Efficient Job Creation in LDCs Requires a Tax on Employment
This paper argues that, contrary to the views of most development economists, policies that raise the cost of labor relative to capital are in the collective and individual interest of LDCs. The reason is that low wages mean that the attractiveness of an LDC production location is positively correlated with labor intensity. A labor tax combined with a capital subsidy consequently hits hardest the processes willing to pay the most to produce in an LDC. Even if employment is a concern, the policy is still beneficial if elasticities of substitution are in the empirically relevant range. Copyright 1989 by Royal Economic Society.