The game theory of remote working

Welcome to this week’s blog. If you’d prefer to listen to an audio version, click here for the podcast. 

What a fantastic week to live in the UK. The temperature is rising, COVID-19 cases are less than 5% of their peak, and deaths even lower; half of our population has received a first jab, and the punishing lockdown of the past 4 months has been released. The 12th April marked perhaps the most significant milestone in Boris Johnson’s roadmap. We can once again go to the pub (albeit outdoors), visit shops, and travel beyond our local communities. For many, the combined impact on outlook, including the restoration of these once taken for granted liberties will be game changing 

 

While the guidance remains to work from home where possible, many businesses will now be thinking in earnest about the narrow runway ahead on the one-way roadmap to further normalisation and will be actively considering what the new work normal might or should look like. Along the way, we are likely to see some difficult and divisive decisions. It has become clear during the past year that across the world, people have polarised opinions about how they would like to work in the future.  

 

Based on some of the polling and announcements of the past weeks, it would be easy to reduce this to a binary battle between, on the one side, heavy-handed employers who require everyone back in the office 5 days per week by the end of June, and on the other a workforce of feckless employees who, having become used to working in tracksuits, want to skive at home from now on. Of course, the full picture is much more nuanced; many workers have either found greater productivity at home or are desperate to get back to the office. And many employers are drafting new flexible work policies that recognise the importance of being competitive to secure the best talent. However, I would put it to you that the focus of the discussion is also likely to take a new turn in coming year; one which is much more significant to the future of the office in the UK. Let’s briefly play through the game theory of the period ahead; and the decisions on remote working. 

 

Once employers spot that some roles can be delivered effectively remotely, what happens next? Let’s take the example of an employee who used to work in an office in London, but in lockdown relocated to Wales where the average salary is 35% less, and now works virtually. But I’m still doing the same job and delivering the same output,’ says the employee. In the short run the fairminded employer might tend to agree. Perhaps personal loyalty will prevail. But what happens when they leave and the vacant position needs to be filled? The concept has now been proven that the job can be performed from Wales, so there is no need to backfill in London. And why would you pay 35% more than the prevailing labour cost? The salary of the remote role would sensibly be rebased. But the smart employer shouldn’t stop there. 

 

Firstly, what has been proven is not just that the job can be done in Wales, but that the job can be done anywhere where there is someone suitable to do it. Suppose someone else puts up their hand who offers to do the job from Greece, where the average salary is 50% less? Great, thinks the hiring manager; more savings. But thats just the start. The CFO then knocks on the door. I see that you managed to successfully reduce the cost of that role through homeworking? If we can virtualise that role, what about all of those other people that work for you doing a similar job? Why are we paying them a London wage? And why Greece, and not India?  

 

The answer to these questions relies on three key factors: (1) can the work be performed remotely, (2) is there somewhere where this can be done cheaper, and (3) is there suitable talent availability? Let’s look at all three, before considering what this means for the UK property market, and for each of us. 

 

Can the work be performed remotely?  

To be clear; most people in the UK actually do jobs that require them to be somewhere. A nurse can’t work remotely, nor can a shop assistant, a factory worker or a teacher. This might of course change in the future as whole industries digitise their activities, but in the short term that’s not on the table. In a previous blog on the future of work, I set out how office work applies to perhaps 20% of the UK population. And so, if 15% of people who expressed a desire to do so work fully remote in the future, they would account for only say 3% of the UK population; many of which are probably already working remotely to some extent. No big deal. 

 

But if it’s the employer’s choice, which other roles could get pushed remote or abroad 

 

Importantly, the ability to offshore a role is not dependent on work value. As Princeton Economics professor Alan Blinder notes, Contrary to conventional wisdom, the more ‘offshorable’ occupations are not low-end jobs, whether measured by wages or by education. The correlation between skill and offshorability is almost zero’. Instead the factors to look out for are: repetition, predictability and lack of need for proximity to the customer; all of which can also be features of high value roles. If this sounds like your job – watch out!  

 

Of course, most jobs are not so binary, and fully virtual working will (initially at least) only affect a relatively small percentage of the workforce. What if youre in the much larger group that needs occasional proximity to clients, whose work is a mix of the routine and the complex, and who now for personal reasons wants to work 2 days per week in the office? The critical factor here is the degree to which the various roles within your job benefit from being integrated. If customer-facing problem-solving accounts for 50% of your job, and routinised administration the other 50%, then what’s stopping your employer from splitting the role in two, and keeping half in the UK and offshoring the other half? In Henry Ford’s production lines, he simplified operating processes such that each task was allocated to a different employee. However, for many knowledge workers, doing the thinking and doing the doing has a combinational benefit that adds value both to the employer and the customer. These roles should be more defensible to partial offshoring.  

 

One also needs to consider the flip side to this assessment. Is there a disbenefit to separation? If youre outside time zone, can’t speak face-to-face and cannot effectively teamwork, there will inevitably be inefficiencies which the prospective offshorer needs to consider.  

 

Is there somewhere it can be done cheaper? 

This is an easy one. If you live in the UK (or the US), the answer is almost certainly, yes. Offshoring to Eastern Europe carries significant labour arbitrage, and offshoring to India, massive. Precisely how high the benefit is depends on the type of role. A backoffice role paying £50k in the UK can typically be sourced for £10k in India. At the bottom end of the scale, labour protection in Western countries carries further business penalties. For instance, the UK minimum wage is ~$10.50 ph, whereas the Indian minimum wage is ~$1.  

 

The more important question that we should be asking is… 

 

Is there suitable talent availability? 

This one is trickier, and in many cases the answer is not yet. If you are doing a complex finance role in the UK, chances are that there won’t be many serious options to replace your role in India. There are a few reasons for this.  

 

Firstly, we have higher educational attainment. In the UK, we come second only to the US on most educational ranking tables, followed largely by other European countries, Japan and Australia. However, we should not rest on our laurels; global educational standards are improving rapidly, including through exposure of international students to Western education. Relative size is another factor here: I’ve heard it said that due to population factors, there are more Grade A students in India than there are total students in the US. 

 

Secondly, there is deep seated institutional learning in many Western businesses. This includes a high proportion of top tier businesses that have more advanced platforms and have consistently attracted top talent. Operating within these businesses confers a learning benefit on the employee, which make them more effective members of the future workforce. Again, we should not assume that this will remain. These businesses tend to be globally oriented, and workers in multiple geographies will soon be able to claim the benefit of a comparable experience. 

 

What should we read into this for the UK property market 

In world that is increasingly joined up digitally, we should expect for there to be corresponding changes to the location of our global workforce, and for there to be a corresponding rebalancing of where they will sit. To reduce this to a debate about working from the office versus working from home misses the point that businesses will inevitably seek opportunities to create savings and efficiencies. The bigger threat to the UK office market is not that people might work from home a couple of days per week, but rather that the people working in UK businesses, might no longer be situated in the UK at all.  

 

Digital technologies bring openness to markets and in doing so push markets towards equilibrium. In this context, the premium that the UK has enjoyed for many years is likely to come under pressure. Similarly, those areas of the UK that have enjoyed higher rents will experience some pressure towards convergence with lower value UK locations. Importantly this doesn’t need to happen through reduction; it may equally occur through levelling-up, depending on economic factors.  

 

Of course, we need to remember that this has happened many times before. Through the 1980s we lost our manufacturing industry to offshoring based on similar principles, and during that period the UK become economically stronger. The trick is continual reinvention and continual moving up the complexity curve, focussing on areas where there is strong sustainable national advantage. We now need to make the bump up from a service economy to a new creative economy, reliant on inventiveness, openness and a cultural willingness to embrace new ideas and technologies. In doing so, we may need to ditch our office-factories and call centres, in the same way that we ditched the industrial factories of yesterday, and in their place look for something new.  

 

And what should you do personally?  

This isn’t about working from home. It won’t make a difference whether you want to work fully from home, fully from the office or somewhere in between. Do whatever maximises your productivity and achieves your personal ambitions. Someone else (or more likely the market) is likely to make the decision whether your job needs to be in the UK or not, regardless of your preference. You can improve your resilience to having your role relocated by increasing your exposure to local clients, and by undertaking more complex work activities. Of course, that is if you want to avoid relocation… 

 

The other option is to open your eyes to the biggest opportunity ever to live and work somewhere new. Being able to draw a high salary is often a reason to relocate to a new place. However, there is now a window to disconnect the cost of living from the value of working. Even if this proves to be temporary, it should provide sufficient pause for reflection on what will optimise the value of your life. High wages are often fully offset by higher costs and other quality of life detriments. Maybe your life would look better if you took a 30% pay cut and moved to live mortgage free in a remote beach hut? The critical factors to consider are: (1) the relatively of variable costs in your chosen location to your sustainable wages (the biggest variable cost typically being housing costs), (2) your personal exposure to fixed costs (if its important to you to own a flash car and go on expensive holidays – the kind of things that cost the same no matter where you live then you will benefit from exposure to a higher wage (and higher variable costs). If not, then high wages will likely mean painful compromises elsewhere in your life, and (3) subjective amenity (some people like the buzz of big cities; others like the simple quiet of nature).  

 

The fantastic thing is the choice that you increasingly have and the option to pick your own path, rather than following the one picked for you. Carpe diem!