This note is adapted from an article I co-authored a while back with my business partner Charlie Grantham.

By way of introduction, the two of us co-founded the Work Design Collaborative in 2001. WDC in turn formed and still manages the Future of Work network – a consortium of firms dedicated to understanding and creating workplaces and work environments that are productive and personally satisfying – all in the context of the changing nature of work, the workforce, and all those technologies that are both driving and enabling change.

Lately we’ve become very focused on the communities in which people live and work (partly because we’ve discovered that in order to attract and retain talent organizations have to “go” where the talent is – at least virtually). And because so much work can be conducted just about anywhere, anytime, our clients are having to learn how to manage distributed teams, remote workers, and mobility. That’s got huge implications for corporations, but it also creates new challenges and new opportunities for local communities as well.

Enough with the preface. Here’s our analysis of why the “hidden economy” has become so important to the future of both organizations and communities.

Lately we’ve been paying a lot of attention to how local communities are coping with the new information-based global economy. The “new rules” for success are creating significant opportunities (and threats) not only for business organizations but for local communities and the governing bodies that run them.

We’ve written about many of these shifts fairly frequently over the past couple of years (see “Business Community Centers as Third Places,” “The Future of Work and Economic Development,” and “We Need a Department of Social Capital,” for example), but recently we’ve become much more aware of the impact of the so-called “new economy” on these local communities.

Think about the following hypothetical scenario: Anytown USA has suffered significantly over the past decade as several mid-sized manufacturing operations closed their doors (either for good, or to relocate south of the border). The population is shrinking, and the folks who are left are having a tough time making ends meet. To make matters worse, the reduced tax base means the schools have had to make severe budget cuts, and even the “big box” retailers on the outskirts of town are hurting. There doesn’t seem to be much reason for optimism.

Anytown is located in a wonderful valley, with nearby summer hiking, swimming, and fishing as well as winter skiing, and it has always been a popular place to live, but now its future feels pretty bleak.

Then something strange and unexpected happens. Without any planning on the town fathers’ part, the population begins to grow again. There are more young families in the neighborhoods and more kids in the schools. The grocery stores and the local shopping centers are experiencing sales growth again. Yet there are virtually no new businesses in town. While retail tax revenues are rising, property taxes haven’t grown much at all.

What’s going on? In a word (or two), Anytown is benefiting from what our friend and colleague Amy Zuckerman calls the “hidden economy” (see her Hidden-Tech website for details).

Those young families moving into Anytown are predominantly Internet-savvy professionals who have set up home offices and are fully employed as software engineers, call-center specialists, marketing consultants, technical writers, lawyers, accountants, and virtual assistants. But their employers aren’t located in Anytown; they are based all over the country (and even outside the United States).

Anytown is a perfect example of what an information-based economy is like. You can’t really see the work that’s being done every day; and it doesn’t take a freight train or a UPS truck to export the finished “product.” The “hidden economy” is generating work and wealth without any visible impact on the community – no traffic congestion, no air pollution, no ugly industrial buildings along the railroad tracks. Unfortunately, however, this “new economy” usually doesn’t bring much in the way of additional property taxes for the local government, since the “invisible” work being done in all those home offices is also pretty well-hidden from the tax rolls. Sure, these good citizens and breadwinners are paying all their federal and state taxes, but the local folks hardly know they’re there.

What makes all this interesting – and important – is that these “free agents,” entrepreneurs, and remote employees of large organizations based elsewhere are essentially “exporting” their services outside the local economy – thereby importing income that they then spend locally on food, clothing, toys for their kids, home improvements, recreation, restaurants, and all the other necessities of life.

It’s powerful operating model that is beginning to turn our economy upside down. As we’ve written elsewhere, much of the population growth in the United States these days is occurring in what the census bureau now calls “micropolises”: smaller cities and regional areas with populations between 50,000 and 100,000. High-speed broadband Internet access puts those smaller communities right on a par with the New Yorks, Chicagos, LAs, Dublins, and Bangalores of the world.

And for many professionals (not all, but a growing number of them), these micropolises are much more attractive places to live and work and raise their families than the big, older cities that have dominated our economy for the last century (there are rebirths going on in many urban neighborhoods as well, but our focus here is on the smaller towns and cities).

Our little story of Anytown describes a community that simply “lucked out” because of some attractive living conditions (recreation, decent schools, low housing costs). But the real message here is that local officials and economic development specialists can actually drive this kind of rebirth with some thoughtful planning and appropriate decisions that make their community more attractive to knowledge workers.

When we work with folks in communities like Anytown we encourage them to look at a number of critical factors that increase their attractiveness to the creative class:

• high-quality local schools, including a local community college or a branch of a state university;
• the existence of a true “downtown” area that’s easy to walk to and includes a good mix of restaurants, business services (accountants, office supplies, computer stores, print shops, mailing services, and so on), and retail stores;
• support for the arts and cultural activities;
• good recreational opportunities; and
• the willingness of local public officials and business leaders to collaborate in creating and maintaining a desirable place to live and work.

Our work often involves conducting market research studies to estimate the size of the “hidden economy” along feasibility studies to explore the possibility of forming a Business Community Center^tm to support the small businesses and remote workers whose success is so critical to the local economy .

Insanity has often been defined as doing the same thing over and over but expecting different results. We think it’s time for local officials to stop chasing the old industrial model of offering incentives to bring blue collar jobs to town. That’s crazy in today’s economy; it’s time to recognize that there’s a new path to economic viability.

That path is called the Information Economy, and it’s a marvelous opportunity for local economic development. But it clearly requires you to rethink just about all of your assumptions about what drives economic growth. It’s not jobs per se, it’s creating a community that is so attractive to well-educated knowledge workers that they’ll come, settle down, and bring their work with them. They’ll then begin exporting their services while they import their income to your town. This is truly a case of “If you build it, they will come.”

When you really think about it, it’s a pretty simple equation. But it’s a new kind of math.