Cost-Benefit Analysis in a Situation of Unemployment: Calculating the Decline in Unemployment as a Result of the Realization of a Government Project

Abstract

The subject of this article is the cost-benefit analysis (cba) of government projects in a situation of unemployment. In calculating the opportunity costs of a project, the costs of otherwise unemployed persons employed by the project are valued at a shadow wage below the market wage. An estimate of this shadow wage can be derived from an estimate of the decline in unemployment as a result of the project. To this end, we deduce a response function on the basis of UV-analysis (U=unemployment, V=vacancies) in this article. This response function was estimated for the Netherlands. The empirical results indicate that the probability of a decline in unemployment as a result of a unit increase in labor demand is rather high.