Working Paper: NBER ID: w1229
Authors: Raaj Kumar Sah; Joseph E. Stiglitz
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.
Keywords: shadow wage; project evaluation; labor economics; public economics
JEL Codes: I31; H43; D61
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| agricultural productivity (Q11) | shadow wage (J31) |
| labor migration (J61) | agricultural output (Q11) |
| labor migration (J61) | shadow wage (J31) |
| price distortions (L11) | shadow wage (J31) |
| government policies (H59) | shadow wage (J31) |