Estimating The Opportunity Cost Of Labor In Project Analysis And Comparative Advantage Studies: A Critique And Application In The Context Of Disequilibrium

This study presents a critical analysis of procedures currently used to estimate the opportunity costs of unskilled labor in developing countries. The issue is particularly germane today. Economic analysis is playing an increasingly important role in most developing country agricultural and industrial production. Many labor markets, however, remain relatively thin and subject to a variety of market distortions which render the job of the economic analyst extremely difficult. In light of these conditions, this research aims to accomplish the following three objectives: 1) To critically evaluate methods currently used for estimating opportunity costs of labor and the adherence of these methods to the underlying dictates of economic theory; 2) To present an empirical case study which examines the problems of opportunity cost estimation and the sensitivity of the estimates to selected assumptions and estimation techniques; 3) To discuss the methodological problems which highly sensitive labor estimates pose for interpretation of economic analyses, and to suggest means of responding to these problems.