Discussion paper
DP18817 Work from home, business dynamism, and the macroeconomy
The COVID-19 pandemic catalyzed a surge in remote work. We propose a new macroeconomic model in which firms can employ workers off-site. Cheaper or more efficient remote work increases profitability and incentivizes firm entry. This, in turn, raises labor demand and wages which elevates business exit and lowers average firm size. We confirm all these predictions in the data. According to our model, the post-pandemic increase in remote work accounts for 1/3 of the observed surge in firm entry. Moreover, despite a shift towards smaller and less productive businesses, a greater number of firms increases aggregate output, consumption and welfare.
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