A Welfare Loss Measure of Unemployment with An Empirical Illustration

Abstract

Based on interpersonal comparisons, a welfare loss measure of unemployment is developed. The proposed measure is additively decomposable which enables us to assess the group‐specific contribution to aggregate welfare cost. It possesses certain other desirable properties. It is sensitive to unemployment rate, mean duration of unemployment and the relative differences in the duration of unemployment. Since all these can vary differently over the years and across regions, the proposed measure is most suitable for comparing the welfare cost of unemployment over a period of time or across regions. An empirical exercise based on the Australian labour force survey data illustrates the usefulness and an easy applicability of the proposed measure.