ACCOUNTING PRICES FOR LABOR
6.5 The Treatment of Contributions to a Compulsory Social Security System
The existence of a compulsory social security system introduces a difference between the cost to the employer of hiring a unit of labor and the monetary income received by the worker. The cost to the employer will be equal to the wage received by the worker plus the contributions of the latter and the employer to the social security system. In this section the main aspects to be taken into account for the allocation of these contributions in distributional analysis will be presented.
The wage appearing in the Project column of the tables that present the effects of the additional job created corresponds to the cost to the employer of hiring labor, since this is the sum of money that the project has to pay for hiring. If this sum is represented by w, the sum of money received by the worker will be w (1 - tss) in which tss is the proportion of the cost to the employer that is transferred to the social security system as the sum of contri-butions from the employer and the worker. The latter receives a benefit from his participation in the system, which he values at fiss, the CV of participating in the system. Consequently, we have the following set of effects
in which Css is the cost of providing the service. Although Css can be esti-mated, at least as the average cost per member, Bss will not normally be known and some drastic simplification will be required. Assume, for exam-ple, that wtss is the payment for a worker who joins a medical insurance scheme to participate in the system and that this is the only service of such a type to which the worker has access. If it can be assumed that w tss = Bss, then the total wage w will be income for the worker. Assume, on the other hand, that the worker is employed in an area that is very far from social security medical care centers, and he consequently will not make use of these services, even though both employer and worker will have to pay the corresponding contributions. However, the project will provide the medical services which the worker values at Bsp. In such a case, the effects to be recorded will be
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in which the cost of the service provided by the project (Csp) will be included with the other costs. Again, if Bsp = w tss is a reasonable assumption, all of wage w will be income for the worker. As for the social security system, it will receive revenue without incurring any costs.
Let us now consider a case where the workers hired already participate in a pension scheme and would continue to do so in the situation without the project, as might be the case with skilled labor. Hiring these workers for the project would not affect their situation (if their wages did not change) since they would continue to pay (w tss) and receive (Bss) from the system as they would in the without project situation. Their original employer would not be affected either if the cost to this employer is assumed to be equal to the value of the marginal product, and the social security system continued to receive the same revenue and incur the same costs. In the case of workers who belong to the system and are expected to continue to belong to it until their retire-ment, as might be the case with unskilled jobs created in the formal sector, the only approximation possible may be to assume that Bss = w tss. However, in the case of temporary hiring of rural labor which is not expected to succeed in obtaining benefits from the system, the effects will be as follows:
The worker's income will be less than his wage and the social security system will receive a transfer w tss.
Given the difficulty (not to say the impossibility) of estimating the benefits Bss, the solution that is always adopted will include an element of arbitrariness on the part of the analyst. However, common sense should enable him to come up with an acceptable approximation.
6.6 An Example
Consider the case of an industrial project in the formal sector of the economy, which will be located in the metropolitan area of the capital city and will hire unskilled labor for a present value of 31,887. This sum corresponds to the cost for the project of hiring labor, and therefore includes not only the worker's monetary income, but also contributions to the social security system (wf ts)
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ACCOUNTING PRICES FOR LABOR
estimated at 2,232. We know that the labor force comes (at the margin) from the farming sector, in which workers are fully employed for a period of three months for the harvest of an export crop. During this period, the supply of labor is totally inelastic to small changes in wages and the latter effectively determine the allocation of available labor among big farms. During the remainder of the year, the farm workers are under-employed. The demand for labor from small-holdings (the providers of labor during the period of peak demand) plus the requirements of the big farms are considerably less than what is available. This is clearly shown by the fact that during the latter period
"landless farm workers" have great difficulty finding jobs, even temporary ones, and thus finance their consumption to a certain extent from income earned during the period of peak demand. For these reasons, for the purposes of estimating the APLU, the year has been divided into these two periods.
The income from wages earned during the period of peak demand (wx), which rises to 20% of the annual cost to the employer or the project (w* = 0.2 wf), is considered a reasonable approximation of the farm gate value of the marginal product (wx = v"). Consequently, in accordance with [6.13]
It is also known that an export tax of 4% (tx = 0.04) is levied on agricultural produce and that the domestic processing, transport and trading costs are 15%
(dc = 0.15) of the f.o.b. price. Consequently, the farm gate value of the marginal product can be broken down into
Contributions to the social security system are not included in this breakdown since in practice they are not paid.
During the rest of the year, the labor force is underemployed and the output of the rural economy and the farms is assumed to be unaffected (-yj, + v' = 0).
Consequently, the valuation during this period corresponds to the CV of the job, less the CV of not working in export agriculture, all valued at the
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Table 6.7. Effects of Hiring Unskilled Labor
vation wage in the farm sector. The result is equivalent to 30% of the wage paid by the project (df - dx - 03wf), that is
Thus, the cost to the employer (the project) of the labor to be hired for the project will be
in which Aw is the increase in the monetary income of the workers hired for the project less the CV total of the jobs.
With this information and the breakdown already presented for w*, almost all of the first column of Table 6.7 has been constructed. The remaining entry, 755 Benefits, corresponds to the benefits that the workers will receive from the Institute of Social Security (ISS) estimated as equal to the average costs per member of the Institution (Bss = Css). Since the cost of providing these services is greater than the contributions received to finance them (wftss < CM), the Government is shown as financing the difference (-568).
The column Unskilled Workers summarizes the effects which in Table 6.6 are divided into the categories Informal Sector Workers, Migrant Workers and Rural Family. The members of this group receive benefits from the ISS (2800) and the transfer (13712) consisting of the difference between the increase in their net monetary income and the CVs of their work. The ISS receives contributions wftss, which it returns as 2800 of services (Bss = Css), of which
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ACCOUNTING PRICES FOR LABOR
it finances only 2232 (the contributions), while the remaining 568 is financed by the Government.11 The latter also loses the foreign exchange premium (APRFE - 1 = 0.1) and the export taxes (-315) because of the reduction (f $°b in exports. Finally, the column totals are the total gains and losses of those affected and the horizontal sum of these totals indicates the minimum additional income that hiring the workers must generate to make compensa-tion possible.
11. Note the implied assumption that the cost of the services at market prices is equal to their value at efficiency prices.
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