Public Good Provision, Commuting and Local Employment

This paper assesses the differential impact of the local availability of grammar schools on local employment depending on the openness of a jurisdiction, measured by commuting costs. Commuting costs matter as they influence workers' reservation wage. While the reservation wage depends on public good provision in jurisdictions with high commuting costs, it does not so in jurisdictions with low commuting costs as workers' outside option is to commute and not to move away. We test these predictions using local grammar school closures in East Germany after 2000. In line with the predictions we find that school closures reduced employment only in jurisdictions with high commuting costs. Reassuringly, house prices responded, however, similar in both types of jurisdictions which rules out that differences in preferences are driving our results.