A rise in telecommuting could lead to slightly higher wages, lower housing costs in city centers and an increase in individuals' welfare, according to a new economic model that uses real data from the Los Angeles area.

The study, published March 3 in the Journal of Urban Economics, could shine light on future urban life if the current pandemic-prompted increase in telecommuting continues. 

The researchers took data on employment and residence patterns in 3,846 census tracts in the Los Angeles-Long Beach Combined Statistical Area between 2012 and 2016. They found in the American Community Survey that, conservatively, 3.7% of people in the area were telecommuting to work before COVID-19, so that rate was used as the baseline for the modeling exercise. Then, the researchers tested what happened to housing costs, housing choices, firm productivity, employment density, wages and commute times as they cranked up the proportion of people working from home in the model to 33%. 

Overall, people's welfare went up by 18.9%, which was largely attributable to the decrease in commuting, the ability to move to places with better amenities and, for some people, the ability to fulfill randomly assigned idiosyncratic preferences.

"I don't know what it means to be happier by 18%, but that's a quantitative model," co-author Andrii Parkhomenko told The Academic Times, chuckling. Parkhomenko, an assistant professor of finance and business economics at the University of Southern California, characterized the study's assumptions: "Simply speaking, somebody who consumes a lot of goods, who has a big house, who doesn't spend time commuting is the happiest person in the model." 

Workers in the model chose where to live and work based on commuting time, wages, housing costs, neighborhood amenities and any randomly assigned location preferences they had, with "high-amenities" areas generally assumed to be places where, in the real-world data, a lot of people lived even though housing was relatively expensive and there was not a lot of job density. Because telecommuters in the model no longer had to take a commute into account, many of them moved away from the city center to more peripheral areas where they could live in larger residences with lower costs. And as these workers dispersed, the housing prices in core areas dropped, leading to an overall 5.6% drop in housing prices. 

Some workers who continued to commute also moved to the periphery of the city because there was somewhat less commuter traffic for them to deal with. The overall decrease in commuting, the authors wrote, could also have some positive environmental effects.

A second, forthcoming study expanded the model to include much of the United States; Parkhomenko said the findings for Los Angeles in the March 3 paper are "qualitatively similar" to other big cities. 

In the model, all workers were essentially identical and equally able to work from home. Thus, a caveat of the study is that it does not account for the disproportionate harm to less-educated lower-wage workers who tend to occupy jobs that cannot be performed remotely. 

"Consider a Starbucks barista in the Silicon Valley," Parkhomenko said. "If all the software engineers move from the Silicon Valley to Colorado because they don't have to come to the office, the barista will be harmed because nobody is buying coffee anymore." 

A model that accounted for those differences between workers would have shown an average decrease in wages, he said, rather than an overall small increase. He noted that his follow-up study included those variables.

Parkhomenko pointed out that the rise in telecommuting will have a profound effect on urban economics research, because the vast majority of theoretical models assume people commute to work every day. He and his co-author had already built a model with Los Angeles specifications to study housing supply and affordability, and when the COVID-19 pandemic forced much of the workforce — including Parkhomenko and his co-authors — to work from home, "We thought, OK, we've got this model, we have all this data, why don't we think about what may happen to cities if people telecommute more often?"

The study, "How Do Cities Change When We Work from Home?" published March 3 in the Journal of Urban Economics, was authored by Matthew J. Delventhal, Claremont McKenna College; and Eunjee Kwon and Andrii Parkhomenko, University of Southern California.