WFH Employment Dynamics Over the Business Cycle
A Microeconomist Ponders a Wall Street Journal Piece
Over the business cycle, we appear to be in a recession. As firms now reduce their labor demand, will WFH/hybrid jobs be created or destroyed as compared to traditional office jobs? In this entry, I will explore the simple economics for answering this question. A recent Wall Street Journal piece motivates my interest in this topic.
Every job features “fixed costs”. Workers incur fixed costs when they commute to work each day. Firms incur fixed costs by renting space for workers and by offering them health insurance. In the presence of such fixed costs that are incurred for each worker, a firm who needs 1000 hours of lawyer help would prefer to hire 1 lawyer to work 1000 hours rather than hiring 1000 lawyers to each work 1 hour. Why?
Note that in the latter case, that the fixed cost is paid 999 more times!!
Imagine a case where every worker has access to health insurance from the market rather than from buying it from their firm. Imagine if workers are equally productive at the office or when they engage in WFH.
Under these assumptions, how would a cost minimizing firm adapt to shifts in aggregate demand for its product? During a boom, aggregate demand increases for the firm’s output and the firm wants to expand output. Such a firm can hire more WFH workers to produce this output and would be more likely to do so if it does not know if the increase in demand is permanent or temporary.
During a time of recession and declining demand, the firm could respond by reducing the number of hours its WFH each work rather than firing them. Since, there are no fixed costs in the WFH economy, the firm can respond on the intensive hours margin rather than on the extensive (fired worker) margin.
So, the point of this entry is that the rise of WFH actually helps firms to navigate demand shocks by not firing workers but instead by changing hours worked. This favorable dynamic would occur if there are not fixed costs to hiring workers. Unbundling health benefits from employment would accelerate this transition.
I recognize that I have discussed the point that during a recession a firm may seek to have “all hands on deck” as it strives to reoptimize and adapt to new challenges. The idea of Creative Destruction would say that downturns are the right time to try to create new plans for the future (because the opportunity cost is low) and such planning is facilitated by face to face interaction.
Finally, in our litigious society —- firms that want to shrink hours worked without being sued may seek to use Return to the Office as a screening mechanism. Under RTO rules, workers are “free to choose” whether they quit. Those with the least firm loyalty will be the most likely to do so.
Awesome article professor Khan! What are your thoughts on expanding the notion of elasticity? Would the most elastic workers self select to quit under RTO rule? And if so, is it fair to make an assumption that yes they are more risk taking, but also more qualified in some regard (and have more options). Fight on!