Wages, Housing Prices, and Commutes

Abstract

Whereas economic theory suggests that, all else equal, workers should be willing to accept disamenities such as higher housing costs and longer commutes only if they are compensated with higher wages, little is known about the magnitude of these compensating differentials. In this paper I address this gap in the literature by estimating an empirical model of the relationship between wages, housing prices, and commutes that addresses the simultaneous determination of these variables. The results from the empirical models suggest that the wage premia associated with high housing costs and long commutes are substantial. Furthermore, results from baseline models reveal that estimates of these compensating differentials are seriously biased if endogeneity is not addressed.

Keywords: Housing Costs, Commute Times, Compensating Differentials