Congestion charges and labour market imperfections: “Wider economic benefits” or “losses”?

The presence of distortive taxation and agglomeration benefits in the labour market means that there are benefits and losses not captured by standard cost-benefit analyses of transport policy measures. Recent theoretical analyses have raised concerns that the labour market effects of congestion charges may constitute considerable losses in the form of reduced aggregate labour income, over and above what is captured by the consumer surplus in the standard analysis of congestion charges – possibly to the extent that congestion charges may reduce aggregate social welfare, contrary to conventional wisdom in transport economics. The sign and size of these effects are an empirical question, however. We investigate this issue by estimating the labour income effects of the Stockholm congestion charges, using an estimated relationship between workplace accessibility and labour income. Results show positive effects on labour income, meaning that the “wider economic benefits” of this system are in fact benefits, not losses. It turns out to be crucial that the model accounts for value-of-time heterogeneity in the income/accessibility relationship and in the calculation of generalized travel costs.