Shadow wages in cost-benefit rules for project and policy analyses: estimates for OECD countries

This paper extends the theory and empirics of shadow wages by explicitly distinguishing between an hours-of-work response and a labor-force participation response – a distinction relevant for projects and policies expected to create jobs – and both responses are considered for different types of labor. Our analysis rests on a general equilibrium model of a tax-distorted but otherwise perfectly competitive economy. The model establishes an unambiguous link between shadow wages, market wages, and parameters of a country´s fiscal regime. Using data on market wages and countries´ fiscal regimes, we quantify this link for 33 OECD countries. We find that even with perfect competition shadow wages are considerably lower than market wages. We conjecture that imperfect competition does not necessarily widen this gap.