A Model of Endogenous Unemployment and Commuting

A Model of Endogenous Unemployment and Commuting

WINNER OF The Neil Mansfield Award


N Pilegaard, Danish Transport Research Institute, DK



Commuting is costly both in time and money for the individual as well as for society since transport in general generates negative externalities, as e.g. congestion, accidents and air polluting. At the same time commuting is complementary to labour and is therefore a necessity. In many European countries commuting is subsidised. The subsidies can have different forms and sizes and are given for various reasons.

This paper studies an argument used in favour of commuting subsidies; since commuting longer from home takes more time and costs more money, workers will only accept a job far from their residence if they are subsidised. Consequently, the commuting subsidy is necessary to reduce the expected length of an unemployment period and to ensure sufficiently mobile and flexible labour supply and thereby sustain high production possibilities. At the same time as politicians worry about the labour supply they worry about the increasing traffic and the pollution and the increasing congestion around cities. The conflict or trade-off between these two political issues is studied in the paper.

In analysing the argument and the trade-off, it is assumed that the effect of labour market mobility does exist and evaluations of the magnitude of the effects are made. The analyses are carried out in a model that describes the households' demand for commuting. The demand emerges from the need to go to work to increase the income and thereby the goods consumption. The model has two regions with separate labour markets. In each region there exists by assumption both firms and households with exogenous location. The labour markets are described by a search imperfection, following Pissarides (1990 and 2000). In case of unemployment a worker can choose to search only in his residential region or in the neighbour region as well. Congestion is explicitly included in the model as the only externality. Congestion has a feedback effect on consumption since more commuters increases congestion and thereby increases the time needed for commuting making commuting less attractive. The model combines a labour market externality with a transport externality in a spatial framework. This formulation implies that there are interactions between the transport sector and the remaining economy through the labour market.

Even though the importance of transport and its interaction effects with the remaining economy is widely recognized, so far only few papers have studied the interaction effects directly. Transport policies have often been studied in a partial description while the interactions with other sectors have only vaguely been described. An example though, is Parry & Bento (2001) where interactions between congestion taxes on commuting transport and distortionary labour market taxes are described. Compared to the present paper, there is no structural unemployment and the only distortions on the labour market are caused by the labour income taxes.

The model describes the costs and benefits of commuting by the trade-off between ensuring labour supply and reducing the congestion externality. The model is formulated as a small scale CGE model, where quantitative evaluations can be made as well as qualitative. The general equilibrium effects are important to include in the analysis where the interaction effects are studied. For a number of transport economic problems the interaction between the proposed policy regarding transport and structural issues like wage formation, production and unemployment is of importance for the proposed policy's ability to fulfill the objectives. Both for efficiency and for distributional considerations the general equilibrium effects are therefore important.

Numerical values have been assigned to the parameters and variables. The purpose is to give not only qualitative evaluations but also quantitative evaluations of different policies and of the relative importance of the two effects ? the labour supply effect and the congestion effect.

Different policies aiming at increasing the employment are analysed for their abilities to fulfill the purpose versus the effects on total transport performance and congestion. It is impossible to stimulate labour supply without increasing the traffic and congestion and vice versa. Further, using a CGE model it is possible to measure the importance of this effect. The experiments performed covers increased subsidies to long distance commuting, reductions in labour income taxation, reductions in transport taxes and subsidies of firms for opening jobs. The results indicate that even when using quite drastic policies to reduce unemployment the resulting effects on transport and congestion are much larger than the effects on employment and production, in relative changes. This means that it is possible to stimulate labour supply and employment by using transport policies, and vice versa, but at a cost of drastic increases in the commuting performance. Actually, the results on the congestion that the individual experiences is typically about a factor 2.5 of the effect on employment while the effect on the total commuting performance is typically about a factor 10. The effect on production is about half the effect on employment. The results additionally show that policies that are directly designed at handling the problems of incentives to search are more effective than the more general policies. I.e. that the resulting effects on employment, production, congestion and transport performance are larger when the long distance subsidy is increased than for the other policy experiments.


Parry, I. W. H. & A. Bento (2001) 'Revenue Recycling and the Welfare Effects of Road Pricing', Scandinavian Journal of Economics 103(4), 645-671
Pissarides, C. A. (1990), 'Equilibrium Unemployment Theory', Basil Blackwell
Pissarides, C. A. (2000), 'Equilibrium Unemployment Theory', second edition, MIT Press, Cambridge, Massachusetts


Association for European Transport