As a result of public investment, lower freight transport costs tend to translate into lower local price indices and are associated with equilibria characterized by higher capital intensity, output and consumption. In this paper we investigate an additional effect to these trade gains, namely the gains from labor matching. We simulate a two-region Spatial OLG model in which agents are heterogeneous in terms of skill. Under repeated simulation experiments, we show that, for high household relocation frictions, the possibility of interregional commuting can be seen as an alternative way to realize the potential matching effects. For high levels of skill heterogeneity and a plausible parametric input, a steady state in which labor matching is realized through commuting can be associated with up to 10% higher per capita output, compared to the one with homogenous labor, in which only gains from trade are feasible.
Heterogenous skill OLG, Spatial OLG