04The impact of Covid-19 on agglomeration

The onset of the Covid-19 pandemic in a world where knowledge-based jobs can be undertaken (at least in part) remotely as a result of technological developments triggered an enormous experiment in the world of work and posed serious questions about the future geography of national economies in developed countries. This section looks at what the literature to date has to say on its impacts and how working patterns in central London, where the impacts of agglomeration were most clearly seen pre-pandemic, have changed since lockdowns have been lifted.

The productivity impact of a rise in remote working is not yet understood

The key area of debate on what will be the dominant way of working in the future has hinged on whether there has been any productivity hit to moving to remote working. If there is no long-term change to productivity (or indeed an increase), then this would cast doubt on the on-going requirement for face-to-face interaction.

The short answer to this question is that it is too early to tell, with various studies pointing in different directions. For example, on the negative side:

• A study of UK workers found that the transition from office-based work to WFH (work from home) led to increased work intensification, online presenteeism and employment insecurity, thereby causing psychological strain and poor levels of work engagement.³⁸
• Similarly, a study of the US workforce reported decreased worker productivity resulting from increased work intensity (e.g. receiving more information from teams and engaging in more planning activities) due to WFH.³⁹
• Another study conducted in Japan concluded that WFH productivity was about 60-70 per cent of the productivity at business premises and was especially low for employees and firms that started working from home after the onset of the pandemic.⁴⁰
• Additional evidence suggests that since the onset of mass home working, 30 per cent of workers reported that it is now more difficult to meet targets, and they had concerns of underperforming.⁴¹ Previous studies have also found that home workers reported longer working hours.⁴²
• A study of Microsoft found that interactions between workers during the pandemic tended to become more siloed, with fewer links between different departments and a decrease in synchronous communications that made it harder to share information between colleagues.⁴³

Meanwhile, on the positive side:

• A study of Finnish workers found that home workers were more relaxed, more efficient, and produced a better quality of work.⁴⁴
• A study in America estimated a 5 per cent productivity uplift from saved commuting time and optimisation of working practices from more flexibility.⁴⁵
• A study commissioned by the Bank of England highlighted differences in the impact across UK firms. According to this study, firms where more work could be done from home and where sales involve less face-to-face contact with customers reported a productivity increase between the second quarter of 2020 and the first quarter of 2022.⁴⁶

Existing studies have also explored how socio-demographic factors contribute to differences seen in the impact of WFH. For example, one study found that WFH men were less productive than WFH women. Additionally, unmarried workers with no children, older workers, and those with higher levels of income were also found to be less productive. Another study found that highly educated, high-wage employees and long-distance commuters exhibited smaller reductions in productivity when WFH. Having an appropriate workspace was also associated with higher levels of productivity, something more likely in larger living spaces.⁴⁷

All of these studies look at the relatively short-term impact of the pandemic on productivity. It is possible that the impacts are felt over the longer term. If pre-existing social bonds helped to get work done in the immediate shift to greater remote working, but it affected the ability to create new bonds or impacted upon creativity and new ideas generation, then the impact may take much longer to emerge.

A very recent paper looking at workers in a Fortune 500 software engineering firm (so a study focusing on knowledge work – something previous studies have tended not to do⁴⁸) offers some insight on this. By looking at feedback on engineers’ code, it shows that Covid-induced remote working increased short term productivity but had long term impacts on on-the-job training and promotions, especially for younger workers. It also found evidence that working in a hybrid model pulled down productivity by making collaboration more difficult.⁴⁹

This provides evidence to answer the question that ultimately will determine what will happen in the future – that is, the individual benefits versus the wider company benefits of proximity. Even if shifting to home working makes individual workers more productive (and the evidence on this for knowledge work is light), knowledge firms and the cities they are located in could still lose the collective benefits of between-worker and between-firm interaction.⁵⁰

It should be no surprise that predictions of a wholesale shift to fully remote working have not come to pass

Given this distinctly mixed picture, it is worth considering both the theoretical impact of the rise of more advanced communications technologies on the benefits of agglomeration and the observed patterns of behaviour that have happened in London since lockdown restrictions have been lifted.

The two benefits that are in theory affected by the rise of technologies are the matching and learning elements of agglomeration. In principle, matching – that is, the ability of cities to match people to jobs – is deeply affected. Remote technologies quite literally open up a world of workers that companies can hire from, rather than solely those within commutable distance.

Learning, though – the sharing of ideas and information – is not. There is no doubt that remote technologies do offer some degree of substitution to face-to-face interaction, but they do not seem to replace them. Analysis of the eye-movement data of people communicating over video conferencing finds that virtual communication can curb creative idea generation.⁵¹

Crucially, this in turn impacts on matching. If people do still need to come together, then geography becomes important again for hiring. It may be the case that commuting distances have become longer as people trade coming in fewer days, pre-pandemic, with longer commutes – although there isn’t any strong evidence on this as yet – but they still need to be within commuting distance. This would suggest that agglomeration will remain important.

The shift from fully remote to hybrid working shows the enduring benefit of face-to-face interactions in London

The gradual change in behaviour of workers and companies, since the lifting of the final lockdown, backs up this theory. Far from Covid-19 triggering a future world of fully remote working, real time and survey data point to a return to the office that is being encouraged by businesses. This suggests that there is a productivity loss by not being able to interact face-to-face.

Unsurprisingly, there was a large increase in home working across the country as a result of the Covid-19 lockdowns. While the majority of jobs still had to be done at a workplace – in the 2021 Census, 49 per cent of people did not work from home – there was a 28-percentage-point increase in home working from the previous census to 31 per cent of all people in England and Wales.

This was most clearly the case in London. The ability of knowledge-based jobs to be done remotely,⁵² and the proportion of these jobs in the Capital, meant that home working⁵³ by the city’s residents increased from 3 per cent to 42 per cent (see Figure 10).

But the most recent census was conducted during a lockdown. What is more interesting is how workers and businesses have responded since. For this there is little official data. But combining Transport for London (TfL) data with a survey commissioned for this report gives insights as to how this picture has evolved.

Looking at TfL data for Tube exits from Underground stations in and around the City of London (where offices are the dominant use of space),⁵⁴ Figure 11 shows that:

• There was a sharp increase in exits in the second half of 2022, and by the end of November 2022 weekday exits were up to 71 per cent of February 2020. This was 40 per cent higher than in April 2022, and represents a weekly increase in exits of around 600,000 in spite of storms and repeated train and London Underground strikes.
• It has plateaued, however, in 2023 to date, with very little further increase beyond November 2022 levels.
• This return varies by day of the week, with Tuesdays, Wednesdays and Thursdays being more popular than Mondays and Fridays (reflecting pre-pandemic trends). Thursdays are the busiest days.

• The survey of 558 central London workers fills in detail on the behaviour of individual workers that the TfL data cannot provide. It shows that in April 2023:
  • On average workers spent 3 days in the office, or 50 per cent of all working days. This was 59 per cent of January 2020 levels. Box 5 looks at working patterns before the pandemic.
  • At4 days, the number of days in the workplace was slightly higher for people living in London than those commuting in from outside (2.0 days). In particular, those living outside of London were less likely to work 4 or 5 days in the office than those living within it.
  • Of those going into work (as opposed to working fully remotely), the most popular hybrid model was two days in the workplace – 31 per cent of workers did so. That said, almost half of workers went into their workplace for at least three days. Tuesdays and Wednesdays were the most common days in the office, while Friday was the least popular.
  • Younger people were more likely to go into work than older people, with those aged under 30 spending more time in the office. Given the likely contribution more experienced people make towards on-the-job learning for younger workers, this may be an important issue for skills development.

In line with the TfL data, the survey also shows that there has been an increase recorded in the amount of time spent in the office, but this trend is much more muted than relevant TfL ‘office’ station exits (suggesting respondents overestimated how much they worked in the office 12 months ago).

Most businesses have insisted on a return to the office, but vacancy data suggests hybrid working will persist

It appears that the majority of businesses working in activities that could be undertaken from home have taken a cautious approach to requiring people to come back into the office. Few businesses have been outspoken on the issue. The CEO of Goldman Sachs was a clear exception this, describing home working as ‘an aberration’.⁵⁵

This caution is understandable given the mismatch between employer and employee preferences and the post-Covid-19 labour shortages experienced in many countries. Numerous surveys have reported on large numbers of employees who claim they would quit their job if required to come in to work five days a week.⁵⁶ A survey of WFH preferences across 27 countries highlighted a gap between employer plans and worker desires.⁵⁷ The survey found that employers planned an average of 0.7 WFH days per week post-pandemic, but workers wanted more than 1.7 days. Separate US data from the Survey of Working Arrangements and Attitudes 2021 and UK data from the Business Insights and Conditions Survey 2021 showed similar mismatches.⁵⁸

The most high-profile mismatch between organisation and employees has perhaps been between Apple and Twitter and their staff, with plans to increase office working days being met with strong employee pushback.⁵⁹

That said, more company bosses appear to have spoken out against home working in recent months. At the World Economic Forum in Davos it was reported that there was more open questioning of home working from business leaders such as JP Morgan and BlackRock.⁶⁰ And more recently even Mark Zuckerberg, CEO of Meta (and the creators of the Metaverse, which imagines a much greater amount of life will occur virtually), told staff that working in the office helped build relationships and get more done, referring to preliminary analysis that suggested that junior engineers “perform better on average when they work in-person with team-mates at least three days a week.”⁶¹ These comments were echoed by Disney CEO Bob Iger in January.⁶² And more recently IBM’s CEO, Aravind Krishna informed employees that a failure to return to the office may lead to limited career progression. He told Bloomberg, “Remote work can be hazardous to your career”.⁶³

Despite the wider reticence, the majority of central London office-based businesses appear to have also set minimum office days. Three quarters of respondents to the survey said that their companies required them to be in their workplace at least one day a week, and almost half had their days specified by their employer. Two days was the most common number of required days (26 per cent), followed by three (21 per cent).

A number of employees go to their office more than this baseline requirement. Just over a quarter of respondents reported going in more than prescribed by their employer, although for workers living outside of London it was much lower at 6 per cent. This suggests that despite the nervousness reported around employers pushing people back to the office, a reasonable number are already going beyond what guidance has been given.

There is as yet seemingly little appetite for employers to push beyond these requirements. Using job adverts as a proxy for employer intentions in the future, Figure 12 shows postings on Indeed for any vacancy that says it is either hybrid or remote for companies based in London. For all jobs, the share is both considerably higher than pre-pandemic levels and, while it was flat for much of 2022, it was higher than for 2021.

Commercial office costs have not yet seen sharp falls

One of the knock-on impacts of predictions of much greater home working was that there would be a big fall in demand for office space in the centre of London. Data from property agencies does not suggest that this has happened to date. Rents for Grade A space in the West End have recovered from falls at the beginning of the pandemic, although rents in the East End are around 6 per cent lower than 2019.

It appears, however, that there has been some change in the structure of deals being made. Rent free periods (which don’t show in the headline rent figures) have been extended, and the length of contracts has fallen from 11.6 years to 6.4 years. There are also signs of a flight to quality, with 91 per cent of office space leased in the City of London in the year to June 2022 being grade A, up from 67 per cent pre-pandemic and evidence of businesses swapping larger grade B space to smaller grade A offices.⁶⁴ This suggests that demand for central London office space has weakened but there has not been an implosion.

Worker spend has recovered in line with the return to the office

Unsurprisingly, businesses built around selling goods and services to workers have seen a hit from the reduction in worker footfall.⁶⁵ An index that tracks the performance of Pret-a-Manger stores in the City and Canary Wharf shows that in early 2021 transactions were less than a third of what they were before the pandemic. But this has recovered in line with the recovery in workers in the second half of 2022 and as of the last two weeks of April 2023 it had reached 95 per cent of its pre-pandemic baseline.