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

This paper develops a general methodology for analyzing shadow wage (and other shadow prices). Our approach is to identify those reduced form relationships describing the economy which are central to the determination of the shadow wage, and use these to obtain simple formulae for the shadow wage. Among the aspects of the economy on which we focus are: (i) the difference between the domestic and international prices, (ii) the equilibrating mechanisms in the economy, (iii) the mechanisms which determine earnings of industrial and agricultural workers, (iv) the nature of migration, and (vi) the intertemporal trade-offs and the attitudes towards inequality. These aspects are modelled in a general manner, which can be specialized to a number of alternative hypotheses concerning technology, behavioral postulates, and institutional settings. Most earlier results on the shadow wages are derived as special cases of our formulae. In addition, we identify a number of new qualitative results concerning the relationship between the shadow wage and the market wage.