ABSTRACT
According to cost-benefit analysis theory, the shadow wage rate (SWR) is the social opportunity cost of labour and may differ from the observed wage because of distortions in both the labour market and the product market. In practice, appropriate conversion factors (CFs) are used to translate observed market wages into shadow wages. As the conversion factor is defined as the ratio between the shadow wage and the observed market wage, if the shadow wage is lower than the market wage the social profitability of the public project is greater than its financial profitability. For many infrastructure projects, ignoring this correction may lead to an underestimation of the social benefits of public investment. The same would be true for policy reforms leading to significant job creation (or destruction).
