ESTIMATION OF PRODUCTIVITY COSTS USING THE FRICTION COST METHOD- NEW EVIDENCE USING NATIONAL DATA

OBJECTIVES: Many health economists consider applying the friction cost method to estimate the productivity costs, but lack practical data and tools to apply the method. This study aims to provide estimates for length of the friction period, cost per working hour/day lost and friction costs for several European countries. METHODS: Using national aggregate stock and flow time series data on vacancies, we; 1) estimate vacancy durations for several European countries in order to estimate the length of friction period, and 2) examine estimated vacancy durations with unemployment and vacancy rates using regression analysis in order to check the validity of estimated durations. Data for the price component for each country on hourly labour costs is used for productivity costs per working day/hour. RESULTS: Vacancy durations estimated in 2009 for The Netherlands, Belgium, Germany, France, the UK, Norway and Sweden range between 40-80 days. Regression analysis of the vacancy durations shows that, there is a strong negative relationship between vacancy durations and unemployment rates. When unemployment increases, vacancy durations and hence friction period decline. We also find that an increase in the vacancy rate (the ratio of the stock of vacancies to total labor force) has a positive effect on vacancy durations which can be explained by the congestion provoked by the increase in the number of vacancies competing in the labor market. CONCLUSIONS: This paper provides estimates on vacancy durations, friction periods and the price component in order to calculate the friction costs. For seven European countries, we present empirical estimates to use the friction cost method in a practical way which can improve more uniform analysis of productivity costs in economic evaluations of diseases. Our regression results confirm the validity of estimated  vacancy durations which are necessary to calculate the length of friction period and friction costs.