Musk is right in the short run

Major U.S. companies are now wresting with this work-from home issue; Goldman Sachs
GS,
+0.75%
has nudged its employees to return while Apple
AAPL,
+1.68%
is preparing for a hybrid-WFH future. A key trade-off is balancing company-wide productivity gains from returning to the workplace versus the quality-of-life gains from allowing workers to have more freedom.

Tesla has succeeded in designing and mass-producing electric vehicles, but the firm faces increased competition from General Motors
GM,
+1.57%,
Ford
F,
+2.51%
and other car makers. To maintain its edge, Tesla must continue to innovate. And that happens best with in-person meetings.  

The design process shares a similarity with academic collaboration. At the start of any research project, teams must meet face to face to solve problems that inevitably arise. While Zoom has proven to be effective for workers with established relationships, face-to-face interaction facilitates both mentoring and spontaneous interactions. (Due to security concerns, Musk actually banned the use of Zoom for his SpaceX employees.) 

Musk may also see his approach as a way to prune his workforce. By ordering people back to work, those workers who are not fully “committed to the cause” may quit. In this sense, his new order may represent a screening device to force workers to reveal whether they are truly committed to Tesla in the same way as Musk, who boasts of 80-hours weeks. 

Update: Tesla shares drop after report Musk wants 10% job cuts amid ‘super bad feeling’ about economy

But what’s good for Tesla may not be good for every company. Tesla is a young firm that features a young, mostly male applied-science workforce. Such individuals do not have the same at-home responsibilities as the typical American worker. Young workers tend to want to be back at the office! This means that the Musk mandate does not impose the same costs that would occur if the average American firm ordered a return to work. 

But here’s where he gets it wrong

Economists think in terms of “what ifs”. What if Tesla allowed workers to engage in hybrid work? Could worker productivity actually be even higher? I believe that the answer is yes – for two reasons.

Tesla could hire from a larger pool of workers, and the workers would be happier with their job because they have more freedom over where they live and how they structure their days. When workers are more satisfied with their job, they are less likely to quit.

Tesla should want to avoid a workforce retention and training challenge as well as risk losing intellectual property to rival firms. People are the main resource of America’s superstar firms. To attract and retain talent without paying huge wage or stock options premiums, employers can offer better working conditions. WFH is such a job perk. If workers can live where they want to live, they will likely be in better mental and physical health and they will suffer from less burnout. Workers with special at-home responsibilities will value the flexibility offered, and those with a special taste for leisure hobbies (i.e skiers, surfers) will value their ability to spend more time where they actually want to live.

Tesla’s headquarters is in Austin, Texas. Most workers who must report to this office five days a week will live within an hour of 13101 Harold Green Road. While Austin has many desirable features, local housing is expensive, and many potential workers may not want to live in the local neighborhoods.  

Now imagine a flexible WFH option where Tesla workers must be at headquarters five days a month or two days a week. The Austin airport already offers 46 direct flights on Southwest Airlines to other cities each day. 

Musk is certainly correct that face-to-face interaction raises worker productivity, but he should consider the quality-versus-quantity trade-off. If workers spend less time in the office, the quantity of interaction will go down but the quality of interaction will rise. Midlevel managers will have strong incentives to design group meetings to facilitate these interactions. Experimentation through A/B testing will help to optimize this adjustment process.

Based on the 2020 Tesla Diversity report, women and minorities are underrepresented at Tesla and especially in the leadership ranks. Yet research shows that firms with a more diverse leadership are less likely to engage in the sort of “group think” that leads to unforeseen risks and lost opportunities.

If Tesla seeks to hire a more diverse workforce, it will gain from introducing the WFH optionand recruiting from a larger pool of women and minorities.   

Going forward, Tesla will be a more profitable firm if it offers the WFH and hybrid-WFH option. The workaholic Elon Musk is too smart to assume that his firm’s workers are clones of him.

Matthew E. Kahn is the Provost Professor of Economics at the University of Southern California and the author of “Going Remote: How the Flexible Work Economy Can Improve Our Lives and Our Cities.” He owns two Teslas and holds less than $5,000 of Tesla stock.

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