The friction-cost method
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The Friction-Cost Method Replacement for Nothing and Leisure for Free? Werner B.F. Brouwer and Marc A. Koopmanschap Institute for Medical Technology Assessment, Erasmus Medical Center/Erasmus University, Rotterdam, The Netherlands
Abstract
The friction-cost method has been put forward as an alternative to the human-capital method as it allows more realistic estimates of productivity costs to be calculated for use in economic evaluations. The possibility of replacement of (long-term) absentees is at the heart of the friction-cost method. It recognises that society will restore initial production levels after some period of adaptation, the length of which may depend on the availability of labour and, hence, on unemployment. The friction-cost method has received two main criticisms in the literature: (i) it has no theoretical underpinning; and (ii) it treats leisure time as having no value. We demonstrate in a simple ‘theoretical’ time-allocation model how time use shifts in the friction-cost method and that leisure is not treated as having no value. Rather, it is considered to be valued in terms of QALYs – as is normally the case in economic evaluation. The time-allocation model also demonstrates that when using the friction-cost or human-capital method the changes in the amount of unpaid work and leisure time need to be valued separately. Unpaid production losses from the previously unemployed may be larger than the gain in unpaid production gain of the absentee, resulting in a societal loss of unpaid work or the sacrifice of leisure in order to make up for lost unpaid work. These changes should be incorporated into economic analyses.
The friction-cost method has been put forward as an alternative for the human-capital method in calculating productivity costs in economic evaluations.[1] The human-capital method has been criticised as calculating potential rather than actual productivity costs,[2] leading to unrealistically high estimates of productivity costs. In particular, it ignores the possibility of replacement of long-term absentees, and many may feel that such replacement is rather common and can temper productivity costs. The concept of replacement is therefore at the heart of the friction-cost method. It recognises that society
will restore initial production levels after some period of adaptation, the length of which may depend on the availability of labour (and therefore unemployment). Although the friction-cost method was put forward as an improvement to existing methods to estimate societal productivity costs in economic evaluations, two main arguments have been used to criticise it: (i) it has no theoretical underpinning; and (ii) it treats leisure as having no value (because replacement would not be valued at its opportunity cost) [for more on this subject see, for example,
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Johanneson and Karlsson[3] or Liljas[4]]. In this paper we address these two concerns, which can be countered jointly. We demonstrate in a simple ‘t
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