The distributional effect of commuting subsidies - Evidence from geo-referenced data and a large-scale policy reform

We use the unexpected partial repeal of a tax break for commuters in Germany to examine the distribution of benefits from commuting subsidies between workers and firms. Drawing on a large set of geo-referenced employer-employee data, we use exact route distances between place of work and place of residence to calculate individual net wage benefits from commuting subsidies. In line with urban efficiency wage theories, we find robust evidence that employers compensate workers on average for about one third of the net wage loss caused by the reform if wages are individually negotiated. We find no comparable effect for workers covered by collective wage agreements. The subsequent existence of two common subsidy regimes within an otherwise stable institutional environment allows to draw inference on how each regime redistributes income between wage groups and between regions. We find that the introduction of a lower bound for commuting distances leads to a more equal distribution of net wage benefits between wage groups and regions compared to a regime without a lower bound. •We examine the distributional effects of commuting subsides.•We exploit exogenous variation in tax savings from a large tax reform in Germany.•We find that firms only partly compensate workers for their commuting costs.•Workers covered by collective wage agreements benefit most from the subsidy.•Commuting subsidies strongly favor high-earning workers employed in urban areas.