Total Opportunity Cost Parameter (z)
RCTField Experiment
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 [1, 20].
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 [20-23].
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 [20-22, 26].
- Who was studied
- 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 [20, 26].
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 [20]."
Labor_Supply_and_the_Value_of_Non_Work_Time_Experimental_Estimates.pdf