Agricultural Economics 24 2001 199–208
The social cost of labor in rural development: job creation benefits re-examined
Theodore M. Horbulyk
∗
Department of Economics, University of Calgary, Calgary, Alta., Canada T2N 1N4 Received 19 November 1998; received in revised form 24 October 1999; accepted 24 February 2000
Abstract
Job creation effects are examined as they would apply to social analysis of rural development programming by public or private sector agencies. A synthesis and critique are provided of approaches to valuing the social opportunity cost of
labor. These approaches vary according to whether or not unemployment is present in the pre-project state and according to whether or not there is interregional migration in response to project hiring. Graphical, partial equilibrium analysis illustrates
why, in general, job creation and project employment give rise to social costs, not benefits. The magnitude of these social costs is shown to depend upon the presence of payroll taxes, wage subsidies and unemployment, in addition to the market’s
supply and demand elasticities. These social costs may be reduced or offset in specific instances where projects increase the value of labor’s productivity or reduce its costs, such as with job training, worker mobility and skill development projects.
Careful attention to these approaches can help society choose correctly among alternative development proposals and among alternative labor-intensive versus capital-intensive technologies. © 2001 Elsevier Science B.V. All rights reserved.
JEL classification: D6; J3; O2; Q1
Keywords: Social opportunity cost; Labor; Cost-benefit analysis
1. Introduction
Governments in developed and developing coun- tries are attempting to implement policies that favor
rural economic growth and simultaneously reduce existing unemployment or underemployment of labor.
By reference to recent published examples, this pa- per shows that some analysis has not paid sufficient
attention to the social cost of labor employed when job creation is pursued in the private or public sector.
In specific instances, policy analysis has confused the social cost of labor with the distributional benefit that
∗
Tel.: +1-403-220-4604; fax: +1-403-282-5262. E-mail address:
horbulykucalgary.ca T.M. Horbulyk.
is potentially achieved through job creation. Correct analysis is important both in choosing among alter-
native development proposals and in choosing among alternative labor-intensive versus capital-intensive
technologies. The paper illustrates these issues using static, partial equilibrium analysis of labor market ad-
justment, with and without regional migration. When correctly conceptualized, the social costs and benefits
of job creation policies can best inform a range of rural policy decisions.
The next section of this paper outlines a number of concepts used to assess the costs and benefits to soci-
ety from employing a specific class of labor in either the public or private sector such as part of some ru-
ral development project or job creation scheme. The
0169-515001 – see front matter © 2001 Elsevier Science B.V. All rights reserved. PII: S 0 1 6 9 - 5 1 5 0 0 0 0 0 0 6 3 - 3
200 T.M. Horbulyk Agricultural Economics 24 2001 199–208
Fig. 1. Labor market adjustment without involuntary unemployment.
following section expands those concepts to labor mar- kets that incorporate interregional migration as an ad-
justment process. These concepts are then applied to re-examine, conceptually, the appropriate assignment
of social opportunity costs and job creation benefits in rural development applications.
The principal contribution of this paper is to provide a clear synthesis of these economic welfare concepts as
they relate to labor use in rural development program- ming, and to highlight by reference to published coun-
terexamples, the need to apply them assiduously.
1
2. Concepts in labor cost measurement
