Justin Sullivan/Getty Images
It was only a few years ago that Apple finished construction of its 2.8 million-square-foot “spaceship” headquarters in the San Francisco Bay Area. The glittering, donut-shaped building cost the company about $5 billion to construct, making it one the most expensive buildings in the world. It was all part of Steve Jobs’ vision of a highly centralized company, where Apple employees collaborate under one roof in the place the company was founded. And now — record scratch — Apple seems to be abandoning that vision.
Apple is now “decentralizing” operations away from its expensive donut. The primary reason for the change, according to Bloomberg, is that housing in the Bay Area has gotten so excruciatingly expensive that even high-paid Apple employees are struggling to live there. Apple executives believe continued insistence that employees work in the donut will hurt employee retention and recruitment. So they’re expanding satellite offices in places outside the Bay Area. This will save the company money because they can pay lower salaries in places with a lower cost of living. Starting September, the company will also adopt a hybrid model that will allow most employees to work from home two days a week, which will let them commute less frequently and perhaps even live further away from the donut (although most Apple employees would prefer even more flexibility).
Apple isn’t the only tech company freeing large numbers of workers from the shackles of the bonkers Bay Area housing market. Salesforce — which itself recently finished construction of a big, expensive building in San Francisco — has adopted a similar hybrid policy. Facebook and Twitter say their employees can be permanently remote if they choose to. Shopify. Slack. Square. Coinbase. The list goes on and on.
With so many Silicon Valley companies saying employees no longer have to work in Silicon Valley offices, are we witnessing the remaking of America’s economic map? A leading expert on economic geography doesn’t think so.
The Gravitational Forces of Our Economic Map
UC Berkeley economist Enrico Moretti may be from Italy, but he’s probably thought more deeply about America’s economic geography than anyone else. In 2012, he released a blockbuster book, The New Geography of Jobs, which became a must-read in wonk circles. Even President Barack Obama recommended it.
The book’s core thesis has become conventional wisdom: American economic prosperity was becoming increasingly concentrated in a small number of places filled with brainiacs. These places not only created jobs for tech and finance types, but they also created jobs for bartenders, waiters, chefs, lawyers, yoga instructors, dog groomers, and any other provider of services that the brainiacs wanted to spend their money on. The job opportunities and amenities of these places became like a gravitational vortex for more brainiacs and providers of things that brainiacs love, which made the vortex only get stronger. Meanwhile, places without brainiacs were getting left behind. Moretti called it “The Great Divergence.”
[Editor’s note: This is an excerpt of Planet Money‘s newsletter. You can sign up here]
Now, with remote work and satellite offices freeing many brainiacs from working in those places — some of which have failed to build enough housing to support all the people getting sucked in by their vortex — the question is whether we’re on the verge of a Great Convergence.
Internet pioneer and venture capitalist Marc Andreessen seems to believe so. He recently declared we are witnessing “a permanent civilizational shift.” It’s a new era where we can divorce “physical location from economic opportunity” and spread the bounty of good jobs to a wider swath of the nation.
Andreessen is brilliant, and there are signs that he could be right, but many others before him have made similar predictions that proved to be very wrong. Back in the 1970s, the then-deputy editor of The Economist, Norman Macrae, predicted a new-fangled gadget called the personal computer would soon kill the office and lead to the “end of the urban age.” Prognosticators made similar predictions in the 1990s when the Internet took off.
Yet, the opposite happened. Far from de-urbanizing, the Internet revolution drove innovative companies and workers to cluster together like never before. Economists like Moretti refer to this as agglomeration.
Economists believe agglomeration — like the clustering of tech in the Bay Area — has historically been the result of two main forces. The first is what they call “human capital spillovers” — a fancy way of saying that people get smarter and more creative when they’re around other smart and creative people. Think informal conversations, or “serendipitous interactions,” over coffee in the break room or beers at the bar. These interactions, the theory says, are crucial to generating great ideas, and they encourage the incubation and development of brainiac clusters. The other force is the power of “matching” opportunities. When lots of tech firms, workers, and investors clustered in Silicon Valley, there were lots more opportunities for productive marriages between them. As a result, companies that wanted to recruit, grow, or get acquired gravitated to places like the Bay Area.
However, remote work could actually improve certain matching possibilities. Companies can hire smart people anywhere in the world when they drop the requirement that they physically be in a central office. Not only that, they can pay them less. Moreover, killing the office can significantly lower costs for companies, which no longer have to pay for expensive real estate.
So, in this theory, the future of work and the economic geography of America really hinges on whether companies can create those “human capital spillovers” through computer screens or in offices in cheaper locations.
Why Silicon Valley Might Survive
We’re now in the world of smart people peering into the future with crystal balls, and Moretti’s crystal ball tells him that the new normal will look a lot like the old normal. “I don’t buy into the notion that the future is completely different from the past,” he says.
Moretti believes that computer screens remain a poor substitute for being face to face. Living and working near each other, he says, allows for random collisions of brains that can spark new ideas. Ideas that would not be generated on Zoom. He points to evidence that shows that brainiacs are much more productive when they live and work near other brainiacs working in their field. He published a recent study, for example, that crunches the numbers on hundreds of thousands of U.S. inventors and finds that when inventors physically move to a larger cluster, they produce more patents per year than they did before.
When you plop down a brainiac in a place with other like-minded brainiacs, it does seem like they get better at their jobs. But do they get so much better at their jobs that the benefits make up for all the wasted time and lost productivity from having to commute to and from the office? Does it make up for the more expensive real estate that they and their company have to acquire as a result of all these high-paid brainiacs all clustering together? Moretti believes it does.
Even now, with the pandemic giving a boost to remote work, Moretti says evidence suggests that most companies aren’t seriously considering an officeless future. He’s analyzed new job postings and finds that companies aren’t hiring that many full-time remote workers. Yes, he finds, the number of new full-time remote jobs has tripled, but the overall percentage remains incredibly low. Before the pandemic, it was about two percent of all new office jobs, and now it’s only about six to seven percent of new office jobs.
In 2020, a group of economists surveyed 22,500 American workers and executives and found evidence that remote work would “stick” — but they weren’t talking about full-time remote work. The average office worker, they predicted, will work two days a week from home — as Apple is now allowing its workers to do. That’s a huge change. But it still means that workers will have to be in the office three days a week. “If that’s the case, the link between place of work and place of residence will stay intact,” Moretti says.
The reluctance of big, influential companies like Apple to embrace remote work wholeheartedly might explain why we haven’t seen as much of an exodus from California as some people were expecting. Tech workers have definitely left San Francisco in droves, but most of them have ended up in the outer counties of the Bay Area, according to a recent analysis by the University of California. The data suggests tech workers are making a rational calculation that living near their Silicon Valley office will remain important, even in the near term.
Beyond remote work, there’s the question of whether Silicon Valley companies will move more of their office work to cheaper locations. Moretti says they’ve been doing this for years — and, if anything, Apple has been an outlier in not doing it more. But Moretti believes the braintrust of the company — product design, research and development, and big-thinking business strategy — will continue to be housed in physical offices located in Silicon Valley, where brainiacs can interact with other brainiacs. The gravitational vortex, he believes, is still spinning. And it will be centered in places like Apple’s donut.
Did you enjoy this newsletter segment? Well, it looks even better in your inbox! You can sign up here.