Welfare implications of a transport improvement in the case of a labour market imperfection.

Conventional cost-benefit analysis generally assumes perfect competition, which allows the analysis to be based on the market for transport, ignoring the effects on other markets such as those for housing, labour and goods. Imperfect competition entails welfare effects in these other markets that are in addition to the effects on the transport market. Conventional cost-benefit analysis may be seriously misleading when these additional effects are significant. The paper investigates the welfare implications resulting from a transport investment in the case of imperfect labour markets. The contribution of the paper is to evaluate this in a small spatial CGE model with a labour market imperfection and to compare with the result that would be attained from a standard conventional cost benefit analysis based on a traffic model and assuming perfect competition. The results show that additional benefits are substantial in relation to the direct user benefits consisting of travel cost savings to commuters. These additional benefits arise due to search unemployment. A proportion of the labour force is un-employed and searches for jobs over an area partly determined by transport costs. Unemployment is partly determined by the duration of the period until an unemployed person finds a job. Lower transport costs induces search over a larger area, which reduces unemployment and the expected duration of vacancies with ensuing benefits to workers and firms. Earlier contributions have demonstrated a similar effect for imperfections in the goods market due to monopolistic competition. The model describes commuting transport in a small open economy with two regions. The demand for commuting emerges from the need to go to work to earn income and thereby increase the consumption of goods. Jobs are located endogenously while households are located exogenously. Roads may be subject to congestion. The government decides to invest in the infrastructure such that travelling times can be reduced. In the labour markets, there are vacancies and unemployment in both regions at the same time. This is caused by the fact that finding the right match between a worker and a firm takes time. The search model follows Pissarides (1990, 2000). For the covering abstract please see ITRD E135207.