Working from home: Too much of a good thing?

We develop a general equilibrium model with skilled workers who can and unskilled workers who cannot work from home (WFH). Firms choose the amount of time they require workers in the office, whereas workers choose to either work on-site or hybrid, splitting working time between office and home. The endogenous work arrangements determine productivity, wages, and demand for residential and commercial real estate. We find that firms 'outsource' workers to their homes to save on real estate costs, and in doing so push beyond the WFH share that maximizes skilled workers' productivity. This effect is more pronounced if land-use regulations are strict, thus showing another channel through which the latter may reduce productivity. More efficient information and telecommunication technologies allow firms to shift office expenditures toward skilled workers who invest more in home working space. In a nutshell, WFH may well be the 'new margin of offshoring' for firms.