Shadow Wages for the EU Regions

Abstract:     
The shadow wage is the social opportunity cost of labor. After reviewing earlier theoretical and empirical literature, we define four labor market conditions: fairly socially efficient (FSE), quasi-Keynesian unemployment (QKU), urban labor dualism (ULD) and rural labor dualism (RLD). We offer, for the first time to date, an empirical estimation of the shadow wages for the EU at regional (NUTS2) level. Our estimated values are in the form of conversion factors that translate actual observed real wages into shadow wages, as required by social cost-benefit analysis of investment projects under the Structural Funds of the EU. Our results are obtained with an empirical strategy that is easy to implement with aggregate data, differently from micro-data based approaches that are costly, project specific, and often difficult to be applied because of lack of data. We find that the conversion factor for the shadow wage rate is 0.998 in 29 FSE regions (mostly capital cities); 0.943 in 135 ULD regions (mostly in rich areas); 0.8005 in 74 QKU regions, and just 0.519 in 32 RLD regions. These findings point to high variability of labor markets in the EU and have important applications for project evaluation.

Number of Pages in PDF File: 40

Keywords: Shadow wage, project evaluation, EU regions

JEL Classification: H43, D61, R23

working papers series