The pandemic has changed cites and many people are starting to revaluate their role in our lives. Some are even starting to wonder if cities are still relevant. Over millennia, cities have survived many structural changes (both economic and social) and have always proven to be surprisingly resilient. How has the pandemic changed them and are they still useful?
Before the pandemic, the main economic reasons for cities to exist was the density of jobs and amenities. Although economists argue about whether, density of amenities or jobs was the more important benefit, the consensus was that together they were the main reasons for people and firms to be in cities. The pandemic affected jobs and amenities differently and one is now compelled to wonder how this affects cities.
Fortunately, economists understand the basic forces that encourage urbanization as they have studied agglomeration forces for a long time. To a large extent the early research in this field was led by Paul Krugman who received the Nobel Prize for his contribution to this field in 2008. Since then, the main contributions to the field focused on how cities adapt to changes which offer a very good theoretical foundation for thinking about current challenges.
There are two reasons why firms may prefer to have their employees work in the same location at the same time. Firstly, many managers believe that this supports unstructured exchanges of ideas. It is a well-established notion that unexpected conversations lead to new ideas and higher productivity. However, there is surprisingly little evidence to show that ‘watercooler talk’ encourages innovation. The pandemic ruthlessly tested the assumption that teams needed physical proximity to be productive and it turns out that, in some professions such as writing, design or many branches of IT and accounting, work from home is the best option. Indeed, the work of Nick Bloom on the impacts of working from home on workers, managers and firms shows the pros and cons of office work very clearly.
Research on transaction costs and industrial organisation shows that the second reason for firms to like coordinated office work is the fact that it makes it easier to monitor employees. We have good evidence (the work of Brown and Medoff amongst others) showing that salaried employees can be monitored more effectively if they are nearby. Indeed, labour economists have documented those salaried employees need closer supervision as their renumeration is not directly related to their effort or output.
Despite the progress in monitoring technologies and skills that the pandemic encouraged, this benefit of a city office is difficult to dismiss. Therefore, it seems that although some professions may switch to remote work, there still are clear benefits for most firms to stay in cities. This likely means that the jobs that pay the highest salaries and offer the best career progress may still be in cities (controlling for all other differences between jobs). Even if they will not require daily commuting to the office, an office in a central location will still be a great asset to most firms.