The Rising Value of Time and the Origin of Urban Gentrification

In the past three decades, American central city neighborhoods have experienced an influx of high-income, highly skilled residents and an exodus of low-income, low-skilled residents. This gentrification of central city neighborhoods has reversed decades of decline in urban centers. In this paper, I test the hypothesis that an important driving force behind gentrification is the rise in the value of highly skilled workers’time. To perform the test, I estimate a spatial equilibrium model of neighborhood choice. In the model, workers choose the neighborhood in which they live based on their value of time, commute times, rents, and amenities. I measure the differential growth in the value of time for each occupation by analyzing changes in the cross-sectional relationship between residual earnings and hours worked in Census data. My empirical strategy exploits the variation in the spatial distribution of jobs in different occupations. This allows me to separate the demand for shorter commute times from the demand for local amenities. I find that workers in occupations that experience greater growth in the value of time are more likely to locate in neighborhoods with shorter commute times. The initial shock to demand for central city housing by high-skilled workers creates endogenous amenity improvement in the affected neighborhoods, which furthers gentrification because additional high-skilled workers are attracted by the improved amenities. While the estimates of my model indicate that changes in the value of time are likely an important driving force behind gentrification, the effects are substantially magnified by endogenous amenity improvement. The estimates also imply that the welfare gap between highand low-skilled workers (which takes into account not just earnings but also the value of time, rents, and amenities) has grown more than the earnings gap between highand low-skilled workers. ∗I thank my advisors Luigi Pistaferri, Caroline Hoxby, and Rebecca Diamond for their guidance and support. I also thank Ran Abramitzky, Yiwei Chen, Eran Hoffmann, Sitian Liu, Isaac Sorkin, Yu Zheng, and participants at the Stanford Labor and Public workshop and the Applied Economics workshop. I gratefully acknowledge that this research was supported by the Leonard W. Ely and Shirley R. Ely Graduate Student Fellowship through a grant to the Stanford Institute for Economic Policy Research.