Principles of valuing business travel time savings

OVERVIEW

There are two approaches to valuing travel time savings to business people. The first is that which has formed the basis of UK policy for about 30 years, and which is set out in Section 2. This takes the value of travel time savings on employer’s business as equal to the gross wage rate plus an allowance for other costs that the employer saves. These might include such things as desk space, computer, tools, uniform, protective clothing, travel expenses. These were investigated in studies for the UK Department of the Environment around 1970 (Fullerton and Cooper, 1969; Rubashaw, Michali, Taylor and Key, 1969; Harrison, 1969; Harrison and Taylor, 1970; and Makrotest, 1970).

The underlying rationale was that if employers were actually seen to be saving a certain amount of cost (through the gross wage and these various add-ons), then this was the value to them and, subject to any taxation related adjustments, should be the value to society. The approach is sometimes called ‘The Cost Saving Approach’, though it is also sometimes referred to as the ‘wage rate plus’ approach. Clearly, it was believed by the UK government that the economy was sufficiently competitive that average wage rates, for the employment groups concerned, reflected the value to employers.

The approach can (but need not) be underpinned by appeals to the neoclassical theory of the firm and the labour market. This gives the equivalence of the marginal (revenue) product of labour to the marginal cost of employing labour, implying that a marginal minute saved will result in a marginal output increase valued at the wage rate for that minute. It is sufficient for this to be true on average, rather than for each individual employee involved. The process may also be ‘indirect’, such that employers receiving sufficiently big travel time savings, via their employees, might release resources into the labour market, where their value should be the marginal wage rate paid by employers for labour of this type. There is clearly room in this argument for small edge effects, but in general it does provide credible support for the Cost Saving Approach. However, its value is undermined by the possibilities it gives for objections to its assumptions, and this process ultimately leads most students of this area to at least wish to consider the more detailed ‘Hensher’ method to be considered in Section 3.

This note then proceeds in Section 4 to review what AHCG did. Section 5 looks at the matter from the point of view of the employer. Finally, section 6 gives our conclusions.