Friction Costs and the Chain of Vacancies Problem: A Novel Vacancy Multiplier Solution

A key criticism of applying the friction cost approach (FCA) to productivity cost estimation is its focus on a single friction period. A more accurate estimate of the friction cost of worker absence requires consideration of the chain of secondary vacancies arising from the opening of a new primary vacancy. Currently, empirical evidence on this is almost absent. We suggest an original approach to empirically estimate productivity costs that include a chain of secondary vacancies.

The vacancy multiplier is based on labor market flows and transition probabilities between states of employment, unemployment, and economic inactivity. It is a summed infinite geometric series using a common ratio e_t - the probability of an employed person filling a new job vacancy in a given year. We report vacancy multipliers for 30 European countries for 2011-2019.

The average multiplier across Europe is 2.21 (standard deviation [SD] = 0.40) in 2019, meaning that every new primary vacancy created a chain of secondary vacancies that increased the primary friction cost by a factor of 2.21. The equivalent multiplier is 1.99 (SD = 0.37) between 2011 and 2019. Romania had the lowest country-specific multiplier (1.11 in 2011), and Greece the highest (4.51 in 2011).

Our results highlight the extent of underestimation of current FCA costs, comprise a resource for future researchers, and provide an implementable formula to compute the multiplier for other countries.