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The Cyclicality of the Opportunity Cost of Employment

Staff Report 514 | Published August 26, 2015

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Gabriel Chodorow-Reich Harvard University
The Cyclicality of the Opportunity Cost of Employment


The flow opportunity cost of moving from unemployment to employment consists of foregone public benefits and the foregone value of non-working time in units of consumption. We construct a time series of the opportunity cost of employment using detailed microdata and administrative or national accounts data to estimate benefit levels, eligibility and take-up of benefits, consumption by labor force status, hours per worker, taxes, and preference parameters. Our estimated opportunity cost is procyclical and volatile over the business cycle. The estimated cyclicality implies far less unemployment volatility in many leading models of the labor market than that observed in the data, irrespective of the level of the opportunity cost.

Published in: _Journal of Political Economy_ (Vol. 124, No. 6, December 2016, pp. 1563-1618),