Total Opportunity Cost Parameter (z)
Macroeconomic search and matching frameworks (such as Mortensen-Pissarides models) require calibrating the parameter $z$, representing the ratio of non-work time value to post-tax marginal product, but calibrations in literature range wildly from negative values to near unity without empirical consensus.
Picture this
Think of accepting a job like purchasing a ticket where the cost is not just the sticker price of lost free time, but also includes mandatory convenience fees like commuting fuel, lost government assistance, and paying for childcare.
What the evidence says
Accounting for commuting costs (+0.06), foregone welfare benefits (+0.06), and childcare expenses elevates the baseline non-work value ($\tilde{z} = 0.58$) to a comprehensive total opportunity cost parameter of $z = 0.72$ under monopsony assumptions, or $z = 0.87$ under Diamond-Mortensen-Pissarides assumptions.
- Who
- N = 1,152 unemployed field experiment applicants combined with national parameters from the Current Population Survey (CPS) and Survey of Income and Program Participation (SIPP) [7, 24, 25].
- How
- Integrative structural accounting that combines baseline experimental MVT estimates with empirical parameters for effective tax rates (20%), average daily commute times valued at half gross wage, foregone benefit loss (6%), and national childcare expenditure averages (2.3% of income) [20-22, 25].
What to do
Calibrate macroeconomic search and matching models by setting the opportunity cost parameter $z$ to 0.72 for unemployed workers when factoring in fixed employment costs and taxes.
From the source
"Our preferred estimate after accounting for these additional costs is z=0.72 which is in the intermediate to higher range of values used in the search literature."
Labor_Supply_and_the_Value_of_Non_Work_Time_Experimental_Estimates.pdf