The impact of a global work from home labor force
Market implications of skill-biased tech adoption and lower urban density
How many of us will work from home (WFH) when the dust from the COVID-19 pandemic settles?
Right now, there’s a big gap between the ability to work from home and the extent to which it happens — but that gap is likely to narrow. There’s also a gulf in the ability to WFH between developed market and emerging market (EM) economies. In the U.S., where less than a quarter of the labor force works from home on a regular basis, we expect that share could reach 40% over the near to medium term. Globally, the WFH share is about 25%, up 8 percentage points since 2001 and steadily growing (Exhibit I).
A quarter of the global population can now work from home
EXHIBIT I: INDIRECT ESTIMATES OF THE GLOBAL WFH LABOR FORCE
Greater internet connectivity, younger workers
Growth has largely been driven by greater internet connectivity, and to a lesser extent by the increasing share of younger, more tech-savvy workers; rising educational attainment; and service sector shares in the economy. The evolution of economic structures – a shift from manufacturing to services, the proliferation of the knowledge economy and the rising tech intensity of production – are all pushing the incidence of WFH in the same direction. As such, under most scenarios the range of WFH labor is expected to expand over time.
The WFH trend is among the most visible manifestations of the technology forces that we have been highlighting as upside risks to aggregate productivity growth in our Long-Term Capital Market Assumptions.1 The extent to which social distancing has further catalyzed recent waves of tech innovation and adoption implies that these upside risks to real growth and downside risks to inflation are that much more likely to take effect.
Productivity, inflation, income inequality
To what extent does the WFH phenomenon translate into higher labor productivity? It’s not yet clear. Much of the effect hinges on the specific conditions of working from home (e.g., commute times saved, children present, adequate space, effect on privacy), as well as managers’ ability to monitor the quantity and quality of their employees’ work. Certainly, the pandemic experience has boosted internet connectivity and strengthened the “gig” structure of work, and the two trends’ respective direct influences on productivity.
The relationship between the work from home trend and inflation is an ongoing subject of discussion among economists and market participants. The pass-through effects of the WFH phenomenon to inflation are a function of two distinct channels: lower marginal costs of production as an extension of productivity enhancements, and an erosion of labor bargaining power, weighing on wage growth, as individual work arrangements become more common. We have already seen incipient signs of this trend as firms adjust salaries to align with the lower cost of living in home locations.
Increased work from home may also exacerbate income inequality: As a skill-biased technology, working from home may contribute to a further widening of the relative wage gap between high and low skill workers.
As investors consider the main implications of the WFH trend, many will focus on the tech sector and trends in urbanization.
A more powerful tech sector
The tech intensity of WFH will be a tailwind for companies that provide the hardware and software tools to enhance WFH productivity, and may even extend to the regional equity markets that have higher tech sector weights. But it is not a free lunch. As more information is exchanged virtually, cybersecurity will also be an increasingly important aspect of firms’ production functions.
The story is more complicated for emerging markets. On the one hand, the tech sector makes up a large share of the EM equity index. On the other hand, there is relatively limited technological infrastructure in the larger EM countries. Whether, and when, emerging economies will catch up to developed economies in terms of fixed broadband and 5G internet remains an open question.
Real estate and redesigned cities
The WFH trend could change the way that cities are designed and used, with significant implications for the real estate sector. If economic activity moves out of central business districts, it could affect a wide array of business and household activities. Residential vs. commercial real estate is one asset-class manifestation, though it is not an unambiguous win for residential real estate, given its distribution across both urban and suburban areas. For larger firms, the returns to scale of office buildings for a large employee base may still make sense. Industries geared toward daily commutes and corporate travel are more obvious examples of the losers, with business passengers representing 75% of airline profits but only 12% of passengers. The relative challenges for transportation and other affected sectors may also correlate with ESG (environmental, social, governance) filters based on carbon emissions. From the employee perspective, savings in commuting time and money may well make their way into enhancements for the home.
The COVID-19 shock is prompting what might be lasting behavioral changes. As we see it, the same factors enabling work from home are also facilitating wider adoption of a “virtual lifestyle,” with WFH and e-commerce among its high profile features. Related and equally profound changes in household and corporate behavior include: digital education, social media connectivity, e-health care and virtual leisure activities such as fitness and recreational events. What are the relative benefits and drawbacks of sitting in a classroom, visiting the doctor’s office, working out at the gym or consulting a financial advisor in person if one can receive comparable service or content online? Is there an optimal balance of physical vs. virtual experiences, and will we know it when we see it?
Investors will be looking for metrics and measurements, of course, and that could be a challenge. For example, it’s unclear if the labor productivity effects of working from home will be adequately captured by current official surveys. If not, this could lead to underestimates of real activity, as have been found for e-commerce. If the WFH trend proves enduring, as we think it will, it could reshape whole industries and sectors—creating new corporate winners and losers, and, as always, new investment risks and opportunities.
1See J.P. Morgan Asset Management (2019): “New economy, same old returns? The future impact of e-commerce on the economy,” 2020 Long-Term Capital Market Assumptions, and J.P. Morgan Asset Management (2017): “Technology, productivity and the labor force: The impact of technology on long-term potential economic growth,” 2018 Long-Term Capital Market Assumptions.