The shift to working from home: how has it affected productivity? - Economics Observatory

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The shift to working from home: how has it affected productivity? - Economics Observatory

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The Covid-19 outbreak led to a rapid shift to working from home in many occupations.
During the pandemic, there was a rapid move towards working from home (WFH) in many occupations.
A review of recent evidence indicates that policy-makers should be sceptical of general claims being made about the impact of home working on productivity, either negatively or positively.
While the first two approaches show a mainly negative relationship between working from home and labour productivity, the self-assessment approach reports mixed results.
Specifically, although some research seems to imply that a return to the workplace is necessary to recover economic performance, the preferences and perceptions of employees seem to suggest that working from home at least some of the time (‘hybrid working’) may become a permanent option.
The pandemic forced many firms to adopt working from home.
These include the time spent on coordination activities and meetings both within and outside companies, which has meant a reduction in the number of uninterrupted hours when working from home (Gibbs et al, 2021).

The shift to working from home: how has it affected productivity? - Economics Observatory

The Covid-19 outbreak led to a rapid shift to working from home in many occupations. The change may have a negative impact on productivity, but this ignores workers’ perceptions and effects on their wellbeing. Covid-19 changed how many people work. During the pandemic, there was a rapid move towards working from home (WFH) in many occupations. This is very likely to be a permanent shift in how work is organised in at least some advanced economies. But this development has raised questions about the effects on workers’ productivity. A review of recent evidence indicates that policy-makers should be sceptical of general claims being made about the impact of home working on productivity, either negatively or positively. Some quantitative studies indicate that the pandemic has had a negative effect on labour productivity. But at the same time, more qualitative studies provide important insights that are relevant to public and private decision-makers. Indeed, productivity is a complex variable to determine, and different studies have applied varying approaches to capture the impact of Covid-19 on labour productivity. Recent studies have used three main approaches, which appear to give different results. These are based on: accounting data; systems for monitoring the activities and hours worked by employees; and self-assessment by workers. While the first two approaches show a mainly negative relationship between working from home and labour productivity, the self-assessment approach reports mixed results. Specifically, although some research seems to imply that a return to the workplace is necessary to recover economic performance, the preferences and perceptions of employees seem to suggest that working from home at least some of the time (‘hybrid working’) may become a permanent option. This implies that employers will have to adapt to this situation by supporting its implementation, agreeing on a strategic position on hybrid working with respect to the specific organisational context, and facilitating it through training, provision of appropriate equipment and so on. How might the pandemic have affected productivity? In economic terms, the pandemic has led to a fall in investment, an erosion of human capital due to unemployment and a decline in global trade and supply chains. In addition, it could also be associated with a constraint on the ability of economies to raise incomes in the long run and a reduction in productivity (World Bank, 2021). In the short term, the negative effects of the pandemic are most evident when considering the depletion of the labour force (people made redundant, becoming sick and/or on furlough), the tightening of financial conditions and the disruption of supply chains (World Bank, 2021). Similarly, the measures to contain Covid-19 have increased firms’ intermediate costs, pushed down value-added relative to sales – that is, reduced the difference between the selling price of a product or service and its cost of production – and reduced productivity (Bloom et al, 2021a). There are other effects that are less clear. The pandemic forced many firms to adopt working from home. At least initially, many employees were not provided with the necessary support or infrastructure for remote work, nor did many have the skills required. As a result, productivity may have gone down due to increased distractions and communication costs. These include the time spent on coordination activities and meetings both within and outside companies, which has meant a reduction in the number of uninterrupted hours when working from home (Gibbs et al, 2021). On the other hand, in this new way of working, greater job autonomy and self-leadership could have led to higher individual productivity (Galanti et al, 2021). The adoption of working from home has also meant that at least a fraction of the time saved in commuting is devoted to work-related activities, which may increase productivity (Barrero et al, 2021). In addition, the closure of less productive firms due to the pandemic tends to increase average productivity in the short run (Bloom et al, 2021a). Many of these mechanisms that can explain productivity changes in the short term may also apply further down the road. A prolongation of the pandemic would continue to have supply-side effects, mainly in terms of labour depletion (that is, people made redundant, sick and/or on furlough) and supply chain disruptions. In addition, social isolation, family-work conflicts and longer working hours can affect workers’ wellbeing and their mental and physical health. This is likely to have a negative impact on their long-term productivity at work. Similarly, it is likely that the time that senior managers have had to devote directly to the pandemic has in part been taken away from other long-term productivity-enhancing activities (Bloom et al, 2021a). Further, the effect of lower investment in research and development (R&D) and innovation during the pandemic is likely to affect productivity in the long run. Nevertheless, while the adoption of working from home may have had negative effects on productivity in the short term, these can, in principle, be mitigated and even reversed in the long term. Indeed, there is scope for improving the management of remote working, and labour productivity can be increased by enhancing managerial support (Farooq and Sultana, 2021). What do recent empirical studies say about the impact of Covid-19 on productivity? Research in this area has focused on analysing the effects of the pandemic on productivity in specific economies, sectors and firms, mainly considering the effects of home working. This is due to the specific objectives of each study, the availability of relevant information and the complexity of measuring productivity in practical terms. Although measurements in this context are diverse, three main practical assessment methodologies can be identified in recent studies. First, there are studies that examine labour productivity on the basis of mass accounting or numerical information from statistical databases. For example, using data from the Decision Market Panel of the Bank of England, one study finds that the pandemic would have reduced total factor productivity – that is, productivity including changes in capital as well as labour inputs – in the UK private sector by up to 4%, estimating a 1% reduction in the medium term (Bloom et al, 2021a). The study also suggests that the increase in intermediate costs associated with the pandemic would influence the reduction in ‘within-firm’ productivity, that is, how productive individual firms are. This is notwithstanding the compensating effect coming from the contraction of less productive sectors (and firms), which is known as the ‘between-firms’ effect (see Figure 1). There is evidence of a negative relationship between Covid-19 and productivity in another study, which estimates that the pandemic reduced labour productivity by 4.9% in Latin America and by 3.5% in the 24 countries included in the sample, considering direct and indirect sector-level effects on the economy (Ahumada et al, 2022). Figure 1. Contributions to the impact of Covid-19 on productivity Panel A: Labour productivity per hour Panel B: Total Factor Productivity (TFP) Second, other studies determine labour productivity on the basis of employee activity monitoring systems. One, which uses employee activity tracking systems in Asian information technology (IT) service companies, observes a reduction in labour productivity by 8-19% due to the pandemic (Gibbs et al, 2021). This is explained by the fact that employees worked longer but less productively, as output remained about the same (see Figure 2). Another study, using a dataset of the daily activities of developers in one of China’s largest IT companies, finds varied results depending on the different comparison metrics used (Bao et al, 2021). The researchers observe that working from home has both positive and negative effects on overall project productivity depending on the metrics evaluated and the characteristics of each project. Figure 2: Average outcome by month Panel A: Input – Time worked per working day Panel B: Output –tasks completed relative to target Panel C: Productivity Note: the vertical line (month 0) indicates the switch to working from home. Third, there are a large number of studies that analyse labour productivity from a self-assessment point of view. In other words, they address the workers’ own perceptions of their performance. Only one study fully supports the negative relationship between working from home and labour productivity during the pandemic, particularly considering the possible influence of a less supervised work environment (Farooq and Sultana, 2021). The results of other research show mixed or positive incidences. For example, one study observes that difficulties in reconciling family and work and social isolation negatively affect work productivity, while autonomy is positively related to work productivity (Galanti et al, 2021). Another finds negative impacts in terms of decreased work motivation, distraction and multi-tasking, as well as positive effects related to work-life balance, flexibility and time savings (Mustajab et al, 2020). Other work shows that factors related to working from home – such as having a comfortable workplace, making one’s own decisions about how to schedule work, combining work with household chores or avoiding commuting – can have a positive effect on job satisfaction and a negative impact on job performance, with positive and negative effects on productivity, respectively (Ramos and Prasetyo, 2020). Other studies find no significant changes overall in workers’ perceptions of productivity before and during the pandemic. But this does vary by sector, occupation, worker characteristics and work context. For example, one study observes that workers in industries and occupations that are less suitable for home working, such as those related to food, report a decline in productivity. This was also observed among low-income earners, the self-employed and women, particularly those with children (Etheridge et al, 2020). Another study finds that women, older and high-income workers were likely to report increased productivity (Awada et al, 2021). Other research finds that self-reported productivity was higher while working from home despite self-reported negative effects on physical health, such as a significant increase in back pain and weight gain related to decreased physical activity and increased consumption of junk food (Guler et al, 2021). Evidence also indicates that home working will boost productivity in the post-pandemic economy by 0.8-1% as conventionally measured, or by 3.6-4.6%, on a wider definition of productivity that includes reduced commuting time (Barrero et al, 2021). In the data used by the latter large-scale survey, 45% of the respondents answered that their efficiency when working from home was about the same as working on company premises, while 39.7% answered that their efficiency at home is higher (see Figure 3). Figure 3: Efficiency of working from home versus working on business premises Note: Responses to the question ‘how does your efficiency working from home during the Covid-19 pandemic compare to your efficiency working on business premises before the pandemic?’ Overall, in studies that could be called more ‘objective’ – that is, those that use mostly accounting data in measuring the productivity of the corresponding economies, sectors or firms – it appears that Covid-19 has negatively affected productivity. But when the monitoring of workers’ activities and workers’ perceptions of their performance are taken into account, the results are more diverse. They depend on the context and characteristics associated not only with the work, but also the workplace and workers themselves. In addition to the studies mentioned above, a recent investigation of 1,612 engineers, marketing and finance employees at a large technology firm based in Shanghai used a randomised control trial (RCT) methodology in which half the group were arbitrarily assigned to being able to work from home for two days per week, while the other half worked full time in the office (Bloom et al, 2022). Among other findings, this study found no impact in the group that were working from home or in any individual sub-group in terms of performance reviews or promotions. Lines of code written by the home working group – one measure of employee productivity for IT engineers – rose by 8% (as measured over the whole working week) compared with the control group. Employees' self-assessment of their productivity while working from home was also positive, with an average post-experiment assessed impact of 1.8%. What are the implications of the results of the impact of Covid-19 on productivity? The pandemic is a unique crisis that has affected both the supply and demand for goods and services. It has created a context in which incentives for product innovation and quality improvement are reduced, technological progress is held back and productivity is reduced (World Bank, 2021). Consequently, a pro-active approach from both the public and private sectors is needed to boost productivity growth. Policy-makers will need to facilitate investment in physical and human capital. Firms will need to revitalise their capabilities to drive technology adoption and innovation. Economic shocks caused by the pandemic may lead to structural changes that can improve productivity in certain sectors. The option to work from home could increase and may positively affect labour productivity due to the re-optimisation of labour arrangements (Barrero et al, 2021). Additionally, the various measures taken by firms to deal with the productivity consequences of the pandemic, such as investment in home equipment to facilitate working from home, have not only mitigated the decline in output but also significantly changed work dynamics (Eberly et al, 2021; Bloom et al, 2021b). The shift to home working seems to have affected not only labour productivity but also workers’ wellbeing, especially in the context of work-life balance. One study observes that individuals working from home due to the pandemic reported lower stress, higher efficiency and better quality in their work. But the same study also finds self-reported weight gain and increases in lower back pain, both of which may have longer-term health implications (Guler et al, 2021). Workers’ perceptions of home working are still subjective and depend on multiple factors, such as the complexity of the work performed, the need for interaction (or not) with other colleagues to complete certain tasks, the awareness of being observed and evaluated, and, even more importantly, family and workspace conditions at home. Indeed, there is currently no consensus in economic research on the productivity effects of working from home, as it can be very unequal across people and locations (Behrens et al, 2021; Barrero et al, 2021). Undoubtedly, policy-makers should be sceptical of general claims being made about the impact of home working on productivity, either in a negative or positive direction. The quantitative studies reviewed here mostly support the notion of a negative effect on labour productivity, indicating a necessary return to the workplace to regain pre-pandemic economic performance. Yet those studies of a more qualitative nature provide important insights – on employee preferences and wellbeing – that should be considered by relevant public and private decision-makers. Where can I find out more? Who are experts on this question? Nick Bloom, Stanford University Philip Bunn, Bank of England Steven Davis, The University of Chicago José María Barrero, Instituto Tecnológico Autónomo de México Authors: Cristian Escudero and Mark Kleinman Picture by monkeybusinessimages on iStock
The Original Article can be found on Economics Observatory

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