What is the value of time, and does it actually exist?

One of the fundamental cornerstones of transport economics is the concept known as the value of time (VoT). The VoT is widely used in transport models as the key driver for predicting people’s mode and route choices, as well as being the key monetary benefit measured in transport infrastructure appraisals based on traditional cost benefit analysis methods. But what is it, and what relevancy does it have today?

The concept of the VoT in transportation has its origins in micro-economic theory and was originally derived from a goods/leisure trade-off perspective. Under this framework, it is assumed that individual travellers are trading off travel time for time spent undertaking leisure activities. In terms of practice, the VoT involves the calculation of the marginal rates of substitution (MRS) between time and money.

Marginal in economics implies the last unit, implying that VoT measures the value people place on the last minute of travel. We measure the value of the last minute and not the first as this represents the actual value people are willing to pay to save an additional minute of travel time or alternatively willing to accept compensation for having to travel one more minute. Rate of substitution implies that individuals are willing to trade (substitute) one additional minute of travel, for some monetary cost or penalty. In economics, this is computed based on the concept of utility, in particular utility indifference. That is, consider a trip involving 20 minutes of travel time at a cost of $2.00. Economics suggests that a given individual will derive (dis)utility for such a trip of say X.

Now consider the same trip, only now it takes 19 minutes. The MRS, then, is how much more the individual is willing to pay above $2.00 for the additional minute they save travelling and still have utility equal to X. For example, they may be willing to pay $2.08, in which case they are equally indifferent between a trip that takes 20 minutes and costs $2.00, and a trip that takes 19 minutes and costs $2.08. In short, they are willing to pay $0.08 for the minute less spent travelling.

So how do we get data on the trade-offs people are assumed to make between time and cost? Three main methods exist. The first approach is based on an assumed relationship between time and the average weekly wage rate, specifically the VoT for private travel is valued at 40 percent of the average weekly earnings (AWE) rate of the employed population. For example, in May 2024, the average weekly earnings for an adult Australian working full-time was $1,923.40 pre-tax, and assuming a 38-hour work week implies an hourly earnings rate can be computed as $50.62. The VoT is therefore calculated as 0.4 × $50.62 or $20.25 per hour. Business travel VoT is valued at 128 per cent of average weekly earnings (135 per cent of full-time average weekly earnings less seven per cent for payroll tax, also derived from the DOT, 1987 report, see Austroads, 2012), or $64.79 per hour.

So where do the percentages used come from? According to Wardman (1998), the current approach adopted for calculating the VoT using the AWE approach originated in the United Kingdom (UK). It was based on a meta-analysis of several studies in the UK (some revealed preference (RP), others stated preference (SP)), whereby a single VoT by trip purpose was obtained. This value is then compared to the existing wage rate. See also Hensher (2019). With respect to the employer business travel segment, however, Wardman (1998) notes that the majority of those surveyed were undertaking inter-regional rail trips (note that despite this, the AWE for business trips is used today for the VoT for trips undertaken within a city for people moving from their office to a meeting location 10 minutes down the road).

Aside from the AWE approach, SP experiments have been widely used where sampled respondents, drawn from some population of interest, are presented with hypothetical scenarios in which they are asked to select travel alternatives involving some form of time/cost trade off. SP data, whilst easy and relatively cheap to collect, is open to manipulation if not collected properly, and suffers from a range of issues, including strategic and hypothetical bias concerns. RP data have also been used, but much less so, often collected via respondent travel diaries or data capture devices such as GPS or mobile phones. Whilst many economists argue RP data is the gold standard, many issues exist regarding how best to collect such data, with many modelling hacks often required to produce behavioural meaningful estimates.

As such, each method for estimating the VoT possess unique challenges. The AWE rate is based on a meta-analysis of results from the 1980s and early 1990s, often involving a single study extrapolated to different modes. SP data is hypothetical and requires extreme care in how the survey is written and administered, whilst RP data is easy to manipulate in terms of how one constructs all the possible alternatives and often produces behaviourally nonsensical outputs.

Furthermore, the theories upon which the VoT were developed were derived many years ago under a different set of societal, economic, and technological circumstances than exist today. Whereas previously cash was king, nowadays a significant proportion, if not the majority, of payments for goods and services are paid either online or using credit cards, creating both a psychological as well as physical disconnect between the point of purchase and the time of payment. The question then becomes, do people truly understand the actual costs of what they are paying for, and if not, then how can they trade off real costs with something such as time? For transportation, this situation can be considered even more ambiguous.

For example, if I fill my household’s car with petrol, but in the sequence of vehicle usage it is my spouse who uses the car for the next five trips, what is the monetary cost paid by the spouse for each trip that individual makes? Does my spouse even perceive a cost? And as we are assuming marginal costs at a trip level, what is the cost of each of the five individual trips to my spouse, or for that matter, to me?

Beyond the discrepancy of who pays the cost and who makes the trip, even if I, as the person who paid the original cost (say via credit card), use the household vehicle for trip making, am I paying for trips I previously undertook or trips I am yet to take? And when am I truly paying the cost of travel? When I tap my credit card, when I pay my credit card bill at the end of the month, or when I undertake the trip?

In a recent survey of 772 respondents, participants were asked to think more deeply about transport costs, particularly car trips. In the question, respondents were presented with the arguments of six economists, each suggesting that people calculate the cost of car travel differently. Interestingly, only 4.92 of respondents agreed with the economist who argued that people calculate the marginal cost of the trip and use this to make decisions about car travel. Interestingly, the majority of respondents (78.50%) agreed that people don’t use the marginal cost or even an average proxy cost for each individual car trip (see Figure 1). 

If true, then we are left with the old billiard ball argument often cited in economics: people when playing billiards don’t calculate the angles and vectors of the balls once hit, but rather only act as if they do. Thus, the question is, do we want to make decisions about billion-dollar investments based on time/cost trade-offs, based on the assumption that people “act as if they do”? And more to the point, is it time to think about developing new theories about how people value things, that is consistent with modern day life?

References

Austroads (2012) Guide to project evaluation, part 4: Project evaluation data, https://ngtsmguidelines.files.wordpress.com/2014/08/agpe04-08.pdf

Department of Transport (1987) Values of Journey Time Savings and Accident Prevention, DOT March 1987.

Hensher, D.A. (2019) Using the average wage rate to assess the merit of value of travel time savings: a concern and clarification, in inaugural issue of Transport Findings (an online Open Access Journal), Issue 1, February.

Wardman, M. (1998) The Value of Travel Time: A Review of British Evidence, Journal of Transport Economics and Policy, 32(3), 285-316.