SHADOW WAGES AND THE PROMOTION OF EFFICIENT LABOR ALLOCATION IN DEVELOPING COUNTRIES

Stanislaw Wellisz

Kyklos, 1974, vol. 27, issue 3, 554-582

Abstract: The article questions the advisability of using the standard shadow wage formulas to calculate labor costs for development project appraisal purposes. It is shown that such formulas apply only if a share‐alike rural ethic is responsible for the rural marginal product‐urban wage gap. Moreover even in cases where such formulas may be legitimately used, their application leads to a decrease in the accumulation rate. To improve labor allocation without sacrificing growth it is necessary to have recourse to fiscal tools. With the aid of appropriate fiscal measures it is possible to eliminate the gap between the actual wage and the social opportunity cost of labor, and to promote good use of labor throughout the economy, and not merely on projects covered by the social cost‐benefit calculus.

Date: 1974
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