Total Opportunity Cost Parameter (z)

In Simple Words

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.

Research question

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.

Participants

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).

Study Design

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).

Results

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.

Takeaway

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.

Related findings

• Employed vs. Unemployed MVT Divergence →Labour & employment

  Think of offering overtime hours to two people: one who is currently jobless and sitting at home, and one who already works a second side-hustle paying $15/hour during those same hours; the employed person demands a higher wage because taking the new hours means giving up real earnings from their second job, not just giving up TV time.

• Opportunity Cost of Vocational Training →Labour & employment

  Think of a worker taking unpaid leave from a part-time job to attend a full-time certification program. Without a stipend to replace their lost daily wages, the worker cannot afford food and rent during the program, forcing them to drop out regardless of future pay raises.

• Ability-Dependent Peer Screening →Labour & employment

  Imagine trying to pick the best chess player out of a crowd. Only a master chess player has the expertise to accurately assess who among their acquaintances truly plays at an elite level, whereas a beginner cannot distinguish between a decent amateur and a grandmaster.

• Ability-Heterogeneous Wage Returns →Labour & employment

  Imagine a nightclub with a strict dress code based on exam scores where high scorers enter easily without extra effort. For high-scoring individuals, additional work experience adds little value because employers already hire them based on test scores.