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 frictio nal unemployment rate for Australia and its States over the period January 1978 to December 1997. These estimates are derived from parametric statisti cal models of employment growth in which technical inefficiencies are accou nted for. The mean estimate of the (technically efficient) frictional unemp loyment, ate for Australia over the sample period is 5.3 per cent of the la bour 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 l evels of inefficiency suggests that inefficiencies vary countercyclically, are related to which political party is in power and the time of year and t hat only Western Australia and Queensland have exhibited a significant decl ine in inefficiency over the period.