Commuting, congestion tolls and noncompetitive labour markets: Optimal congestion pricing in a wage bargaining model

The purpose of this paper is to study optimal congestion tolls in a bargaining model of the labour market. The model distinguishes commuting and non-commuting transport, and it allows some telecommuting. We first show that transport taxes as well as congestion levels raise negotiated wages and reduce employment levels; more efficient homework reduces wages. We then study optimal second-best labour and transport tax policies and find that they strongly depend on the impact of congestion on labour market outcomes. If transport taxes have to be uniform for commuting and other trip purposes, the optimal peak period transport tax positively depends on the impact of congestion on negotiated wages, and negatively on the wage effects of the congestion tax itself. Moreover, the tax rises to the extent that demand by people that are not active on the labour market represent a larger fraction of peak period transport flows. We further show that more efficient homework does not necessarily reduce congestion nor the optimal transport tax. If taxes can be differentiated according to trip purpose, ‘subsidizing’ commuting is justified as a way to shift the tax burden away from the employed. Finally, extending the model for multiple transport modes we find that the impact of congestion on negotiated wages provides an argument for subsidizing commuting by public transport but not by car, a proposal suggested in several European countries.