Edited by John Weiss and David Potts
Chapter 3: Shadow Wages Rates in a Changing World
3. Shadow wage rates in a changing world David Potts INTRODUCTION This chapter outlines the issues involved in determining the shadow wage rate for different categories of labour. It starts off by looking at the surplus labour and migration theories that influenced early debates about the need to use a shadow wage rate and the kind of values that might be expected. It then looks in more detail at the factors that might determine the shadow wage for unskilled labour and the ways in which these may be taken into account, focusing on literature relating to the developing country context. Next it considers the different categorisation of labour and the factors that might influence the shadow wage rate in different regions and for different skill levels. Finally it looks at the potential use of shadow wage rates in the context of countries not normally described as ‘developing’ and asks whether the methods applied in developing countries are equally applicable in such contexts. ORIGINS OF THE SHADOW WAGE CONCEPT: SURPLUS LABOUR THEORIES The case for using a shadow wage rate can be traced back to the dual economy models of the 1950s and in particular to the work of W. Arthur Lewis (1954), who postulated the existence of ‘unlimited supplies of labour’ in some countries due to extensive rural underemployment. Lewis attempted to explain the coexistence of underemployment in the rural areas and relatively high levels of wages for unskilled workers in the urban areas on the basis that the marginal...
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