The Shadow Wage Rate and the Numbers Effect

The Shadow Wage Rate (SWR), like any shadow price, is a function of the social objectives set for the particular country. Brent [1984 and 1986] has argued that one should consider the number of uncompensated losers from a public investment as a third social objective (together with the usual efficiency and distributional objectives). This paper explores the implications for the SWR of Quire and van der Tak [1976] (S & T) of having this third objective. It uses a simple optimal control model of the type used by Lal and Squire [1980] to derive the SWR. The general implications for S & T's methods of including the numbers effect have been explored in Brent [1990]. It will be via a concern for employment that the numbers effect will enter the SWR. Employment has long been an important consideration for policy makers. Now analysts can have a vehicle for incorporating this consideration.