Open AccessAn Estimate of the Shadow Wage Rate in Pakistan
Author(s) -
Shahrukh Rafi Khan
Publication year - 1974
Publication title -
pakistan development review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.154
H-Index - 26
ISSN - 0030-9729
DOI - 10.30541/v13i4pp.389-408
Subject(s) - economics , wage , shadow price , subsidy , investment (military) , labour economics , externality , value (mathematics) , shadow (psychology) , marginal cost , social cost , microeconomics , market economy , psychology , mathematical optimization , mathematics , machine learning , politics , political science , computer science , law , psychotherapist
In the past few years, increasing attention has been given tothe methods by which investments in developing countries should beappraised. Benefit-cost analyses, based on market prices and costs, donot indicate whether an investment would be profitable from a socialpoint of view. The methods of project evaluation developed in the pastdecade suggest ways in which private costs and benefits can be adjustedto reflect positive or negative externalities and to eliminate theeffects of distorting taxes and subsidies which influence privatedecisions but which do not affect an investment's fundamental economicvalue. One item in an investment's cost for which the market value iswidely believed to be unrepresentative of its social value is labour.Much of develop¬ment theory has been built around the notion that labouris misallocated, largely because it is mis-priced. Urban labour commandsa wage above its equilibrium price because of the effects of unions,minimum wage legislation and other institutional rigidities. Forinstitutional reasons as well, rural labour is paid a wage which is inexcess of its marginal contribution to agricultural output. Determiningthe social opportunity cost of labour is consequently essential to theproper evaluation of investment in both rural and urbanareas.