Estimation of the Shadow price of Labour in China

Abstract

The shadow prices of unskilled and skilled labour are discussed and estimated for the Xiamen special economic zone in China for the period 1986-1989. Unskilled labour is assumed to be drawn from rural areas. The estimated shadow cost of unskilled labour includes the agricultural output forgone, the effect of excess migration from rural areas to urban areas when urban jobs become available and the net social cost of increased consumption by workers at new jobs with higher wages. The estimated shadow cost of skilled labour includes output forgone at the worker's previous job and the net social cost of increased consumption. The estimates for 1986-89 show that unskilled labour is over-priced and skilled labour is under-priced in the Xiamen special economic zone, resulting in capital-intensive production rather labour-intensive production more in line with China's comparative advantage.