The Cost of High and Long‐Term Unemployment

The sharp increase in unemployment in the 1990s has focused attention once again on the causes, extent and effects of high and long‐term unemployment. This article presents a methodology for estimating the cost, in income terms, that individuals and their families bear as a result of becoming unemployed. Estimates of the cost of job loss are developed for Australia for the period 1973 to 1992. Two methods of estimating the cost of job loss are presented in this article. The first method is the conditional cost of job loss which refers to the loss in income an employed person would incur over a given period of time if they became unemployed. In Australia, the conditional cost of job loss rose sharply in the mid 1980s and again in the early 1990s because of a marked increase in the average duration of unemployment which more than offset a slight increase in the net replacement ratio (that is, the ratio of unemployment income to wage income). The second cost of job loss measure we estimate is the expected cost of job loss. This measure refers to the difference between the expected income stream of workers and the income stream associated with continued certain employment. We interpret the expected cost of job loss as an indicator of the bargaining strength of workers.