Shadow Wage Research Articles

Rural Policies and Poverty in Tanzania: An Agricultural Household Model-Based Assessment

Exogenous shocks to farmers’ consumption, production and labour market decisions are rarely considered accurately. For farm households, under labour market imperfections, such decisions are often interlinked. This calls for non-separable agricultural household models. According to this framework, second-order (or behavioural) effects include a direct (i.e., supply or demand reactions due to an exogenous shock) and an indirect (i.e., supply or demand adjustments to the endogenous variations in the shadow wage generated by the exogenous shock) component. Under large price changes or following structural interventions, such as those concerning land redistribution or mechanization practices, neglecting such second-order effects on consumption and production can bias the final impact on household welfare. The main objective of this study is thus to develop a robust and comprehensive tool to evaluate the effect on household welfare of different agricultural policies in Tanzania and food price changes. A two-stage estimation strategy is adopted: the shadow price of labour is first estimated and then used to estimate production and demand systems as well as labour market functions. These models are subsequently used to simulate the effect on household welfare of a hypothetical 40% increase in the price of cereals and other crops and a hypothetical 10% increase in the hectares of arable land and in the use of ox-ploughs. The results are finally compared with the case in which a separable model is adopted.

Measuring the price of labour in agricultural economies: the shadow wage rate

Labour market imperfections are one of the leading causes of economic backwardness that result in under utilization of labour, the most important input in production process. Labour markets are shallow in subsistence agricultural economies which causes problem in determining the wage rate. The household production function provides an alternative to estimating the shadow wage rate such that it reflects the opportunity cost of labour. The most important deductions of the household production function are: the marginal productivity of labour is its shadow wage rate and; at equilibrium, the marginal returns from labour are exactly equal across all activities. This paper uses data collected in 2008 in course of a leasehold forestry study from 297 households from Makwanpur district of Nepal using a multi stage sampling. This paper estimates the marginal productivity of labour in maize production, the most common form of economic activity, for male and female labour. It examines how the money wage rate and the actual wage rate may differ from the shadow wage rate reflected by marginal productivity of labour in agriculture. The findings reveal that the actual wage rate for male labour is inflated and exceeds its marginal productivity while female wage rate slightly understates its marginal productivity. The paper concludes with policy recommendation of ensuring institutional mechanisms to correct for these imperfections. DOI: http://dx.doi.org/10.3126/ejdi.v15i1-2.11860 Economic Journal of Development Issues Vol. 15 & 16 No. 1-2, pp. 24-35

Estimation of family labor supply: Evidence from the MeKong River Delta in Viet Nam. Can Tho University Journal of Science

This article explores the data of 1,860 families living in the Mekong River Delta (MRD) region from the Viet Nam Household Living Standards Survey 2008 (called VHLSS 2008) to learn about their familial labor allocation in responding to changes of market wage. Theoretically, wage – one of the key factors influencing changes of family labor supply– is used to estimate a level of the shadow wage which is an exogenous factor in the labor supply function. Based on the survey data of 1,860 MRD families, findings showed that family labor supply is significantly sensitive to changes of both shadow wage and non-labor income. Family labor supply is being of a forward bending curve, while family tended to reduce its labor supply as a response of an increase of the non-labor income. Additionally, plot size was closely related to labor supply within a family. Consequently, results also indicate that IV estimation methodology is substantial to estimate impacts of changes of the economic opportunity (mainly wage) on family labor supply.

The nexus between labor wages and property rents in the Greater China area

Tse and Chan (2003) investigated the relationship between property sales price and the value of commuting time without accounting for the fact that property sales price is subject to the inherent limitation of containing speculative elements. A better measure to use for such a study would be the rent paid by the genuine end-user of the property. This paper examines how equilibrium rents in different locations within Greater China are determined by the time value, or the shadow wage, of an individual. Using the rental information, we provide the first estimated ratio of time values for individuals in Hong Kong, Shanghai and Taipei. Our results show that the shadow wage ratio of the households in Hong Kong, Shanghai and Taipei is about 2.25:1:1.61.

The Nexus between Labor Wages and Property Rents in the Greater China Area

Abstract Tse and Chan (2003) investigated the relationship between property sales price and the value of commuting time without accounting for the fact that property sales price is subject to the inherent limitation of containing speculative elements. A better measure to use for such a study would be the rent paid by the genuine end-user of the property. This paper examines how equilibrium rents in different locations within Greater China are determined by the time value, or the shadow wage, of an individual. Using the rental information, we provide the first estimated ratio of time values for individuals in Hong Kong, Shanghai and Taipei. Our results show that the shadow wage ratio of the households in Hong Kong, Shanghai and Taipei is about 2.25:1:1.61.

Traditional vs. modern production systems: Price and nonmarket considerations of cacao producers in Northern Ecuador

Many factors besides profit maximization, such as nonmarket ecological and social benefits, influence smallholder households to adopt a specific agricultural production system or sell in a particular market. Thus, different analytical techniques are needed that take into consideration more than monetary income to fully capture these additional benefits to better understand the production decisions of smallholder farmers. We build on previous work on the household model and shadow wage estimation to develop a shadow wage for Ecuadorian cacao producers that includes these nonmarket benefits. We found that the shadow wage correctly indicated that, on average, these households would prefer to use an agroforestry production system instead of the more profitable modern system because of the nonmarket benefits received from the former system.

Food stamps and the time cost of food preparation

Using a structural model of time allocation between household production and market work, I estimate the shadow wage of household production. I combine data from the American Time Use Survey and the Current Population Survey’s Food Security Supplement to estimate the time cost as well as the total cost of food preparation at home. Using information on whether a household received food stamp benefits, I compare actual food stamp recipients’ time cost to those who do not receive food stamp benefits. Previous literature that also uses American Time Use Survey data suggests that “typical” food stamp recipients incur a higher time cost of preparing food at home. I cannot confirm this finding using actual data on food stamp recipients and non-recipients. In fact, the lower shadow wage of household production of food stamp recipients more than offsets the larger amount of time spent preparing food at home, generating lower time cost of food preparation for them.

Shadow Wages for the EU Regions

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.

Estimating the labour transformation elasticity between agricultural and non-agricultural sectors in China

Abstract In this paper we examine labour mobility between agricultural and non-agricultural sectors in China using a household survey data set. We use the approaches of Jacoby, as well as Sicular and Zhao, to estimate the elasticity of transformation of labour between agricultural and non-agricultural employment. Firstly, shadow wages are imputed by estimating the household agricultural production function. Secondly, labour supply decisions are modelled as functions of imputed shadow wages, observed market employment wages and other relevant variables. The coefficients of the labour supply equations are then used to derive the labour transformation elasticity. Our empirical results show that China's labour market at the beginning of the 2000s, as measured by the ease of transfer between agriculture and non-agriculture, was relatively open, despite continuing institutional barriers. This has important implications when assessing the distributional impact of further opening of China's economy to internation...

Shadow Wages for the EU Regions*

AbstractAccording to cost–benefit analysis theory, the shadow wage rate (SWR) is the social opportunity cost of labour. After reviewing earlier theoretical and empirical literature, we define the SWR under four labour market conditions: fairly socially efficient (FSE), quasi‐Keynesian unemployment (QKU), urban labour dualism (ULD) and rural labour dualism (RLD). We offer, for the first time, a short‐cut empirical estimation of the shadow wages for the European Union (EU) at the regional (NUTS2) level. Our estimated values are in the form of conversion factors, i.e. coefficients that translate actual observed real wages into shadow wages, as required by the evaluation of public investment projects under the Structural Funds of the EU. Our results are obtained with an empirical strategy that is easy to implement with aggregate regional data, differently from traditional micro‐data‐based approaches to the estimation of the SWR, which are costly, project specific and often difficult to apply because of lack of information.

Investigation into the Shadow Wage Rate for Roughage Production Labor in Dairy Farming

Investigation into the Shadow Wage Rate for Roughage Production Labor in Dairy Farming

Intellectual bridges across project evaluation traditions: the contribution of EU Regional Policy

This paper reviews the basic principles of the EC approach to cost-benefit analysis (CBA) of infrastructure projects, as embodied in the recently issued CBA Guide for the Structural Funds. After an introduction about the objectives and instruments of the 2007-2013 EU Cohesion Policy, the paper discusses some methodological choices which have been made by the CBA Guide. Some ‘rules of the game’ (i.e. the use of shadow prices, the calculation of a proper shadow wage, the monetisation of non-market impacts, the choice of a social discount rate and the use of welfare weights) have been proposed in the Guide, in the light of regional differences in market conditions and welfare objectives of the EU regional development policy. The analysis shows that, differently from well-known national traditions of CBA in Europe (an explicit comparison is made with the British «Green Book») the EU perspective calls for a general CBA framework which is not entirely different from the project appraisal practice in less developed countries.

Shadow Wages and Shadow Income in Farmers’ Labor Supply Functions

AbstractThis article extends the current literature on estimating the labor supply function in agriculture by providing a different method to derive the shadow wage and shadow income. The method is based on the observation that the shadow wage is the marginal product of labor at the optimal point of both farm and household production functions. Thus, under certain assumptions on the functional form of the production functions, both the shadow wage and shadow income can be derived without estimating the production function. Using a sample of Vietnamese farmers, the results from the new method are shown to be consistent with the theory.

Assessing the impact of regeneration spending: lessons from the United Kingdom and the wider world

The government increased the funding for regional development agencies to £2.3 billion in 2007/8, yet hard evidence on the effectiveness of the spending is difficult to find. Techniques for valuing benefits in difficult areas have existed for many years. They range from the hedonic methods and contingent valuation studies of environmental economists to the estimates of shadow wage rates used by development economists to take account of the economic value of additional employment. The latter have been used for years in some of the poorest developing countries in the world, as well as some countries in the European Union. Meanwhile some attempts to capture the indirect benefits of regeneration spending have surfaced through the United States with the ‘Social Return on Investment’ and Local Multiplier 3, yet the proponents of these approaches do not seem to have come across the abundant literature on the use of shadow pricing in the context of developing countries. This article attempts to explore the extent...

Analysis and forecast of labor commuting in the Moscow region, the case of Dubna

The proportion of push-pull labor migrants (LC) in the city of Dubna (Moscow region) has been obtained on the basis of microdata for 2001 as well as the industrial composition of their workplaces. Results are presented of the assessed shadow wages, comparative analysis is performed of the residents employed in their home town and LC allowing for the age and gender. Dynamics and forecast of LC in Dubna are presented based on the analysis of economic macroindicators for 2001–2006 and the legislative activity of the city government. It is shown that the results obtained on the basis of micro-and macroanalysis are in satisfactory agreement both with each other and with the data of the earlier authors’ macroeconomic studies of LC in the Moscow region [1, 2].

Una valoración de la enseñanza superior a partir de los salarios esperados y los salarios sombra de los estudiantes universitarios

In this paper we provide evidence on the economic assessment of university education using Spanish university students’ statements about their wage expectations when they finish university and about their shadow wage or permanent minimum wage necessary to induce them to quit university. For that purpose, and given the qualitative nature or the declared wages, ordered response models are estimated. In order to allow that the quality of information differs depending on the student’s academic year, the estimation is done by course year based subsamples. The expected wages predicted by the model are very similar for both genders and, as a reflection of the improvement in information during the academic cycle, these wages get closer to the ones observed at the most advanced courses. With respect to shadow wages, predictions based on the model show that they are higher for students in the last years of the degree, when the opportunity cost of quitting is higher. Also, we find greater shadow wages for females than for males, even though the observed wages are substantially lower for women. This last result is in agreement with the higher relative return on university education in case of women, which is reflected by the higher propensity of women to invest in this kind of education

Shadow wages, allocative inefficiency, and labor supply in smallholder agriculture

AbstractThis article introduces a method for estimating structural labor supply models in the presence of unobservable wages and deviations of households' marginal revenue product of self‐employed labor from their shadow wage. This method is therefore robust to a wide range of assumptions about labor allocation decisions in the presence of uncertainty, market frictions, locational preferences, etc. We illustrate the method using data from rice producers in Côte d'Ivoire. These data, like previous studies, reveal significant systematic differences between shadow wages and the marginal revenue product of family farm labor. We demonstrate how one can exploit systematic deviations, in the present case related to household characteristics such as the land/labor endowment ratio, to control for both unobservable wages and prospective allocative inefficiency in labor allocation in structural household labor supply estimation.

Using Micro Data to Estimate the Intertemporal Substitution Elasticity for Labor Supply in an Implicit Contract Model

Economists have devoted substantial resources to estimating the intertemporal substitution elasticity for labor supply because this elasticity plays a crucial role in the real business cycle literature. Generally, the estimates of the elasticity have been too low to explain business cycles. Economists have responded by trying to modify real business cycle models to allow for smaller elasticities, but they have experienced mixed success at best. However, the standard intertemporal substitution model has not done well when tested, and if this model is incorrect, so will be the estimated labor supply elasticities based upon it. An equilibrium alternative to the standard intertemporal labor supply model is the implicit contract model. In this latter model firms and workers bargain over state-contingent contracts denominated in terms of consumption and hours of work. Further, the price of leisure is the marginal product of labor or the shadow wage, which differs from the observed wage. A number of studies have found that the data are compatible with an implicit contract model; in particular in Ham and Reilly (2002) we found that we could reject a separable (within period) implicit contract model but not a non-separable one. If an implicit contract model is appropriate, this is the context in which we should try to estimate the intertemporal labor supply elasticity. However this estimation is potentially quite difficult with micro data since the shadow wage (marginal product of labor) is unobserved. In this paper we first develop a procedure that allows one to estimate the intertemporal substitution elasticity in an implicit contract model from micro data. We then implement this procedure using the Panel Study of Income Dynamics (PSID) and the Consumer Expenditure Survey (CES). We obtain statistically significant elasticities of 0.9 with the PSID and 1.0 with the CES. The consistency of the estimate across the data sets is impressive given that we use different estimation approaches (micro data versus synthetic cohorts) and different consumption measures (food consumption versus total nondurable consumption) in the two data sets. These results are three times larger than existing estimates based on the standard intertemporal supply elasticity from this data set and thus offer more hope that equilibrium perspectives on the labor market are capable of tracking the data. Given that the implicit contract model is less likely to be rejected than the standard model in our work and other research, we believe that our approach should prove to be quite useful.

Cost–benefit analysis and the European union cohesion fund: On the social cost of capital and labour

Florio M. (2006) Cost–benefit analysis and the European Union Cohesion Fund: on the social cost of capital and labour, Regional Studies 40, 211–224. Cost–benefit analysis is a formal regulatory requirement for the evaluation of Cohesion Fund projects. It requires the calculation of shadow prices. Observed prices in less-developed European Union regions do not reflect the social opportunity cost of labour and capital because of market failures and policy constraints. The paper discusses simple rules for the calculation of financial and economic discount rates, and of shadow wages, i.e. the opportunity costs of capital and labour, in the context of the appraisal of infrastructure projects part-financed under the Cohesion Fund. It is argued that for the 2007–13 programming period, the European Commission should adopt a unique financial discount rate of 3.5% in real terms, social discount rates of 5.5% for the Convergence regions and 3.5% for Competitiveness regions, and a region-specific shadow wage rate. Cost–benefit analysis Social discount rate Shadow wage Cohesion Fund Florio M. (2006) L'analyse coût-bénéfice et le Fonds de cohésion de l'UE: à propos du coû t social du capital et du travail, Regional Studies 40, 211–224. L'analyse coût-bénéfice est une obligation légale préalable à l'évaluation des projets assistés par le Fonds de cohésion. Elle nécessite le calcul des prix virtuels. Les prix observés dans les zones de l'UE en voie de développement ne reflètent le coû t d'opportunité social, ni du travail, ni du capital, à cause de la distorsion du marché et des contraintes de politique. Cet article cherche à discuter des règles simples visant le calcul des taux d'escompte financiers et économiques, et des salaires virtuels; autrement dit les coû ts d'opportunité du capital et du travail, dans le cadre de l'évaluation des projets d'équipement financés en partie sous l'égide du Fonds de cohésion. On affirme que, pour la période de programmation 2007–13, la Commission européenne devrait adopter un taux d'escompte financier unique de 3,5% en termes réels, des taux d'escompte sociaux de 5,5% pour les régions de convergence et de 3,5% pour les régions de l'Objectif ‘compétitivité’, et un taux des salaires virtuels propre à chaque zone. Analyse coût-bénéfice Taux d'escompte social Salaire virtuel Fonds de cohésion Florio M. (2006) Kosten-Nutzenanalyse und der Kohäsionsfond der EU: Bemerkungen zu den Sozialkosten von Kapital und Arbeit, Regional Studies 40, 211–224. Kosten-Nutzenanalyse ist ein formales behö rdliches Erfordernis für die Evaluierung von Kohäsionsfondprojekten. Es bedarf der Berechnung von ‘Schattenpreisen’. In weniger entwickelten EU Regionen beobachtete Preise spiegeln nicht die sozialen Opportunitätskosten von Arbeit und Kapital wider aufgrund von Marktversagen und Policybedingten Einsdränkungen. Dieser Aufsatz bespricht einfache Regeln für die Berechnung finanzieller und wirtschaftlicher Diskontsätze und für Schattenlöhne, d.h. die Opportunitätskosten von Kapital und Arbeit im Zusammenhang mit der Einschätzung von Infrastrukturprojekten, die vom Kohäsionsfond teilfinanziert werden. Es wird der Standpunkt vertreten, dass die Europäische Kommission für die Programmperiode 2007–2013 einen einmaligen Finanzdiskontsatz von effektiv 3,5% einführen sollte, einen sozialen Diskontsatz von 5,5% für “Konvergenz” Regionen und 3,5% für “Wettbewerbs” Regionen sowie einen bestimmten regionenspezifisch zugeschnittenen Schattenlohnsatz. Kosten-Nutzenanalyse sozialer Diskontsatz Schattenlohn Kohäsionsfond Florio M. (2006) Análisis coste-beneficio y el Fondo de Cohesión de la UE: sobre el coste social de capital y trabajo, Regional Studies 40, 211–224. Los análisis de costes y beneficios son un requisito formal y reglamentario para llevar a cabo la evaluación de los proyectos del Fondo de Cohesión. Requieren el cálculo de los ‘precios sombra’. En los precios de las regiones de la UE menos desarrolladas no queda reflejado el coste de oportunidad social de trabajo y capital debido a fallos de mercado y restricciones polí– ticas. Aquí se exponen reglas simples para el cálculo de las tasas de descuento, según un valor financiero y económico, y los ‘salarios sombra’, es decir, los costes de oportunidad de capital y trabajo, en el ámbito de una valoración de proyectos de infraestructura financiado en parte por el Fondo de Cohesión. Se sostiene que para el periodo de programación 2007–2013, la Comisión Europea debería adoptar una tasa exclusiva de descuento financiero del 3,5% en términos reales, tasas de descuento social del 5,5% para las regiones de Convergencia, un 3,5% para las regiones de Competitividad y una tasa específica de salario sombra para cada región. Análisis de costes y beneficios Tasa de descuento social Salario sombra Fondo de cohesión

Estimating the value of leisure time in Korea

To estimate the value of leisure time, this paper suggests the enodogenous switching model which incorporates individual's willingness to take more leisure time. The empirical results show that the value of leisure time in terms of willingly give-up shadow wage is greater than the market wage by 9% in Korea. The Korea economic crisis in 1997 seems to reduce the value of leisure time nearly 14%.