Transport Investment in Railways to Generate Knowledge Transfer from Interfirm Worker Mobility
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DEPARTMENT OF ECONOMICS WORKING PAPERS 24 HANNU PIEKKOLA Transport investment in railways to generate knowledge transfer from interfirm worker mobility VAASA 2016 ISBN 978—952—476—667—8 (online) III Publisher Date of publication Vaasan yliopisto March 2016 Corresponding author Type of publication Hannu Piekkola Working Papers [email protected] tel. +358 44 0244349 Name and number of series Department of Economics. Working Papers, 24 Contact information ISBN University of Vaasa 978-952-476-667-8 (online) Department of Economics P.O. Box 700 FI-65101 Vaasa Number of pages Language Finland 42 English Title of publication Transport investment in railways to generate knowledge transfer from interfirm worker mobility Abstract An analysis using extensive Finnish microdata reveals new insights into economic returns on transport investments. Cost-benefit analysis is combined with returns to new intangible and human capital from interfirm worker mobility. Halving travel time to one hour in the Helsinki-Turku railway corridor increases commuting by 40% and yields annual returns of 30 million 2015€ in time savings and travel costs and 40-50 million € from new intangible and human capital. Two-thirds of gains are from new intangible capital, and one- third is from new human capital. These are largely explained by new jobs in the Helsinki metropolitan area. Keywords transport, railway, labor market, intangible capital, growth accounting JEL classification: H40, O47, O33, O32, J30, J21 IV Contents 1 Introduction ...................................................................................... 1 2 Cost-benefit analysis and changes in commuting and worker mobility ............................................................................................ 4 3 Production and new IC and HC ........................................................ 13 4 Performance-based intangible and human capital ............................ 18 5 Growth accounting .......................................................................... 21 6 Conclusion ...................................................................................... 28 Annex A. Intangible capital ................................................................... 29 Acknowledgements .............................................................................. 33 References............................................................................................ 34 Figures Figure 1. Interfirm worker mobility 1999-2013 around Helsinki-Turku railway corridor ............................... 11 Tables Table 1. Parameters of the CBA framework .................................... 6 Table 2. Consumer and producer surpluses and change in demand in Helsinki Pasila - Turku Kupittaa ...................... 7 Table 3. One-hour train and increase in consumer and producer surpluses ......................................................................... 8 Table 4. Changes in travel time and commuting with one-hour train in Helsinki-Turku. .................................................... 9 Table 5. Interfirm worker mobility in 2000-2013 and change (%) with one-hour train ........................................................ 12 Table 6. Random effects, instrument gmm and fixed effects estimation of production function in 1999-2014 ............ 19 Table 7. The growth accounting in 1999-2014 (%) and national growth contribution by regions (‰) ............................... 24 Table 8. Changes in annual GDP according to region in previous job, random effects and instrument estimation million 2015€ ........................................................................... 26 1 Introduction This paper utilizes unique linked employer-employee data to analyze interfirm worker mobility and growth spurred by improved transport connections. The focus of this paper is on the planned construction of a one-hour train connection between Turku and Helsinki, which are 150 km apart, where the coastal railway is 196 km, and the travel time is twice as long. The costs and benefits of a better railway connection can be classified as i) regional and national economic development and labor market integration, ii) net costs of the construction and operation including those accruing to other transport, iii) time savings for fast train users, and iv) improved quality of services and environmental impact. Conventional cost-best analysis (CBA) focuses on savings in travel time without separately accounting for work-related travel and spillovers from better allocation of the workforce. Earlier studies, such as those reported by Vickerman et al. [1], assume that most of the benefits from better railway connections are from non-work travel. Vickerman [2] and Bröcker [3] find modest economic growth effects from faster train connections, which typically comprise less than 1% of the GDP. Regional growth contribution can be 3-5%, depending on the degree of development but at the cost of periphery areas (see also Carballo-Cruz [4]). The IASON1 project applied computable general equilibrium CGE models (CGEurope) with modest spatial distribution effects. Finally, Thiry et al. [5] found that priority Trans European Networks would add only 0.25% to the European Union GDP over 25 years. The reason for this is a vast increase in low-cost air travel that is substituted for the use of railways. With imperfect competition and scale, economies the lower deadweight losses may yield 20-80% higher growth effects (Renes, Schade et al. 2004; Graham, Gibbons et al. 2009). The population in the Helsinki-Turku railway corridor is 1.9 million, covering 35% of the total population in Finland. The new faster railway planned to be located between Turku and Helsinki, with an approximately 40 km shorter distance and two tracks instead of the one existing track, reduces travel time from 1 hour 57 minutes to one hour. The one-track connection has speed limits and bottlenecks because of which existing fast trains (trains at a speed of 250 km or below) are not in continuous use. Building up two-track rails and therefore fully using the existing fast pendolino trains would also make trains competitive to the 169 km motorway between Helsinki and Turku. The shortening of the railway distance by 40 km and the halving of travel time is achieved with the current fast trains, but a traditional cost-benefit analysis shows benefits that do 1 Integrated Appraisal of Spatial economic and Network effects of transport investments and policies Working Papers 2 not cover the initial estimates of the required 1.5 billion € investment in infrastructure by the Finnish transport agency. The standard assumptions may partly explain this, as Prud'homme and Lee [6] suggest that the CBA should sufficiently cover periods of 40 years and longer and apply lower discount rates. Graham et al. [7] find instead important work-related travel benefits from achieving a better match between labor demand and supply. Less densely populated areas can satisfy their labor supply shortages, and metropolitan areas have excess demand for (skilled) labor. Graham et al. find that a 10% increase in accessibility improves productivity by 2- 2.5% in business services, which are concentrated in the biggest cities. Specifically, the labor mobility of tertiary level-educated people, experts with special qualifications, and research and development ( R&D) and information and communication technology (ICT) workers has been shown to improve the growth and innovativeness of firms [8; 9; 10; 11]. Stoyanov and Zubanov [12] find high-productivity firms creating spillovers through outbound labor mobility. BVH [13] argues that the implementation of a new high-speed rail (HSR) is a natural experiment that isolates labor market agglomeration gains separately to produce market benefits. High-speed trains reduce commuting times between regions and thereby effectively increase the size of local labor markets without directly affecting the size of product markets. They find that between one-third and half of overall agglomeration externalities are rooted in increasing returns to scale in local labor markets. Fröidh [14] shows that better accessibility improves productivity, especially in business services. An important part of positive creative destructions occurs through interfirm labor mobility such that high-productivity firms increase their market share. Negative creation destruction is the opposite, with layout employees being forced into re-employment in low- productivity firms. In Piekkola and Åkerholm [15], the positive creative destruction was more important, and labor productivity growth improved through market restructuring in the 2007-2012 period. This study gives additional insights on how to measure national growth impacts from interfirm worker mobility creating new intangible and human capital and how this is related to creative destruction. Intangible capital is important, as its omission offers a biased view of economic performance [16; 17]. Piekkola [18] shows that in the EU area, intangible investments contributed approximately 1.5% or 1.7% in Northern Europe to annual labor productivity growth in 2008-2011. These figures are substantial, given that overall labor productivity growth was of the same magnitude. Moreover, half of the GDP contribution was explained by market restructuring, where intangible capital-intensive firms increased their market shares. Piekkola [19] finds new forms of intangible capital to be behind productivity improvement in recent years in Finland. Working Papers