Labour market inefficiency and frictional unemployment in Australia and its States: A stochastic frontier approach

This paper provides estimates of labour 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, ate for Australia over the sample period is 5.3 per cent of the labour force. Technical inefficiency in the labour market matching process is significant and contributes around 1.3 per cent 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.