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Guidelines for the Economic Analysis of Projects : VII. Valuation of Economic Costs and Benefits
E. The Economic Price of Labor80. Labor is an important component of any project. The demands for labor for the project should be broken into two basic categories: types of labor that are scarce and types that are in surplus supply. Scarce labor consists of those workers who would be able to find alternative employment in a short time, that is, where supply is more or less in fixed supply in the short term. This generally includes vocational and technical occupations; it also generally includes managerial and professional occupations, although in some countries there is a surplus of labor with educational rather than vocational qualifications. 81. For most labor that is scarce, the cost of labor inclusive of benefits can be taken as its demand price. This provides an estimate of its opportunity or economic costthe output foregone elsewhere in the economy when labor moves to the new project. In some cases, where as a matter of policy wages have been held down in the public sector, or in transitional economies where substantial pay differentials have been discouraged, the value of production foregone may be greater than the demand price of scarce labor, and an upward adjustment to the cost of labor may be made. For foreign labor drawn into an economy, the economic cost to the economy will include the cost of its local consumption at economic prices, plus any remittances from the country of employment, plus the cost of any additional benefits or facilities such as health or education provision that has to be made. 82. Surplus labor consists of categories for which there would, in general, be a long search time between jobs. For these types of labor, the project wage is usually at or above the supply price. Analysis of the impact of additional project employment generally involves interlinked labor markets. The ultimate effect may be far from the project itself, and this effect will differ from project to project. The cost to the economy of surplus labor in a new project is its supply price, which approximates the opportunity cost of net output lost elsewhere; plus additional economic costs of social infrastructure provision not borne by the project itself. 83. Often the effect of a project may be to draw surplus labor from rural areas or from agricultural production. An estimate can be made of the lost production that would result from labor migration. This estimate can be expressed in terms of a traded good that has a border price equivalent value. Some lost production will include nontraded agricultural output where, in the case of well-developed local markets, the demand price can be used as an estimate of the opportunity cost. 84. Identifying the lost rural production associated with one additional project job can be time consuming. It may include nonagricultural, as well as agricultural, products. It may include an imputed value for lost production that is produced by family labor but not marketed. An indirect alternative is to use rural wage estimates as a proxy for opportunity costs. Rural casual wage rates in competitive markets represent the value placed on surplus labor in the region from which it is drawn, and hence its supply price. Casual wage rates can be reexpressed in annual terms and used as a measure of opportunity cost. 85. With increasing city size and growing numbers of urban poor, many projects draw labor from urban rather than rural areas. Surplus labor in the urban context supports itself through many informal activities. The outputs of these informal activities are generally nontraded products sold only in the domestic market. Estimates of annual incomes in the urban informal sector can be used as a measure of opportunity cost for labor drawn into projects from urban areas. The estimate of income can be associated with a range of urban goods and services for purposes of estimating an economic value. 86. Some projects, especially in the industry sector, use predominantly young female labor. Such labor may play a different role in the rural or urban economy from which it is drawn, depending on local customs and family structure. Generally, there are further costs associated with female rather than male labor. These relate to the provision of goods and services in the household. The migration of female labor to new jobs, especially where it involves geographic migration as well, may lead to a decline not just in marketable production, but also in household production that is not marketed. Estimates of this additional element of opportunity cost can be made through the purchase cost of equivalent services and should be included in the economic cost of labor for projects using predominantly female labor. 87. The economic price of different categories of labor can be expressed in relation to the full wage of the same category of labor to form the shadow wage rate factor (SWRF). The SWRF for surplus rural labor is the ratio of the opportunity cost of rural labor plus the economic costs of migration to the project wage for surplus labor. Similarly, the SWRF for scarce labor is the ratio of its economic and financial price. In each case, the supply price of surplus labor and the demand price of scarce labor have to be adjusted for the general level of distortions in the economy (see Paragraph 104 and Appendix 12).
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