The Accounting Price of Skilled Labor

The traditional approach holds that skilled labor is fully employed and that its supply is completely inelastic in relation to small changes in wages. As a consequence, additional hiring is done at the cost of reducing employment in alternative occupations. In such a situation, the corresponding cost at effi-ciency prices is the loss in consumption due to the withdrawal of labor from

5. Lai (1973) has questioned the inclusion of WR in the calculation of the accounting price of unskilled labor. See also Hamilton's (1976 and 1977) critique of Lai's position.

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ACCOUNTING PRICES FOR LABOR

such jobs and, consequently, its efficiency price (APLJ can be calculated on the basis of [6.9] as follows:

If the market prices of all the resources released are considered acceptable approximations of their efficiency prices, it follows from expression [6.8] that the wage paid will be the appropriate efficiency price and there will be no distributional effects significant enough to be recorded.

If the skilled labor were to be hired abroad, it would be appropriate to treat it as an imported good. In fact, since the Government is only interested in the welfare of "nationals" when it performs cost-benefit analyses, the effects of hiring on the income of skilled labor abroad or on the production of goods for which it would be employed in the without project situation does not count in the analysis. Conversely, what does matter are the costs that this hiring imposes on "nationals." Since the wages for imported labor are normally paid in foreign exchange, of which only a part is remitted, the cost of employment is given by the value of the foreign exchange remitted (PER) plus the value at efficiency prices of domestic expenditure on goods and services (DE). If the market prices of the latter are considered as acceptable approximations of their efficiency prices, the corresponding efficiency wage will be

Let, for example, Wcal = $100 be the equivalent in the national currency of the monthly salary of a foreign professional recruited for the project. This salary is paid in foreign exchange, and it is estimated that $50 is spent in the country, $40 is remitted to the country of origin and $10 is income taxes paid to the Government. This situation is shown in Table 6.3, in which the part of wages remitted in foreign exchange has been corrected by the APRFE, and the loss in Government revenue due to lower expenditure of foreign exchange Table 6.3. Valuation of the Employment of "Imported" Labor

Value at

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Table 6.4. Valuation of Employing a Worker Who Would Have Emigrated Without the Project

With the Project

on uses subject to the payment of import tax has been recorded. Since without the project, this professional would not have been employed in the country that hires him, the income tax is attributable to the project and as such is shown as a transfer from the project to the Government.

Finally, consider the case in which the demand for skilled workers gener-ated by the project is covered by people who, in the absence of the project, would have emigrated due to the lack of jobs. In such a case, there would be no reduction at all in domestic production, although the situation with the project could imply a reduction in output in the country of destination of the potential migrant. However, current value judgments in cost-benefit analysis only take account of the effects on the economic welfare of the "nationals".

These effects are summarized in Table 6.4.

In the situation with the project, the worker would receive a wage Wdom

which will have to be greater than or equal to his willingness to receive WRdom

when the alternative of emigration does not exist. The latter requires WRdom to be completed with the possible gain Wext - WRext resulting from the difference between his wage abroad and the respective willingness to receive. Since the worker remits a proportion k of his wage to his family when he emigrates, the Government loses the corresponding foreign exchange premium. The com-pensating variation of accepting the job in the project, and consequently of not migrating, will then be

which will be the minimum sum he is prepared to accept. His net gain will be Wdom — WRm. The sum of the totals of each column indicate the minimum income to be created by his employment in the project which is required to make the compensation possible. This minimum income will be equal to

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ACCOUNTING PRICES FOR LABOR

the compensating variation WRm plus the loss in Government revenue due to the foreign exchange that would not come in. Assigning the same weights to all marginal income changes allows for the columns to be added up horizon-tally and the welfare loss (measured by total CVs) corresponding to the job in the project to be obtained in accordance with this value judgment. This will be equal to his willingness to receive for not migrating, plus the premium on the foreign exchange, which he would have remitted if he had emigrated.