Elke Jahn (IAB and University of Bayeuth)
David Agrawal and Eckhard Janeba
A potential benefit of commuting subsidies is that they can expand the choice set of feasible job opportunities in a way that facilitates a better job match quality. Variation in tax rates and initial commuting distances, combined with major reforms of the commuting subsidy formula in Germany, generate worker-specific variation in commuting subsidy changes. Increases in the generosity of commuting subsidies induce workers to switch to higher-paying firms with longer commutes.Thus, the causal effect of commuting distance on the firm pay premium is positive. Although increases in commuting subsidies generally induce workers to switch to employers that pay higher wages, commuting subsidies also enhance positive assortativity in the labor market by better matching high-ability workers to higher-productivity plants. Greater assortativity induced by commuting subsidies corresponds to greater earnings inequality.