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International Monetary Fund

sector. It seems that small and effective governments run according to market lines is the most effective and efficient means to improving economic welfare in the country. Any wage policy that departs from this market solution will result in less than optimal output in the economy. If the government’s wage policy consists of two kinds of wages [w *, w] , is the market wage rate given to public sector workers and w * is the wage rate given to government supervisors. If w * < π m where π m is the highest wage that would be paid to managers if the government

International Monetary Fund
This paper argues that the development of human capital in the public sector should be an important ingredient in any proposed set of “second-generation” reforms for Africa. In the post-colonial era the quality of governance has seriously declined, and the stock of human capital in the public sector has been eroded by a flight of human capital from many countries in response to compression of wages. The paper develops a simple theoretical framework to discuss these issues and the continent’s experience with foreign technical assistance in supplementing the low level of domestic human capital.
Glynn Cochrane

be regarded as something more than social overhead capital. They can be regarded as necessary though not sufficient variables. Nor are the difficulties in isolating what is thought to be responsible for growth entirely overcome through use of shadow prices to correct for undervaluation of capital and foreign exchange and for the overpricing of unskilled labor represented by market wage rates. The use of shadow prices is a step toward converting the private rate of return to a social rate of return. But this is not enough. Shadow prices are not, for example

Mr. Desmond Lachman and Mr. Kenneth Bercuson

lines in the following manner. The indirect estimation approach assumes that, while white and nonwhite labor are equally productive within each skill category, the wage rates obtained by white workers include an element of economic rent associated with apartheid labor restrictions. Thus, the amount of income going to white labor can be written as the sum of white skilled and unskilled labor earnings at their “fair marketwage rate (the wage rate that is equal to their marginal product) adjusted by a markup representing the economic rent associated with apartheid

Mr. Friedrich Schneider and Dominik Enste

behind the size and growth of the shadow economy are an increasing burden of tax and social security payments, combined with rising restrictions in the official labor market. Wage rates in the official economy also play a role. Taxes and social security contributions Taxes and social security contributions add to the cost of labor in the official economy and hence are key factors driving the growth of the shadow economy. The bigger the difference between the total cost of labor in the official economy and the after-tax earnings from work, the greater the

International Monetary Fund

wage rate close to the subsistence level of living. Wage rates of low skilled workers are likely to decline as the demand for low skilled labor weakens. This makes the objective of improving work incentives of the unemployed more challenging, as the level of social welfare benefits converges to their “free market” wages. The government has made progress in reducing the tax distortions for people on the low end of the wage structure. The replacement ratios, however, did not change significantly, in part because social welfare benefits were increasing in line with

S. Ehtisham Ahmad

likely to be accompanied by a reduction in public sector employment , which accounts for about 50 percent of the workforce. Measures to provide income maintenance through retraining and employment would be important as a means of ensuring a more effective transition to a higher level of private activity. However, additional employment provisions would have to be self-targeted through below-market wage rates. Care has to be taken not to increase the bureaucracy in this process of providing “targeted” unemployment support. The proposed Development and Employment Fund

Mr. Hyun Park
This paper continues the study of optimal fiscal policy in a growing economy by exploring a case in which the government simultaneously provides three main categories of expenditures with distortionary tax finance: public production services, public consumption services, and state-contingent redistributive transfers. The paper shows that in a general equilibrium model with given exogenous fiscal policy, a nonlinear relation exists between the suboptimal longrun growth rate in a competitive economy and distortionary tax rates. When fiscal policy is endogenously chosen at a social optimum, the relation between the rate of growth and tax rates is always negative. These two conclusions suggest that the interaction between fiscal policy and growth may be complicated enough that it cannot be captured in a simple linear model using an aggregate measure of fiscal policy. The sources of nonlinearity include expectation and coordination of fiscal policy, impluse response of government policies, and the presence of positive externality due to government spending.