The Social Cost of Labor, and Project Evaluation: A General Approach

Abstract

This paper presents a general framework for analyzing shadow wages in LDCs. We focus on (i) the differences between the domestic and international prices, (ii) the equilibrating mechanisms in the economy, (iii) the endogeneity of earnings in industry and agriculture, (iv) the consequences of industrial employment creation on agriculture, and (v) the nature of migration and unemployment.

We identify those reduced form relationships which are central in determining the shadow wage, and use them to obtain general formulae for the shadow wage. These formulae can be specialized to alternative technological, behavioral, and institutional settings. This yields many new results concerning the relationship between the shadow wage and the market wage. Also, earlier results on shadow wages are derived as special cases of our formulae.