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Shadow wages in cost-benefit rules for project and policy analyses: estimates for OECD countries

Author

Listed:
  • Harald Lang

    (Max Plank Institute, Munich, Germany)

  • Armin-D. Riess

    (Adjunct lecturer, Université du Luxembourg)

Abstract

This paper extends the theory and empirics of shadow wages by explicitly distinguishing between an hours-of-work response and a labor-force participation response – a distinction relevant for projects and policies expected to create jobs – and both responses are considered for different types of labor. Our analysis rests on a general equilibrium model of a tax-distorted but otherwise perfectly competitive economy. The model establishes an unambiguous link between shadow wages, market wages, and parameters of a country´s fiscal regime. Using data on market wages and countries´ fiscal regimes, we quantify this link for 33 OECD countries. We find that even with perfect competition shadow wages are considerably lower than market wages. We conjecture that imperfect competition does not necessarily widen this gap.

Suggested Citation

  • Harald Lang & Armin-D. Riess, 2019. "Shadow wages in cost-benefit rules for project and policy analyses: estimates for OECD countries," DEM Discussion Paper Series 19-05, Department of Economics at the University of Luxembourg.
    • Handle: RePEc:luc:wpaper:19-05
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    References listed on IDEAS

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    More about this item

    Keywords

    Cost-benefit rules; project appraisal; shadow wages; intensive and extensive labor-supply responses;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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