The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Value of Time

  • Reuben Gronau
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_1273

Abstract

Time is a scarce resource or, to use a popular adage – ‘time is money’. The value of time depends on its usage and the complementary resources used with it. Firms pay for their workers’ time according to the workers’ value or marginal product. Households naturally place a value on their time when they sell it in the market, but they also assign a value to the time they use in the home sector. This value determines (and is sometimes determined by) the optimum combination of activities a person engages in, and the optimum combination of goods and time used in each activity. It affects the supply of labour and the demand for goods.

JEL Classifications

J2 

Time is a scarce resource or, to use a popular adage – ‘time is money’. The value of time depends on its usage and the complementary resources used with it. Firms pay for their workers’ time according to the workers’ value or marginal product. Households naturally place a value on their time when they sell it in the market, but they also assign a value to the time they use in the home sector. This value determines (and is sometimes determined by) the optimum combination of activities a person engages in, and the optimum combination of goods and time used in each activity. It affects the supply of labour and the demand for goods.

The recognition of the importance of time for many economic decisions related and unrelated to the labour market (e.g., schooling; transportation) is not new. The generalization of the model is associated with Becker’s (1965) theory of home production. Becker (following Mincer 1963) reformulates traditional consumption theory by shifting the focus of analysis from goods to activities (‘commodities’, in his terms). By this approach the source of the household’s welfare is its activities, which in turn, are a combination of goods and time. Welfare is maximized subject to home technology, the budget constraint, and the time constraint. Formally, the welfare function depends on the activity levels (Zi)
$$ U=U\left({Z}_1,\dots, {Z}_n\right) $$
where each activity is ‘produced’ through a combination of goods (Xi) and time (Ti)
$$ {Z}_i={d}_i\left({X}_i,{T}_i\right). $$
The consumer’s welfare is maximized subject to the budget constraint
$$ \sum {P}_i{X}_i=W\left({Z}_n\right)+V $$
and the time constraint
$$ \sum {T}_i=T, $$
where Pi denote prices, W(Zn) is labour income (Zn denoting the activity work in the market), V is non-labour income, and T is the total time available.
The maximization of welfare subject to the home production technology and the time and budget constraints yields the optimum allocation of activities:
$$ \partial U/\partial {Z}_i=\lambda {\widehat{\Pi}}_{i,} $$
and the optimum combination of inputs in the production of each activity
$$ \left(\partial {Z}_i/\partial {T}_i\right)/\left(\partial {Z}_i/\partial {X}_i\right)=\widehat{W}/{P}_i, $$
where λ denotes the marginal value of income, \( {\widehat{\Pi}}_i \) is the shadow price of activity i, and \( \widehat{W} \) is the shadow price of time. The shadow price of the activity equals its marginal cost of production
$$ {\widehat{\Pi}}_i={P}_i\left(\partial {X}_i/\partial {Z}_i\right)+\widehat{W}\left(\partial {T}_i/\partial {Z}_i\right). $$
Thus an increase in the shadow price of time leads to substitution of time in favour of goods and a substitution from time-intensive to goods-intensive activities.
When there are no external constraints on hours of market work the value people place on their time depends on their marginal wage rate
$$ \widehat{W}=w+\left({u}_n/\lambda \right), $$
where w is the marginal wage rate (the change in earnings as a result of a change in market work net of taxes and any expenditures associated with work) and un denotes the marginal utility of labour. However, even when one is not free to change one’s working hours the shadow price of time increases with wages and with income because of the increase in time scarcity.

The importance of the value of time to allocative decisions has been shown in a wide range of contexts: fertility (Becker 1960; Willis 1973; Schultz 1975), health (Grossman 1972) and most notably, labour supply and transportation. Thus, women with higher wages have higher opportunity costs of raising children and therefore tend to reduce fertility, substituting ‘quality’ for ‘quantity’. Travellers who place a high value on their time prefer faster but more expensive modes of transport to slower and cheaper modes. Married women with young children or with high earning husbands place higher value on their time and are, therefore, more reluctant to participate in the labour force.

Theory predicts that the shadow price of time changes with the person’s wage rate. It does not imply that the two are equal; they differ if the marginal net wage differs from the average wage, when labour involves direct utility (or disutility), or when it is assumed that the utility generated by an activity depends on the time inputs involved (Bruzelius 1979).

The value of time saving is a major component of the benefits of the investment in many transportation projects (Beesley 1965; Tipping 1968). To evaluate the shadow price of time transportation economists studied the trade-off between time and money implicit in the choice of modes of transport, choice of route, location decision, and demand for travel. Studying commuter choices it is found that the value placed by commuters on their time is only 1/5 to 1/2 of their wage rate. The value of walking and waiting time is found to be 2.5–3.0 times greater than the value of in-vehicle time. Differences in convenience, comfort, effort etc. are reflected in estimates of time value in bus travel that are higher than travel by car, and values that tend to increase with the length of the trip. Finally, differences between the gross and the net wage and constrained working hours result in estimates that are higher for business travel than for personal travel. (For a recent discussion of the estimating methods and results see Bruzelius 1979).

A second source for the study of the value of time at home is labour-force-participation behaviour. A person is supposed to participate in the labour force if the wage he is offered exceeds the value of his marginal productivity at home – that is, his value of home time. Studying the labour force participation patterns of US married women Gronau (1973) found that the value of time of these women increases with their schooling (most noticeably with college attendance). It is little affected by the husband’s schooling and income and by age, and increase sharply when the family has children. Having a child under 3 years of age increases the value of its mother’s time at home by over 25 per cent (in particular if she has a college education), but this effect diminishes as the child grows older.

See Also

Bibliography

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Reuben Gronau
    • 1
  1. 1.