The Geography of Remote Work: Are Cities Losing Their Agglomeration Advantage?

Thanks to the plethora of electronic tools designed to help white collar workers communicate with each other and generate all manner of digital products, millions of office-bound employees have been freed to work from anywhere with a high-speed Internet connection.  Academics, business leaders, and policymakers are anxiously awaiting changes related to remote work: will cities lose their agglomeration advantage?  Agglomeration, also known as concentration, occurs when businesses in one location attract other businesses to that location through derived demand.  For example, a factory that is built in a town results in several other businesses being built close by to satisfy the demands of wage-earning factory workers, from restaurants to laundromats to gas stations.

History of the Agglomeration Advantage

Rural-to-Urban Migration

In economics, the agglomeration advantage hearkens back to the Industrial Revolution, when workers began shifting from agricultural labor to factory labor.  Circa 1800, a massive shift was underway in Britain, birthplace of the Industrial Revolution, as new inventions like the steam engine allowed factories to be built away from flowing water.  This could put new factories closer to areas where people already lived, meaning a ready supply of low-cost labor.  In Europe and North America, the Industrial Revolution brought new industrial jobs to cities, which quickly attracted agricultural workers.  Migration from rural to urban areas began and continued until World War II.

Urban-to-Suburban Migration

Improvements in transportation by the 1950s, especially the access of working-class families to personal automobiles, allowed many urban workers to move slightly outside cities to quieter, cleaner suburbs.  Thanks to automobiles and improved infrastructure like highways, trains, and subways, workers could still make it to urban factories every day while living in suburbs.  The shift of many workers from urban centers to suburbs did not erode the agglomeration advantage, however, as the ability of living in attractive suburbs continued to attract rural residents to urban areas.  Some rural residents who would balk at living in a downtown apartment would accept a small house in the suburbs.

Does Remote Work Truly Remove Workers From Cities?

Between the 1950s and the 1990s, the ability of workers to move away from cities was limited by commuting time.  Both factory workers and office workers needed to be on time for their in-person shifts.  Starting in the early 2000s, however, high-speed Internet made it increasingly possible for white collar workers, who typically generated documents or digital products, to complete their work away from a traditional office.  In theory, this meant many white collar workers could work from home…even if the home was thousands of miles away from the office.

The 2020 Covid Pandemic

Despite the technological basis for remote work existing for years prior to the Covid pandemic, the mandatory shutdowns during the pandemic started the remote work boom, surging from about 5 percent to over 30 percent of workers.  Tech companies and white collar workers quickly adapted to remote work and fine-tuned the needed technology and protocols.  Therefore, even when the pandemic ebbed and workers were safely able to return to the office, there was strong demand by many to continue working remotely.  Proponents of remote work argued, and continue to argue, that the technology and protocols exist to allow remote workers to be just as productive as in-office workers (although lively debate exists).

Where Did Remote Workers Move: Rural, Suburban, or Urban?

Freed from their offices and cubicles in 2020, many white collar workers chose to move their homes.  Most moved to suburbs or rural areas, though a majority of the movement was to suburbs.  This meant only a small easing of the agglomeration effect, as most remote workers who moved from urban areas stayed relatively close to urban areas.  Relatively few remote workers moved to rural areas, possibly due to lack of high speed Internet infrastructure.  Many remote workers who moved were also likely influenced by the agglomeration advantage and wanted to remain close to urban areas for amenities like infrastructure, cultural events, and education and career opportunities.

The Donut Effect

Therefore, while it is true that many remote workers could work from anywhere with high-speed Internet, most have chosen to remain close to their original urban centers.  This has created a donut effect where more workers have moved to the suburbs, creating a donut-shaped ring of population growth around large cities.  Although the technology is new, the trend is continuing that which began in the 1950s.  Therefore, cities are not losing much of their agglomeration advantage, as people are still drawn to the cities and their amenities…they just live right outside in a suburb rather than inside in a smaller house or apartment.

Post-2023: The Return to [Some] Cities

Many remote workers who quickly fled large cities during the pandemic slowly began to return after about three years, reversing the migration trend of 2020.  However, only “superstar cities” like New York and Los Angeles enjoyed the full return to pre-2020 migration trends; smaller large cities did not enjoy as much of an agglomeration advantage.  Superstar cities have enough cultural importance, prestige, infrastructure, and opportunities to attract migrants despite the ability to conduct remote work from lower-cost areas.

Wage Differentials Limit Some From Returning

One factor slowing the return of workers to large cities, especially superstar cities, is the lower wages sometimes offered to remote workers compared to their in-office counterparts.  Some white collar workers have accepted lower pay in order to work remotely, preventing them from returning to more expensive areas.  Most companies are unlikely to voluntarily increase a remote worker’s wages simply so he or she can move to a more expensive area!  Ironically, because many remote workers argue that they are just as productive as in-office workers, this “locks in” these remote workers to their lower-cost-of-living suburbs or towns - the company has no productivity incentive to let them move to a more expensive location.

This creates a remote work conundrum, especially in an era where many companies want employees to return to the office (at least in a hybrid capacity).  Those who resist returning to the office may be forced to accept lower wages, permanently locking them into living in lower-cost areas.  But, if those workers are truly just as productive as their in-office peers, the company could be advantaged by getting the same output for lower wages.  This could erode the agglomeration advantage of cities in the long run by incentivizing companies to seek remote workers from areas with lower cost of living, allowing those companies to pay less but still reap the same productivity.