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Environmental Economics Research at EPA

Like hedonic property value studies, hedonic wage studies impute observed market wages to constituent attributes that have no independent markets and hence no observable prices. A carefully structured regression can tease apart the values of non-traded attributes that contribute to the observed market wage. The earliest hedonic wage studies focused on job safety issues but the technique is amenable to studying the environment as well. See, for example, Thaler and Rosen.

You can see the full list of reports corresponding to this section in the benefits analysis - valuation - revealed preference - wage differential subview of the subject view of the Environmental Economics Report Manager (EERM) database.

1. Pollution

When one combines employment observations from different areas, the varying environmental characteristics of those areas can become explanatory variables for wages along with other local factors such as climate. The regression results will then include coefficients for the environmental variables. These can be interpreted as marginal prices or values of the pollutant at the margin.

The 1979 report entitled Methods Development for Assessing Air Pollution Control Benefits Vol IV, Studies on Partial Equilibrium Approaches to Valuation of Environmental Amenities (EE0271D) is a collection of four papers. The third paper, "The Valuation of Locational Amenities: An Alternative to the Hedonic Price Approach," by Maureen L. Cropper is not a property value hedonic study; it is a hedonic wage differential study. It looks at wages across cities and occupations and assumes that within each city, employment occurs in the central business district (CBD) and amenities and disamenities including pollution and crime radiate outward from the CBD and diminish with distance. Residential rents and commuting disutility are also sensitive to distance from the CBD. Individuals are allowed to move between cities so an equilibrium is assumed to occur. As an example of the regression results, “the present discounted value of a 30% reduction in SO2, calculated for a person earning the median income in St. Louis in 1960, is between $418 and $489, or roughly twice the figure cited by Ridker and Henning” in their property value study of St. Louis pollution.

Another EPA study that uses the hedonic wage technique is Gerking’s 1980 work, Effects of Air Pollution and Other Environmental Variables of Offered Wages (EE-0026). He performs a hedonic wage differential study to determine the negative value of air pollution. Three measures of air pollution are included in the regression exercise which includes numerous other non-environmental variables to explain wage variation. The investigator derives expected results for the environmental variables, at least in certain cases of interest.

As an example of the voluminous results, meeting the national secondary standards for total suspended particulates in Denver would reduce the offered real wage from $4.1758/hr. to $3.9626/hr. Disregarding the false precision to five decimal places and multiplying by the number of persons affected and 2,000 work hours per year yields an estimated annual benefit for Denver of about $93 million.

Whether the regression results can be used in such a calculation is open to question. Subsequent work found that a marginal valuation of a pollutant was probably inappropriate to use for a non-marginal change in the pollutant’s level.

2. Job Safety

In the 1983 survey Valuing Reductions in Risks: A Review of the Empirical Estimates (EE-0227A,B), Violette and Chestnut review a large number of studies that attempt to place a value on various measures to reduce the risk of death. A variety of techniques are employed by different studies including wage studies (hedonic method), consumer market studies, contingent market approaches and others. This review will focus on the wage studies.

The hedonic method regresses observed wages on attributes of the job, the employee and the location in an attempt to impute values to those contributing factors even though no market exists for those factors. Where risk of injury or death is a job characteristic and an independent variable, the coefficient that falls on it is a value or premium that the employee requires to accept the job and its concomitant risk. From that coefficient, it is a simple calculation to compute the value of a statistical life. The subject document concentrates on that value.

“The value-of-life estimates tend to cluster into two ranges --- a $400,000 to $650,000 and a $4,000,000 to $7,500,000. These estimates differ by roughly an order of magnitude. The studies that use risk data for occupations compiled by the Society of Actuaries ... found estimates ... in the low range, while studies using BLS [Bureau of Labor Statistics] data on risks by industries tended to estimate considerably higher values.”

The 1985 report Experimental Methods for Assessing Environmental Benefits, Vol IV: Valuing Safety: Two Approaches (EE-0280E) by Gegax, Gerking, Schulze and Anderson is a contribution to the literature on the statistical value of a human life. This study is largely comprised of a review of the topic and the presentation of a model. Then, two parallel studies of job-related safety are offered. One is a hedonic model from which a valuation is inferred. The other, a contingent value study, derives a valuation more directly. The values are similar to each other at around $2 million per life and similar to previous studies.

Violette and Chestnut returned to this topic in 1989. Valuing Risks: New Information on the Willingness to Pay for Changes in Fatal Risks (EE-0021) is a survey of the literature on how workers value job safety. Some of the studies cited use contingent valuation but most employ a hedonic technique.

The newer studies included in this survey use different data sets than the studies reviewed earlier and hence add some robustness to the range of results. Some progress may also have been made in technique. As before, the authors reproduce or infer the value of a statistical life. Violette and Chestnut conclude that, “... this updated review suggests a possible narrowing of the range of values for on-the-job risks of death to $1.5 to $3 million.”

A substantial literature outside of EPA exists on hedonic wage differentials. Freeman reviews much of this literature. Thaler and Rosen's work, cited above, is probably the seminal piece in this field. It deals with job safety. In extending the technique to environmental amenities, it became apparent that there must be a dual match between employee and employer. That is, the employee must accept the environmental and safety attributes of the employer’s location but the employee’s worker characteristics must match the employer’s job, the wage equilibrating both. See Robert E. B. Lucas and Sherwin Rosen,.

In a 1989 update of the Violette and Chestnut papers discussed above, Ann Fisher, Dan Violette and Lauraine Chestnut survey eleven hedonic studies from which they reproduce or infer the value of a statistical life. The expanded set of job safety studies produced a range of $440 thousand to $14.9 million (in 1986 dollars, slightly frustrating comparison to the earlier studies which are in 1984 dollars).

There are interurban issues that can be addressed by wage differential models as well. It is necessary to recognize, however, that there are two elements, already discussed, which are at work. Jobs in different cities may offer different compensation reflecting, in part, different environmental amenities. Homes in different locations sell for different prices reflecting, in part, different environmental amenities. Many studies, already mentioned, have considered one element or the other. Rosen, op. cit. 1979, asserted that the two must be considered simultaneously because individuals choose simultaneously where to work and where to live. The literature on joint determination is surveyed in Timothy J. Bartik and V. Kerry Smith.

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