Abstract

The handling of unemployment is a central issue in cost-benefit analysis. Typically, the shadow price of employing an unemployed is derived by considering a marginal change in the employment constraint faced by an unemployed or rather an underemployed. In contrast, in this paper, we consider the discrete shift from unemployment to (full) employment. The result provides guidance how to estimate the social cost of recruiting otherwise unemployed to a project. It is shown that the social cost is overestimated by using the private reservation wage. The common practice of adding different cost items is shown to be flawed.

Keywords

Cost-benefit analysis; unemployment; reservation wage; social opportunity cost; socioeconomic costs; adding-up problem

Published in

Journal of Economic Policy Reform
2022, volume: 25, number: 3, pages: 229-239
Publisher: ROUTLEDGE JOURNALS, TAYLOR AND FRANCIS LTD

Authors' information