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

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  • Joseph E. Stiglitz
  • Raaj Kumar Sah

Abstract

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.

Suggested Citation

  • Joseph E. Stiglitz & Raaj Kumar Sah, 1983. "The Social Cost of Labor, and Project Evaluation: A General Approach," NBER Working Papers 1229, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1229
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    1. Blitzer, Charles & Dasgupta, Partha & Stiglitz, Joseph, 1981. "Project Appraisal and Foreign Exchange Constraints," Economic Journal, Royal Economic Society, vol. 91(361), pages 58-74, March.
    2. Sen, Amartya K, 1972. "Control Areas and Accounting Prices: An Approach to Economic Evaluation," Economic Journal, Royal Economic Society, vol. 82(325), pages 486-501, Supplemen.
    3. Jean-Pascal Benassy, 1975. "Neo-Keynesian Disequilibrium Theory in a Monetary Economy," Review of Economic Studies, Oxford University Press, vol. 42(4), pages 503-523.
    4. Heady, Christopher John, 1981. "Shadow Wages and Induced Migration," Oxford Economic Papers, Oxford University Press, vol. 33(1), pages 108-121, March.
    5. Marchand, Maurice & Mintz, Jack & Pestieau, Pierre, 1985. "Public production and shadow pricing in a model of disequilibrium in labour and capital markets," Journal of Economic Theory, Elsevier, vol. 36(2), pages 237-256, August.
    6. Dixit, Avinash, 1971. "Short-run Equilibrium and Shadow Prices in the Dual Economy," Oxford Economic Papers, Oxford University Press, vol. 23(3), pages 384-400, November.
    7. N. H. Stern, 1972. "Optimum Development in a Dual Economy," Review of Economic Studies, Oxford University Press, vol. 39(2), pages 171-184.
    8. A. K. Dixit, 1968. "Optimal Development in the Labour-Surplus Economy," Review of Economic Studies, Oxford University Press, vol. 35(1), pages 23-34.
    9. Newbery, David M G, 1972. "Public Policy in the Dual Economy," Economic Journal, Royal Economic Society, vol. 82(326), pages 567-590, June.
    10. Roberts, Kevin W S, 1982. "Desirable Fiscal Policies under Keynesian Unemployment," Oxford Economic Papers, Oxford University Press, vol. 34(1), pages 1-22, March.
    11. Dixit, Avinash & Stern, Nicholas, 1974. "Determinants of Shadow Prices in Open Dual Economies," Oxford Economic Papers, Oxford University Press, vol. 26(1), pages 42-53, March.
    12. 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.
    13. Newbery, David, 1974. "The Robustness of Equilibrium Analysis in the Dual Economy," Oxford Economic Papers, Oxford University Press, vol. 26(1), pages 32-41, March.
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    Cited by:

    1. Alkire, Sabina & Deneulin, Séverine, 1998. "Individual Motivation, its Nature, Determinants and Consequences for Within Group Behavior," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 1999033, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    2. Chiara Del Bo & Carlo Fiorio & Massimo Florio, 2011. "Shadow Wages for the EU Regions," Fiscal Studies, Institute for Fiscal Studies, vol. 32(1), pages 109-143, March.
    3. Fields, Gary S., 1997. "Wage floors and unemployment: A two-sector analysis," Labour Economics, Elsevier, vol. 4(1), pages 85-91, March.
    4. Fields,Gary S., 2005. "A guide to multisector labor market models," Social Protection and Labor Policy and Technical Notes 32547, The World Bank.
    5. Lawrence F. Katz & Lawrence H. Summers, 1989. "Can Interindustry Wage Differentials Justify Strategic Trade Policy?," NBER Chapters,in: Trade Policies for International Competitiveness, pages 85-124 National Bureau of Economic Research, Inc.
    6. Fields, Gary S., 2005. "A welfare economic analysis of labor market policies in the Harris-Todaro model," Journal of Development Economics, Elsevier, vol. 76(1), pages 127-146, February.

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