Nova workboard

a blog from young economists at Nova SBE

What is the impact of commuting costs in unemployment?

In futuristic/ sci-fi movies, it is not uncommon to see people leaving from one place and popping out in another place instantaneously. They save time and money in transportation, and generally the time that the hero saves in using teleporting lets him save the world in the last second.
However, (for the disappointment of many people), scientists claim that teleportation is impossible. This means that we will probably continue to have the need to use some form of transport to move from one place to another, as we have done until now.

One example of the need of transport is the daily routine of going from home to work, and from to work to home. People waste time and money in this routine, simply because it is not free to get to somewhere, and generally people don´t work in the same place as they live.

And we have to keep in mind that a person´s decision to work or not is mainly a decision on the occupation of time. People choose to allocate its (precious and scarce) time (T) between work and leisure, and the most obvious factors that play a key role in that decision are the wage rate (which corresponds to the opportunity cost of leisure, w), the amount of income available (budget constraint, represented in graph 1), its preferences on consumption of goods (that are paid by their income) and leisure (represented in graph 2), any fixed costs that they have to incur to go to work, and any fixed income whose source is not work (rents, dividends,…, represented by letter V).

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                                                                                                    Graph 1

 

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                                                                                                     Graph 2

 

The final decision will depend on how much a person is willing to accept to forego its last hour of leisure (the reservation wage) and how much wage employers are willing to pay for that hour of work (the market wage). If the reservation wage is bigger than the market wage, then the individual will choose not to work. In the other way around, if the market wage is bigger the reservation wage, he will choose to work.

If the person works, he has to spend K euros on transports. So his budget line is the straight line starting at the point (T, V – K ). If he does not work, he does not have to incur in commuting costs. So the point (T,V) (No work) is also achievable.
The individual would be better off at the “No work” point than working H hours at the tangency point, resulting in a higher utility level.

This mechanism that gives the incentive to persons to stay at home rather than go to work becomes more visible when they work few hours per day, when the commuting costs is higher and when the wage rate is lower. To the people that continue to go to work, their income available to spend in other goods will be lower, resulting in a lower consumption.

Image        Graph 3

 

And in the last couple of years in Portugal commuting is getting more and more expensive, either because the introduction of tools in many highways, either because the increase in the tickets price in public transports. This possibly resulted in fewer people participating in the workforce due only to this mechanism, and had a negative tendency to the employment level, which in the last years has been decreasing.

This is also true in the other way around. If a person pays less than the real cost of commuting (which generally happened in public transports) then there is a positive tendency on the employment levels triggered by this mechanism and an increase in labor competitiveness, although an analysis on the opportunity cost of the government money spent in this programs is needed to evaluate the full impact of this kind of measures.

This results shows that measures to increase the efficiency of means of transportation and public policies on public transports that result on less costs for the consumers and for tax payers are an important vehicle to help society increase its material well-being and to reduce the unemployment levels.

Bruno Dias, # 670

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Author: studentnovasbe

Master student in Nova Sbe

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