On Measuring the Social Opportunity Cost of Labour
In this paper I attempt to examine in some detail the commonly held notion that the opportunity cost of labor is represented by the product that is forgone from other activities as a consequence of being labor for a given activity. The first variant of this notion that will be treated is the idea that in some poor countries the pool of labor in the agricultural sector is so abundant, and its marginal product so low (effectively zero, according to this idea) that other sectors can expand their demand for labor without entailing any significant loss in production elsewhere. The second variant to be considered is the idea, less restrictive than the first, that the product forgone in other sectors (in this case not necessarily zero or insignificant) is the appropriate measure of the social opportunity cost of labor. I shall argue that the data seem to contradict the idea that great masses of labor can be withdrawn from the agrarian sector without a palpable loss in product. I shall also contend that the use of forgone product as a measure of opportunity cost is an oversimplification which can lead an analyst to wrong conclusions in a number of different ways.
KeywordsMinimum Wage Marginal Product Reservation Price Unskilled Labor Social Opportunity
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