U.S. states with higher rates of telecommuting saw better overall small business performance during the COVID-19 pandemic, with remote work environments offering great potential to upend and reinvigorate the economy in the future, according to new research.

In a study published April 25 in Small Business Economics, researchers constructed a theoretical framework based on company profit maximization and a multifaceted, real-time dataset spanning daily and weekly increments from March 20 to Nov. 9, 2020. They found that small businesses generally performed better in states with higher rates of working from home, controlling for local pandemic and socioeconomic factors. Expected industry variations were also observed, with wholesale, retail and professional services experiencing fewer negative impacts than the construction, health services, accommodation, hospitality and food service sectors.

The paper's theoretical framework assumes that businesses aim to maximize profits and that there is no difference in entrepreneurship contributions between work-from-home settings and traditional office settings, but work-from-home businesses enjoy fewer benefits from geographical agglomeration. After weighing marginal capital, labor, land, and technology costs and agglomeration benefits, the paper's theoretical framework demonstrates that work-from-home environments can be a rationally beneficial option for small businesses, defined for the purposes of the study as those with less than 500 employees.

Although small businesses might be at an initial disadvantage compared to larger corporations when it comes to the infrastructure and resources required to sustain long-term telecommuting options, they could potentially maximize profit in the long run given such factors as the elimination of daily commutes, remote employees' tendency to work longer hours, lower absenteeism rates, the cost of maintaining social distancing and other pandemic procedures and money saved on office rent and utilities.

When controlling for local pandemic, economic, demographic and policy conditions, results indicate that an increase of 1 percentage point in a state's work-from-home rate lowers the logarithm of the odds, a statistical method of estimating probability, for reduced operating revenue by 1.38. The 1 percentage point increase also lowers the log-odds for supply chain disruption by 0.85; and it raises the log-odds for cash flow lasting one to four weeks by 0.79, lasting one to two months by 0.52 and three or more months by 0.83. 

Even after states rescinded stay-at-home orders, the study found that rates of remote work continued to increase. This suggests that, in some ways, telecommuting was found by businesses to maximize profit.

Twenty-five percent of U.S. workers worked from home during the pandemic, according to the researchers' data, which is less than the 37% of estimated jobs that can be done entirely from home. Prior to the pandemic, some firms might have been hesitant to implement work-from-home options, given the many unknowns and potential coordination issues. The coronavirus outbreak and subsequent lockdowns, however, provided businesses with an unexpected natural experiment, during which time the feasibility of remote work as a long-term alternative to the traditional paradigm of on-site labor could be better ascertained. 

"Our empirical analysis showed that WFH is associated with overall better small business performance and is on the rise even after the [stay-at-home] mandate ended," Ting Zhang, co-author of the study and an associate professor at the University of Baltimore, told The Academic Times. "However, adopting WFH practices often requires organizational changes, such as surveillance and control or management of the psycho-sociological distance from the work environment, considering limited promotions, raises and career success often associated with WFH. Otherwise, the benefit of WFH could be compromised or even lost."

The study's models also demonstrated that the Paycheck Protection Program was somewhat helpful for small businesses, lowering the odds of experiencing temporary closure and supply chain disruption, according to Zhang. Other attempts by the government at providing financial support, however, such as Economic Injury Disaster Loans and loan forgiveness, have not necessarily helped small businesses combat the pandemic's negative economic effects so far.

According to the researchers, these findings demonstrate that work-from-home environments are a potential force of "creative destruction," affecting economic and lifestyle factors, as well as permanently altering industrial structures. In the early 20th century, Austrian economist Joseph Schumpeter coined the term "creative destruction" in reference to the mechanism of innovation affecting both products and processes under capitalism, through which new means of production replace outdated ones and enhance productivity. New opportunities for remote work in the years ahead could prompt innovation through the creation of hybrid workplaces or sectors dominated by telecommuting, which Zhang predicts would have important implications for public policy.

In addition to this potential for positive transformation, though, remote work comes with its fair share of potential challenges, researchers warn. The rising popularity of telecommuting could make existing inequalities pertaining to digital access and income even worse. Industries with less remote flexibility are often associated with lower income, and workers lacking digital skills or access often have jobs that pay less and offer less flexibility in terms of location and scheduling.

"Should WFH become the new norm, we hope innovation and training can penetrate at least some barriers and improve conditions and pay for currently non-teleworkable jobs," Zhang reflected.

The study, "Working from home: small business performance and the COVID-19 pandemic," published April 25 in Small Business Economics, was authored by Ting Zhang and Dan Gerlowski, University of Baltimore; and Zoltan Acs, George Mason University.