The working from home evolution
Speech
Chair Michael Brennan spoke at a seminar panel event for RMIT University on 17 August 2021.
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Thank you to Jason and RMIT for having me here today. Of course, when I say ‘here’, I am speaking figuratively – like a lot of people on the eastern seaboard I am in fact at home. But unlike others on the eastern seaboard, I have only been in lockdown for a few days – so working from home still feels a bit unfamiliar.
Historically, the concept of working from home should be very familiar. Because 300 years ago, most people worked from home: as farmers, weavers, blacksmiths and other skilled artisans, as well as doing backbreaking household chores and child rearing. They were also, by today’s standards, extremely poor.
It was, of course, the industrial revolution that increasingly drove us to the centralised workplace – initially the factory and the mine, later the office. Such that by 1900 most people in Britain and the USA worked in a location other than their home.
The move to the central workplace was driven by economic forces. New production techniques changed the business model – it became necessary to combine labour with large and expensive machinery, with a single source of (steam) power. The factory provided a means for bosses to co-ordinate activity in real time, supervise workers and it also provided an efficient way to share knowledge, as did the office.
In many ways, the central workplace reduced transaction costs, but imposed transportation costs – mainly on workers who had to get themselves from home to a central location. And for most of the 20th century, it got radically cheaper to move people around via steam, electricity, the internal combustion engine and the aeroplane.
So technology drove and reinforced the role of the central workplace. And as often happens, other institutions (we can call them inventions) co-evolved, including intangible ones: like the limited liability company, which provided a basis for new businesses to form, as did more sophisticated capital markets.
So the big question is: Are we at a turning point?
For the last 30 years or so the cost of moving people around has stopped falling, or at least stopped falling at anything like the same rate. We seem to have hit physical limits on speed, and congestion has meant that today it takes longer to move around our cities than was the case a few decades ago.
Meanwhile the cost of moving information has plummeted, thanks to innovation in computing and telecommunications. Just as industrial technology drove us physically together into the central workplace, could it be that modern communications technology is set to drive us apart?
The British economist and journalist Frances Cairncross said in 1997:
In half a century’s time, it may well seem extraordinary that millions of people trooped from one building (their home) to another (their office) each morning, only to reverse the procedure each evening... One building – the home – often stands empty all day; another – the office – usually stands empty all night. All this may strike our grandchildren as bizarre.
Perhaps so, but interestingly, until now there has been very little change to that pattern that commenced with the industrial revolution.
Census and HILDA data show that rates of working from home between 2000 and 2019 were low (around 5 per cent) and fairly constant. If anything, over that period, Australia’s CBDs became more significant as centres of economic activity and engines of productivity growth; and we saw the rise of conspicuous monuments to agglomeration economies: from Silicon Valley to the City of London.
Why is it so?
One possible reason is that no technological trend works in isolation. Other forces have been at play. At the very time that information technology was improving, and the cost of communicating at a distance was falling, the nature of work has also been changing.
US Economist David Deming showed in a recent paper that as machines have replaced routine tasks, modern jobs have come to require more open-ended decision making, critical thinking and adaptability. He illustrates a remarkable fact: in 1960 the income of a typical worker in the US peaked in their late 30s, whereas today it peaks in the worker’s mid 50s – a change he attributes (through detailed econometric work) to the rising importance of decision making on the job.
One hypothesis is that these skills – those quintessentially human qualities of adaptability, decision making, judgment – are best developed and honed through in-person interactions: like the serendipitous encounter or the tacit knowledge we absorb through observing those around us.
Perhaps we are seeing the tendency pointed to by futurist Roy Amara, namely that we tend to overestimate the impact of new technology in the short run and underestimate it in the long run.
But it is also hard to escape the likelihood that the COVID-19 pandemic has created a stark discontinuity. The pandemic forced, and continues to force, a mass experiment: in working from home, in remote medicine; in online learning; in the adoption of digital technology generally. We have learned things that we won’t unlearn.
When it comes to remote working, survey evidence suggests that, on the whole, it has been a positive surprise. Hence it is unlikely that the amount of remote working will fall back to its 2019 levels even in a post COVID-19 world.
In coming weeks, the Productivity Commission, will release some research on working from home: what it might mean for cities, for our work health and safety regime, the workplace relations system; what it might mean for productivity.
We analyse these things from an economic perspective, and our starting point is a fairly conventional neoclassical framework. Hence, we think about the considerations that motivate workers (the commute, greater flexibility, the loss of social interaction in the workplace) and how they might trade these things off. Likewise for firms: the capital cost savings versus the productivity implications. And we think about how these different preferences could be reconciled via negotiation and market processes.
The conventional economic framework is useful because it helps us think through the forces acting on wages, rents, productivity and – importantly – overall wellbeing. But I do think that to really understand the path of digital technology and its economic impact you really need to combine those traditional neoclassical insights with the insights gleaned from a more evolutionary approach.
Which is why it’s great that RMIT is undertaking this project.
The evolutionary approach to economics – of which Jason Potts is a leading practitioner – eschews that narrow profit maximising assumption in favour of the more realistic view that firms face uncertainty – both about the state of things and the future – and do their best to navigate their way through the fog.
The evolutionary approach stresses the importance of variety – the idea that different firms make different bets based on their subjective hypotheses about what will work; with these experiments submitted to the test of the market and society. It stresses that variety can foster novelty. It is not an aberration, but that it’s actually fundamentally important – particularly in the early stages of a new technology.
In our work, we have talked about work from home being characterised by two experiments: the first one being the forced experiment of firms and workers having to embrace remote work; and the second experiment being the array of different models tried by different firms: fully remote, fully centralised, and the endless possible versions of a hybrid model.
The first experiment forced change on the economy from the outside; the second experiment will generate change from within, which is where the evolutionary approach is at its strongest.
We have tried to consider the role of learning – another element that the evolutionary economics approach takes seriously. Learning happens at the level of the individual and the firm; but it also happens at the level of the economy and society as a whole, as different methods are tried – some succeed and some fail.
So the evolutionary approach, with its focus on novelty and variety rather than representative agents; knowledge rather than efficiency; change rather than equilibrium and taking its inspiration from biology rather than physics, is a powerful complement to the traditional tools of economic analysis, especially where technology, innovation and entrepreneurship are concerned.
I wish RMIT and the team all the best in their endeavours.
Speech
Commissioner Catherine de Fontenay delivered a speech to the 2023 Tasmanian Economic Forum.
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As you’ve probably gathered from my accent, I’m not from around here! But I am married to a Tasmanian. He grew up in Burnie, in the heyday of large-scale manufacturing there. It’s funny, many of us wax nostalgic about the glory days of manufacturing … but the ocean water was brown because of the residue from the pulp and paper mill; and if the wind was in the right direction, and you were downwind from the sulfuric acid plant, you’d get a strong tingling sensation in the back of your throat. And if you went mountain biking behind the paint and pigment factory, the forest had been completely killed off and it looked like a moonscape.
So if the good old days of manufacturing were not quite as good as we remember, why are so many of us worried about the shift from manufacturing to services? Tasmania after all, like the rest of Australia, has had a long-term shift away from manufacturing and toward services, and Tasmania’s manufacturing sector is performing a useful support function for agriculture and mining, but it’s relatively low productivity. What is it we’re actually worried about?
First, making stuff is cool. I’m very sympathetic to this view, being from Washington DC, a town that produces nothing but hot air. A brilliant Tasmanian architect selling their designs overseas doesn’t have the same tangibility as a manufacturing export.
During Covid, we worried about being dependent on overseas supply chains for manufactured goods. The Productivity Commission did a study of that issue and found that there are only a small number of products where global production is overly concentrated. Relying on global trade means supply can come from a whole range of countries, some of whom can respond to a shock more quickly than we can.
Of more concern is that manufacturing used to offer a route to building skills and earning a good income for those who didn’t get much formal education. The decline of manufacturing means fewer paths to a high-income job for those who didn’t get much education. There are still paths to good jobs through trade apprenticeships and some paths through health, and those are big sectors. But for the rest of workers, the path to a better job is through taking VET courses to upskill (possibly in an area you’re not currently working in). So all of these paths rely on VET being affordable, accessible, and high-quality. Even with good VET, upward mobility is an ongoing policy challenge, for all of Australia, as job markets become increasingly polarised.
Finally, there is a geographic concern, because a shift from manufacturing to services shifts the locus of activity:
- Some economic activity has shifted away from input locations in manufacturing, like the North West of Tasmania; and so the employment options in those locations are worse.
- Economic activity also shifts towards cities, specifically the big cities of the mainland with several universities, that create knowledge economy jobs (for example, finance, professional and technical services).
So some of those concerns are reasonable. That said, policies to slow or reverse the shift to manufacturing have lots of negative consequences. And there is also lots of potential good news in the shift toward services.
First, in terms of the geographic shift, it’s potentially good news for some smaller cities. Even before remote work, some smaller locations became hubs of knowledge work. In the US this includes locations such as Austin Texas, Raleigh-Durham in North Carolina, Boulder Colorado, and so on. There needs to be a good university (for hiring smart graduates and as a source of expertise and new startups), and appealing location to high-income workers.
So in Tasmania, this means that the Hobart region has strong potential if investments are made in boosting the quality of teaching at University of Tasmania and the involvement of academics with the private sector (academics involved in consulting, academics involved in startups).
The same could potentially be said of Launceston. The Commission has made a number of recommendations that the University could implement itself, with encouragement from Tasmanian economists: making all lectures available online to the university community or even better to everyone; real rewards for good teaching (grants and bonuses); allowing academics to consult and to easily license their intellectual property.
More recently, the rise of remote work (and of course climate change) raises the attractiveness of all of Tasmania as a location.
The message is that attracting high-income knowledge work is about attractive locations (the growth in the Tasmanian tourism industry has helped make many locations more appealing), telecommunications and digital infrastructure and SKILLS – attracting retaining and building skilled workers. (I want to stress, the interest in attracting this work to Tasmania is not because high income knowledge work is the only sector of interest, but it’s high productivity and it boosts demand for many other services.)
There is also a tremendous amount of good news for Tasmania in another major shift we are experiencing, the shift to more services being available online.
The shift to online is good for workers
First, the shift to online study. Lots more VET and Uni courses are available online than before Covid. I counted 20 different online TAFE accounting courses, for example. There are also lots of e-learning courses from reputable firms with industry expertise for upskilling and even entering a new industry. This means that there are more paths for people to upskill, and more industries that they can access. It also means more competition for local University and VET courses.
It’s useful that Tasmania was early in the NBN rollout, so students in most locations can access the internet. But Australia is still missing a key ingredient for online: we need good mechanisms to ensure quality in online VET and university. Students need information on the quality and cost of all available courses.
As the Commission has pointed out, the websites to guide students to VET courses are deeply terrible. And the VET regulators (ASQA) are very focused on compliance rather than quality. I would love to see ASQA and TEQSA actually attend some classes in the institutions they regulate!
Next, the shift to online work
That means lots more jobs available in depressed areas, thanks to online options. The transition hasn’t fully happened yet; at the moment there are more people interested in working from home than there are jobs, depending on the type of work. For example, an online health provider advertised 20 work-from-home nursing and allied health jobs, and got 500 applications. But there will gradually be more and more work available purely online. But taking advantage of these online jobs requires literate and internet-savvy workers; and we still have some students leaving school with serious weaknesses in their literacy and computer skills. So Tasmanian school and VET options need to be high quality for all students. More on school quality later today!
The shift to online is good for businesses
I think Tasmanian firms are aware that they need to be online and oriented toward bigger markets on the mainland and overseas. This is a big advantage over mainland firms. And the ease of getting one’s business online really helps.
Online is important for the diffusion of technology: The main way that firms learn about innovation is from other firms in their industry. That’s challenging in Tasmania, when those firms may be further away.
There are a number of ways that the internet can help with that challenge. Staying more digitally connected to professional associations, relevant university researchers on the mainland and overseas, can be really valuable. Firms can attend online events and lectures. Firms can also access more skilled intermediaries from the mainland and overseas: consulting firms, skilled accountants and other intermediaries. There is value in using intermediaries that other firms in the industry are using, because they share information. There are benchmarking services (including one from the ATO) that allow firms to see how they’re performing relative to their industry.
And an online presence makes it feasible to hire workers from the mainland and overseas; for some roles, they may not even need to relocate. Firms can gain both specialised skills and specialised knowledge of sophisticated processes at other firms when casting a wider net in hiring.
What is the role of policymakers and economists in all of this? Policymakers can support the growth of professional associations, especially ones with ties to the mainland; they can provide more industry-specific information about what’s available online; they can support the migration review.
Finally, the shift to online is good for consumers
It’s worth remembering that the benefits to firms that I’ve described also flow to their consumers. Lots of products and services are available from online providers, and this provides a valuable check and balance on local market power: there are lots of areas where there are a small number of firms supplying the market. Again, it requires literate and online-savvy consumers with internet access.
In short, I think some of the broad shifts that we identified in Advancing prosperity have tremendous potential for Tasmania, if there is the right policy response. Supporting people to develop their skills is at the core of that policy response.
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