We're continuing our series on how to include monetary values for environmental and natural resources in benefit cost analysis. Previously we've looked at the theory of benefit estimation, the value of recreation (travel cost method), and the value of health (averting behavior method). Today let's take a look at another way in which values for changes in recreation and health risks are estimated: the hedonic price method. The hedonic price method is the way in which Bureau of Labor Statistics estimates the impact of quality changes for the consumer price index.
The hedonic pricing method relies on information provided by households when they make their location decisions. People tend to move to nice places. This increases the demand for housing and increases the supply of labor in nice places. As the demand for land and housing increases, the price of housing increases (e.g., the cost of living in nice places is relatively high). As the supply of workers increases the market wage rate falls. The higher housing prices and lower wages reveal how much people are willing to pay for the amenities in nice places.
Consider the housing market in two cities with different levels of air quality: a dirty air city and a clean air city. Economists take piles of data on housing sales and compare the prices of similar houses in the two locations. It turns out that houses in the clean air city cost more than houses in the dirty air city. This conclusion holds after taking into consideration the characteristics of the houses (e.g., number of bedrooms, baths, etc.) and neighborhoods (e.g., school district, parks, etc.). The difference in housing prices is one component of an estimate of the value of the better air quality.
Now consider the labor market in the two cities with different levels of air quality. Again, economists take piles of data on incomes and compare the wages of similar people and jobs in the two locations. It turns out that jobs in the clean air city earn less money than houses in the dirty air city. This conclusion holds after taking into consideration the characteristics of the worker (e.g., education, experience, etc.) and jobs (e.g., union, white collar, etc.). The difference in wages is an estimate of the value of the better air quality.
The full impact of the better air quality is the sum of the value of air quality in the housing and labor markets.
The labor market data can also be used to infer values of job risks. The riskier the job the less likely someone will want to take it. The increased scarcity of job seekers in riskier professions drives up the incomes of those who'll take the risky job. From Money/CNN (Many hazardous jobs are well paid):
... highly dangerous jobs, including construction trades, pay high wages. Fourth on the fatality list, structural metal workers, the steel workers who build our skyscrapers and bridges, died at the rate of 58 per 100,000 in 2002, and earned an average of about $20 per hour. Sixth were roofers (37 per 100,000 and $16 per hour), and seventh were electrical power installers (32 per 100,000 and $21 per hour).
The differences in incomes, again, after considering all other job characteristics, can be used to develop estimates about the value of avoiding the health risk.
