Work from home, business dynamism, and the macroeconomy

SedlÃ¡Ä ek, Petr and Chenchuan Shi

No 18817, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The COVID-19 pandemic catalyzed a surge in work from home. We argue that this shift has two opposing macroeconomic effects. On the one hand, cheaper or more efficient remote work increases profitability and encourages firm entry – sparking an economic boom. On the other hand, the distribution of firms tilts towards smaller businesses as they benefit relatively more from (fixed) cost reductions associated with remote work – lowering aggregate productivity. To quantify these opposing effects, we develop a novel quantitative model, discipline it using several U.S. micro-datasets and provide empirical support for its key mechanisms. Our results suggest that if barriers to entry prevent a permanent surge in startups, then the firm-level welfare gains from more favorable remote work can be entirely offset by the fall in aggregate productivity. While recent U.S. data suggests firm entry has indeed persistently increased, evidence from other countries is mixed.

JEL-codes: D21 D22 E24 (search for similar items in EconPapers)
Date: 2024-02
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