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Shadow wages for the EU regions

Listed author(s):
  • Chiara DEL BO

    ()

  • Massimo FLORIO

    ()

  • Carlo Vittorio FIORIO

    ()

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.

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File URL: http://wp.demm.unimi.it/files/wp/2009/DEMM-2009_042wp.pdf
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Paper provided by Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano in its series Departmental Working Papers with number 2009-42.

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Date of creation: 26 Oct 2009
Handle: RePEc:mil:wpdepa:2009-42
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  1. Emmanuel Skoufias, 1994. "Using Shadow Wages to Estimate Labor Supply of Agricultural Households," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 76(2), pages 215-227.
  2. David F. Burgess, 1989. "The Social Opportunity Cost of Capital in the Presence of Labour Market Distortions," Canadian Journal of Economics, Canadian Economics Association, vol. 22(2), pages 245-262, May.
  3. Massimo Florio, 2006. "Cost-benefit analysis and the European union cohesion fund: On the social cost of capital and labour," Regional Studies, Taylor & Francis Journals, vol. 40(2), pages 211-224.
  4. Christopher B. Barrett & Shane M. Sherlund & Akinwumi A. Adesina, 2008. "Shadow wages, allocative inefficiency, and labor supply in smallholder agriculture," Agricultural Economics, International Association of Agricultural Economists, vol. 38(1), pages 21-34, January.
  5. Brent, Robert J, 1991. "The Shadow Wage Rate and the Numbers Effect," Public Finance = Finances publiques, , vol. 46(2), pages 186-197.
  6. Roberts, Kevin W S, 1982. "Desirable Fiscal Policies under Keynesian Unemployment," Oxford Economic Papers, Oxford University Press, vol. 34(1), pages 1-22, March.
  7. Warr, Peter G, 1973. "Savings Propensities and the Shadow Wage," Economica, London School of Economics and Political Science, vol. 40(160), pages 410-415, November.
  8. Marchand, M. & Mintz, J. & Pestieau, P., 1984. "Shadow pricing of labour and capital in an economy with unemployed labour," European Economic Review, Elsevier, vol. 25(2), pages 239-252, July.
  9. Robin W. Boadway & Frank R. Flatters, 1981. "The Efficiency Basis for Regional Employment Policy," Canadian Journal of Economics, Canadian Economics Association, vol. 14(1), pages 58-77, February.
  10. L. S. Wilson, 1993. "Regional Employment Subsidies and Migration," Canadian Journal of Economics, Canadian Economics Association, vol. 26(2), pages 366-379, May.
  11. Sah, Raaj Kumar & Stiglitz, Joseph E., 1985. "The social cost of labor and project evaluation: A general approach," Journal of Public Economics, Elsevier, vol. 28(2), pages 135-163, November.
  12. Srinivasan, T N & Bhagwati, Jagdish N, 1978. "Shadow Prices for Project Selection in the Presence of Distortions: Effective Rates of Protection and Domestic Resource Costs," Journal of Political Economy, University of Chicago Press, vol. 86(1), pages 97-116, February.
  13. Gupta, M R, 1986. "Shadow Wage Rate in a Dynamic Harris-Todaro Model," Oxford Economic Papers, Oxford University Press, vol. 38(1), pages 131-140, March.
  14. Johansson, Per-Olov, 1982. "Cost-benefit rules in general disequilibrium," Journal of Public Economics, Elsevier, vol. 18(1), pages 121-137, June.
  15. Hanan G. Jacoby, 1993. "Shadow Wages and Peasant Family Labour Supply: An Econometric Application to the Peruvian Sierra," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 903-921.
  16. M. Menon & F. Perali & F. Rosati, 2005. "The Shadow Wage of Child Labour: An Application to Nepal," UCW Working Paper 11, Understanding Children's Work (UCW Programme).
  17. Harris, John R & Todaro, Michael P, 1970. "Migration, Unemployment & Development: A Two-Sector Analysis," American Economic Review, American Economic Association, vol. 60(1), pages 126-142, March.
  18. Abdulai, Awudu & Regmi, Punya Prasad, 2000. "Estimating labor supply of farm households under nonseparability: empirical evidence from Nepal," Agricultural Economics of Agricultural Economists, International Association of Agricultural Economists, vol. 22(3), April.
  19. De Borger, Bruno, 1993. "The Economic Environment and Public Enterprise Behaviour: Belgian Railroads, 1950-86," Economica, London School of Economics and Political Science, vol. 60(240), pages 443-463, November.
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