in labs and offices with engineers in front of a whiteboard, working together, trying to solve a problem with a client. There’s a growing body of evidence that this type of interaction is productive and creative in a way that cannot be substituted that easily.
JF: Doesn’t it matter that we’re getting better at coming up with virtual substitutes?
EM: That helps, but I don’t think this is all that new. I remember visiting a very important Silicon Valley software company six years ago, and their video conference facilities were amazing. It was 10 times better than Zoom, six years ago. This company is in San Jose, and it has a third of its workforce in Bangalore. And I was asking them, “How much do you pay a software engineer in San Jose compared to Bangalore?” They said, “Well, it’s between double and triple, depending on the exact position.” And I asked, “Why don’t you use more of these video conferencing facilities, and why do you still have 3,000 employees in San Jose?” Their answer: “Well, you know, our video conference facility works great, but when it’s a matter of coming up with a new product, being in front of a whiteboard, all of us with a client discussing what they really need, face to face, it still matters. It’s still important, so we’re willing to pay these higher wages and these higher office costs to be in San Jose.”
The academic literature points to the fact that this is not an isolated case. That state of the world is perfectly consistent with having some functions that are completely on Zoom. If you are coding very specific projects, I don’t think you need to be in the office every day. But if you’re designing new products and new technologies, I think it’s quite different.
JF: This is making me think of the famous paper you coauthored about the role that housing regulation in places like the Bay Area and New York has played in preventing more people from being able to work there and, and the economic losses from that. It seems like remote work offers a partial solution. People can go off to places where housing is less expensive and still participate in a useful way. Do you think that can enable some of the growth to happen that was being stopped by the fact that not enough people could live in San Francisco?
EM: I think only time will tell. The same economic forces that were at play before February 2020, that were agglomerating those jobs and those careers here and in New York, Boston and Seattle, I don’t think those forces will be gone after Covid is over. Even before Covid there was pressure to decentralize some functions within companies, and the growth of places like Boise, Salt Lake City, Denver and Austin is directly linked to that. But even before Covid, that outsourcing of some functions didn’t mean that San Francisco, New York and Seattle were losing jobs. They kept agglomerating. R&D seemed even more concentrated in those cities.
To me, if more functions are moved to Zoom, that’s more of a complement than a substitute for R&D jobs in the core part of Silicon Valley or life science jobs in Boston. The short answer is that I expect some marginal changes, but not substantial changes. I don’t think in the end it will make a huge dent in the attractive power of the star cities.
JF: Is there any possible future where we all have virtual reality headsets on, and that’s the only way we ever interact with each other, and this stops being true?
EM: You know, that’s a question for a futurist. When you ask me a question about the future, my time horizon is 10 years, 20 years at the most. I have no idea what will happen in 50 years, 100 years. If the time horizon is 10 years, even 20 years, I don’t think that the geography of where good jobs are and where the high-paying careers are will be impacted.
Honestly, it’s the same image that people brought up in the late ’90s when the internet first appeared. Thanks to the internet, the office and urban centers were going to slowly fade away and become unnecessary. And the years between the first dot-com boom and Covid were years where the opposite happened, where certain urban centers thrived enormously due to the concentration of certain industries.
That said, even just having one day a week working from home, that’s an enormous change. Some offices are talking about two days a week, even three. Those are massive changes in the way people live, which could certainly affect geographical location within metro areas and the relationship between a person and work. But the current narrative about the death of cities, or of expensive cities, I don’t think that’s really consistent with the evidence that we have.
JF: The other thing is, clearly San Francisco has some issues, but it’s generally still a really nice place. I spent some time there over the past week, and I stayed in Oakland, which was wonderful. Then I went to Mountain View, which wasn’t as nice because it developed one way and now it’s trying to turn itself into a denser, more lively place and that’s hard to do. There’s been so much emphasis on the idea that if people don’t have to go into the office every day, more will move out to the exurbs. But it really just seems to mean that people can more easily sort themselves into the part of the metropolitan area where they want to live. I mean, I’d rather live in the city.
EM: That’s absolutely right. For the Bay Area, the winners and losers are really to be determined. Before Covid, when work from home was much more rare, there were all these buses taking people from my neighborhood in San Francisco to Mountain View or Cupertino or Menlo Park. The way the area is configured, you could see more people, especially young people, choosing San Francisco because they’d only have to take the bus three days a week.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Justin Fox is a Bloomberg Opinion columnist covering business. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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