The Cost of Unemployment from a Social Welfare Approach: The Case of Spain and Its Regions

Abstract

This paper proposes a protocol to measure the cost of unemployment by taking into account three different aspects: incidence, severity and hysteresis. Incidence refers to the conventional unemployment rate; severity takes into account both unemployment duration and the associated income loss; and hysteresis refers to the probability of remaining unemployed. The cost of unemployment is regarded as a welfare loss, which is measured by a utilitarian social welfare function whose arguments are the individual disutilities of unemployed workers. Each individual disutility is modelled as a function of income loss, unemployment duration and hysteresis. The resulting formula is simple and easy to understand and implement. We apply this assessment protocol to the Spanish labour market, focusing on the regional differences and using the official register of unemployed workers compiled by the Public Employment Service.