Economic Opportunity Cost Of Labour: A Synthesis

In this article the economic opportunity cost of labor has been estimated using the supply price approach under a wide variety of labor market conditions and types of job. This approach is shown to be equivalent to the marginal product of labor foregone approach, when the latter can be estimated accurately. The primary reliance of the supply price approach on the wage rates demanded under the labor conditions of the project greatly facilitates the estimation of this economic parameter for use in the economic valuation of projects. A methodology has been outlined in detail to account for several adjustments that may need to be made to this supply price to reflect special labor market characteristics and distortions. Most of these factors, such as income taxes and unemployment insurance compensation, are straightforward and easy to estimate. Other issues dealing with the quality of the jobs and the nature of the unemployment present require a more detailed examination of the labor market. Once these values have been determined, they are used to adjust the supply price to arrive at an estimate of the economic opportunity cost of labor for a particular skill on a particular project.