The Accounting Price of Unskilled Labor - ACCOUNTING PRICES FOR LABOR

ACCOUNTING PRICES FOR LABOR

6.4 The Accounting Price of Unskilled Labor

The simplified analysis in Section 6.2 made it possible to show that the accounting price of labor depends on the way in which the market adjusts in response to project demand. Some alternative examples of adjustment are presented in this section to show their consequences on the efficiency price of unskilled labor. These examples may be used as the basis for applying the basic reasoning to other particular cases.

Suppose first that the project being analyzed is located in the metropolitan area of the capital city, where a high level of underemployment exists. Full-time unskilled jobs are concentrated in the formal sector, in which wages are relatively high, determined principally through negotiations between workers and employers, and which are considerably above the respective supply price (willingness to receive). Thus, the supply of unskilled labor faced by employ-ers in the sector is infinitely elastic at the prevailing wage. The other sector, the informal one, includes " . . . most of the self-employed, domestic staff and those employed in excessively small undertakings, which are not formally organized and engage in marginal activities". In this sector, wages " . . . tend to be situated at a relatively adequate level in relation to the other options offered by the labor market, becoming the adjustment variable that determines the number of suppliers in a given informal activity" .⁶

Suppose now that the jobs created by the project will be filled by workers from the informal sector, in which the abundance of self-employed workers whose working hours can easily be adjusted results in an almost infinitely elastic supply at the prevailing wage so that minimum variations in wages are enough to make the adjustment. This situation is illustrated in Figure 6.4. The increase in the demand for labor in the formal sector (L| — L?) results in a reduction in the supply in the informal sector which, though it practically does not alter wages in that market, reduces the under-employment of the remain-ing workers. In such a case, the workers now employed in the formal sector increase their income by (vi^ - w') (£, — L0) while those in the informal

6. PREALC (1977, cHAPTER v, PP 25859).

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Figure 6.4 Adjustment of the Unskilled Urban Labor Market

sector increase their weekly hours of work at a wage w' equal to their willing-ness to receive. Consequently, part of the labor cost to the project is a transfer to the new workers now employed in the formal sector.

Table 6.5 contains a schematic presentation of the preceding explanation.

The first column records the cost to the project. The second shows the in-crease in the incomes of the new workers employed in the formal sector. The third column shows that the remaining workers in the informal sector increase their employment level at a wage equal to their willingness to receive, and so are not affected by the new situation. Finally, the distributional value judg-ment that assigns equal weights to all marginal income changes enables us to arrive at the fourth column, which contains the net income changes according

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ACCOUNTING PRICES FOR LABOR

Table 6.5. Valuation at Efficiency Prices of Additional Jobs Created in the Formal Sector When Labor Comes from the Informal Sector (Consumption Numeraire)

to source. The totals in each column can be interpreted as the basis for checking that the potential compensation criterion is complied with. In this case, the increase in workers' income AZ/is not sufficient to compensate the cost (loss) to the project, and the necessary complement will have to come from the production resulting from their employment in the project. From the point of view of efficiency analysis, the net loss vv'AI/ will have to be lower than the value of production (at efficiency prices) resulting from such employ-ment.

Let us now take a case in which an additional job created in the formal urban sector is filled by an informal sector worker, which in turn gives rise to the migration of one rural worker who replaces the former in the informal sector. In such a case, the workers who remain in the informal sector would not be affected and the entire impact would be transferred to the rural sector.

Suppose also that the source of rural labor is family small-holdings in which the effect on family production of the withdrawal of one member can be compensated through the increase in working hours of those remaining.⁷ Table 6.6 outlines this situation. The wage paid for the project is w/ and the worker previously occupied in the informal sector gains, as in the previous case, wage difference w? — w'. The migrant rural worker enters the informal sector earning w', at the same time as he stops receiving his share of rural family income y^r. The rural family gains y^r, stops receiving the income from wages w* which the migrant earned away from the farm during the harvest of export crops, loses the value of the marginal product of the migrant worker on the farm v^rm but compensates for it (totally or partially) with the additional Remainder of Value at Workers the Informal Efficiency

Project L\ L'0 Sector Prices

Formal Sector

• Wages w'(L( L',) w'(L{ L',)

• Willingness to Receive w '(L{ /.J) w^!(L\L'^) Informal Sector

• Wages w'ft L'₀) v/'(L\ L[]

• Willingness to Receive w'(L\ L'₀) w^l(L( i [ ) Total w'Wii) A»(i;ii) w'WiJ)

7. The method of presentation used in the following paragraphs is based on Sen (1966 and 1972).

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Table 6.6. Economic Valuation of an Additional Job in the Formal Sector When Labor Comes from the Rural Economy (Consumption Numeraire)

Informal

Sector Migrant Rural Farming

Project Worker Worker Family Company Government Total

Change in Income w' (w'w¹) (w'y^r) (y^rw*v^rm+v^rr) (w^xv^x) qxp^lob(tx+APRFE^ Ay'v'^p^+ylPfffiEl)

Additional Work d'+d¹ d'+d'+d* d^r d'+d*

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ACCOUNTING PRICES FOR LABOR

production v^rr resulting from the increase in working hours of the remaining members. The farming company stops paying wage w^x at the same time as it stops receiving the market value of the marginal product v", since during the harvesting period the labor supply is completely inelastic.⁸ However, v* is the value of the marginal product valued at the farm gate, that is

[6.11]

in which q^x is the marginal product and p* the farm gate price. The latter will be equal to

the f.o.b. price less the taxes on exports equivalent to an ad valorem rate tx

less domestic transport, processing and trading costs expressed as a propor-tion (dc) of the f.o.b. price. Consequently, the marginal product that is lost by hiring the worker, valued at farm gate market prices, can be broken down in the following way:⁹

[6.13]

Note that the valuation at market prices includes foreign exchange valued at the exchange rate, less taxes and less the domestic costs required to export the agricultural product. However, the taxes that are no longer paid are revenue that the Government no longer receives, to which must be added the revenue it would have received from the use of the foreign exchange that it loses. The total effect on the Government will consequently be

which is that shown in the Government column in Table 6.6.

If, for the sake of simplicity, the market value of domestic costs (q^x pf°^b dc) is assumed equal to their value at efficiency prices, the income that trans-porters, processors and traders stop receiving will be equal to what they stop

8. See, for example, Londero (1981).

9. Gittinger (1982, Chapter 3) shows the breakdown of the farm gate price of a traded good in more detail.

[6.12]

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paying for the resources used. Consequently, there will be no changes in their income to be recorded under this heading.

The second row in Table 6.6 shows the CVs of the additional work of those affected. The rural family will have to compensate for the work done by the migrant worker by intensifying or extending the working day, d^r being the respective CV. The migrant worker will stop working on the family holding and, assuming that his CV for such work is equal to that of the family, will gain d^r, the respective CV. He will also gain the CV of not working in export agriculture d^x. At the same time he will occupy the vacancy created in the informal sector whose CV is assumed to be equal to that of the worker in the informal sector d'. The latter gains d' at the same time that he loses the CV of his working time in the formal sector d^f. The efficiency price of unskilled labor (APLU) can now be obtained in the same way:

[6.15]

This indicates the minimum income that will have to be generated by the project job to make compensation possible or, looking at the Total column, the loss in "total welfare", corresponding to the efficiency analysis value judgments, resulting from reduced production and increased work. The pre-vious expression for APLU can be simplified if the rural family compensates fully for the marginal product of the migrant (Av^r = 0). In such a case, [6.15]

is reduced to

[6.16]

A different set of assumptions on compensating variations d allows us to obtain the most frequently used expression for APLU. If the CVs of each hour of work are equal in the rural, export, informal and formal sectors, d^f - d^x can be estimated as the number of hours of work in the formal sector, less the hours worked in export agriculture, all times the minimum hourly wage that a farm worker is willing to accept (his "reservation wage"). Thus, [6.16] will indicate that the APLU will be equal to the value of the marginal product during the period of full employment in the farming sector (v* in the example) valued at efficiency prices plus the "reservation farm wage" during the period in which there is underemployment or unemployment in the rural sector.

Expression [6.16] can also be presented only in terms of v^x obtaining from [6.13]

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ACCOUNTING PRICES FOR LABOR

and substituting it in [6.16]. Thus we arrive at

[6.17]

The calculation of expression [6.17] does however require that the farm gate market value of the marginal product in export agriculture v* be estimated.

This could be avoided if during the period of peak demand, wages equalled the market value of the marginal product (v* = w*). Thus, expressions [6.17]

can be calculated on the basis of

[6.18]

It can easily be shown that expression [6.18] is the traditional valuation of labor at efficiency prices. This will be equal to the value at efficiency prices of the marginal product (in this example, the value of foreign exchange less the domestic costs saved) during the period of full employment in the farm sector plus the compensating variation df — d* measured through the "reservation wage" during the period in which there is unemployment or underemploy-ment in the rural sector:

Using [6.12], pf°^b dc can be replaced by

to obtain

after working out the products and regrouping, we arrive at expression [6.16]

which is the one used as the basis for deducing [6.18].

Some authors have pointed out that an increase in employment in the formal urban sector may lead to the migration of more than one rural worker.^I0 Such

10. See Harris and Todaro (1970), Harberger (1971a)and Mazumdar (1976).

migrants would become part of the urban labor supply, which is infinitely elastic at the prevailing wage in both sectors (formal and informal). As a consequence, the number of unemployed or underemployed will increase if the fixed number of informal jobs is distributed among a larger number of workers. In this situation, expression [6.18] for the APLU will have to be modified since it was deduced on the assumption that only one rural worker would migrate for each additional job created in the formal urban sector. For this purpose, it would be useful to revise, and make the corresponding adjust-ment to, each column in Table 6.6 for the situation in which more than one worker migrates. The first two columns will remain unaltered since the project would continue to employ a worker from the informal sector. To simplify presentation, assume now that h rural migrants would share the working hours released in the informal sector. Thus, the total of the effects on the migrant workers would be

whereas those on the rural family (families) would be

As for the farm companies, they would be affected by the departure of h workers

and the Government would see its revenue reduced by

Finally, using the same assumptions as for [6.18] the accounting price of unskilled labor would be

ACCOUNTING PRICES FOR LABOR

that is, the value of the marginal product of h migrant workers, plus the CV of the single additional job created, less the sum of the CVs of not working in export agriculture.

6.5 The Treatment of Contributions to a Compulsory

Im Dokument Beneﬁts and Beneﬁciaries: An Introduction to Estimating Distributional Eﬀects in Cost-Beneﬁt Analysis (Second Edition) (Seite 99-107)