Media Briefings

EMPLOYERS COMPENSATE THEIR STAFF FOR HIGHER COSTS OF COMMUTING: Evidence from Denmark

  • Published Date: September 2014

When a firm relocates, employees who face longer commuting times are more likely to receive a wage increase. That is the central finding of research by Ismir Mulalic, Jos Van Ommeren and Ninette Pilegaard, published in the September 2014 issue of the Economic Journal. They calculate that the implied hourly wage compensation for an additional hour of commuting is of the order of 15-20% of the net hourly wage.

Economists usually assume that employers do not compensate employees when commuting costs increase, for example, when road tolls are introduced. But the new study shows that the doubling of a 10km commuting distance when a firm relocates will induce a wage increase of about 1.5%. This finding is consistent with the notion that employers have market power and pay below employees’ productivity.

To test for the presence of an individual-level wage differential to compensate for commuting, the study uses a quasi-natural experiment. Using annual register data from Statistics Denmark for the years 2003-07, the research analyses wage responses to changes in commuting distance arising from firm relocations in Denmark.

The researchers observe the full population of large firms that relocated in 2004 and their employees. They show that employees who faced a longer commuting distance after their firms relocated were more likely to receive a wage increase.

To quantify this result, it is useful to focus on a representative employee with a commuting distance of 10km. For this employee, a doubling of commuting distance induced, on average, a wage increase of 1.5 %. This is an economically significant effect. The implied hourly wage compensation for one hour of additional commuting is of the order of 15-20% of the net hourly wage.

One important question is whether wage responses to firm relocations differ in the short and long run. The researchers investigate this by focusing on wage responses both immediately after and several years on from the firm relocations. The results show that changes in wages are particularly evident three years after firm relocation, while after one year the change is still negligible.

The data also suggest that employees who faced a reduction in commuting distance, because their firms relocated closer to where they live, received a smaller wage increase than other employees for whom the commuting distance did not change.

All these results imply that employers have market power and pay below employees’ productivity. They also imply that employees who face an increase in their commuting time due to increased congestion are at least partially compensated by their employers.

ENDS

Notes for editors: ‘Wages and Commuting: Quasi-natural Experiments’ Evidence from Firms that Relocate’ by Ismir Mulalic, Jos Van Ommeren and Ninette Pilegaard is published in the September 2014 issue of the Economic Journal.

Ismir Mulalic is assistant professor at the Technical University of Denmark. Jos Van Ommeren is professor of urban economics at VU University in the Netherlands. Ninette Pilegaard is senior researcher at the Technical University of Denmark.

For further information: contact Ismir Mulalic via email: imu@transport.dtu.dk; Jos Van Ommeren via email: jos.van.ommeren@vu.nl; Ninette Pilegaard via email: np@transport.dtu.dk; or Romesh Vaitilingam on +44-7768-661095 (email: romesh@vaitilingam.com; Twitter: @econromesh).