Labour Market Inefficiency and Frictional Unemployment in Australia and Its States: A Stochastic Frontier Approach

Philip Bodman ()

The Economic Record, 1999, vol. 75, issue 229, pages 138-48

Abstract: This paper provides estimates of labor market inefficiency and the frictional unemployment rate for Australia and its States over the period January 1978 to December 1997. These estimates are derived from parametric statistical models of employment growth in which technical inefficiencies are accounted for. The mean estimate of the (technically efficient) frictional unemployment rate for Australia over the sample period is 5.3 percent of the labor force. Technical inefficiency in the labor market matching process is significant and contributes around 1.3 percent to the mean steady-state ('natural') unemployment rate. Investigation of the factors explaining the levels of inefficiency suggests that inefficiencies vary countercyclically, are related to which political party is in power and the time of year and that only Western Australia and Queensland have exhibited a significant decline in inefficiency over the period. Copyright 1999 by The Economic Society of Australia.

Date: 1999
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