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

Objectives: 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. Methods: 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. Results: 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). Conclusions: 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.

Automated summary

The study reveals that the productivity cost of worker absence is underestimated when considering a chain of secondary vacancies. There are variations in vacancy multipliers among different countries, highlighting the need for an implementable formula to calculate multipliers for other countries.