Wages, capital rental values and relative factor prices in Pakistan
GUISINGER, S.
It is widely acknowledged that factor prices, especially the prices of labor and capital, play a pivotal role in shaping the economic structures of developing counties. In Pakistan, the wage-rental ratio at market prices during the 1960s was more than five times the ratio at equilibrium prices and, although the 1972 devaluation reduced this distortion, the gap since then has widened again. The price series for capital used in this analysis relate to only one type of capital, but the results are indicative of a very considerable distortion and suggest the price of capital may, in proportional terms, play a far greater role in skewing the wage-rental ratio from its equilibrium level than distortions in the price of labor. Much of the past literature on employment has emphasized the need for a wage policy that moderates the rate of growth in wages in order to ensure full use of the abundant labor in developing countries. While this emphasis is not misplaced, this study suggests that greater attention should be given to policies that affect the price of capital.
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