Concept Architecture
Concept
Theoretically, the Friction Cost Method is an economic approach for estimating productivity losses attributable to illness by recognising that labour markets adapt to worker absence through replacement, redistribution of work or organisational adjustment. Unlike the Human Capital Method, which assumes that all lost production persists for the entire duration of illness or until retirement, the Friction Cost Method assumes that productivity losses occur only during the period required to restore production, known as the friction period. The method is grounded in labour market economics and is widely used in societal-perspective health economic evaluations where labour replacement is considered.
Mathematically, the Friction Cost Method estimates productivity losses over the finite friction period rather than the entire period of work absence. The calculation typically incorporates wage costs, the duration of the friction period and, where appropriate, an elasticity factor reflecting the relationship between labour input and production. Because productivity losses are limited to the replacement period, estimates obtained using the Friction Cost Method are generally lower than those produced by the Human Capital Method.
In practice, implementation requires estimates of the friction period, employee wage rates, labour force participation and, where relevant, vacancy durations derived from labour market statistics. Productivity costs are calculated only for the period during which production is genuinely reduced before replacement or organisational adjustment restores output. The method is frequently applied in cost-of-illness studies and economic evaluations conducted from a societal perspective, particularly in countries whose methodological guidance recommends friction cost estimation.
Purpose
Used to estimate productivity losses resulting from illness by limiting economic losses to the period required for labour markets or organisations to replace absent workers and restore production.
Mathematical Formulae
Primary Formula
Productivity Loss = W ? F
where:
- W = wage rate per unit of time
- F = friction period
Supporting Formulae
With labour elasticity:
Productivity Loss = W ? F ? �
where:
- � = labour productivity elasticity
Discounted productivity loss:
PV = ?(C? / (1 + r)?)
where:
- C? = productivity loss during period t
- r = annual discount rate
Related Mathematical Methods
- Human Capital Method
- Present Value Analysis
- Discounting
- Productivity Cost Estimation
- Cost-of-Illness Study
- Sensitivity Analysis
Example
An employee earning �180 per working day is absent because of illness for six months. Labour market data indicate that the organisation restores normal production after a friction period of 60 working days.
Productivity Loss = �180 ? 60 = �10,800
Although the employee remains absent beyond 60 days, no additional productivity loss is assigned because production is assumed to have resumed after replacement.
Excel Implementation
| Function | Example Formula | Health Economics Application |
|---|---|---|
| PRODUCT | =PRODUCT(B2,C2) | Calculates productivity loss over the friction period. |
| MIN | =MIN(DaysAbsent,FrictionDays) | Limits productivity losses to the friction period. |
| SUMPRODUCT | =SUMPRODUCT(WageRange,FrictionDaysRange) | Calculates productivity losses across multiple employees. |
| IF | =IF(DaysAbsent>FrictionDays,FrictionDays*DailyWage,DaysAbsent*DailyWage) | Restricts losses to the friction period where replacement occurs. |
| NPV | =NPV(0.035,C2:C12) | Discounts productivity losses occurring over multiple periods where appropriate. |
VBA (Optional)
VBA can automate friction cost calculations across large employee cohorts using country-specific friction periods, wage data and labour market assumptions.
Sources
- Koopmanschap MA, Rutten FFH, van Ineveld BM, van Roijen L. "The Friction Cost Method for measuring indirect costs of disease." Journal of Health Economics.
- Koopmanschap MA, Rutten FFH. "A practical guide for calculating indirect costs of disease." Pharmacoeconomics.
- Drummond MF, Sculpher MJ, Claxton K, Stoddart GL, Torrance GW. Methods for the Economic Evaluation of Health Care Programmes. Oxford University Press.
- Briggs A, Claxton K, Sculpher M. Decision Modelling for Health Economic Evaluation. Oxford University Press.
- ISPOR Task Force Reports on Productivity Costs in Economic Evaluation.
Related Concepts (2)
Library
Publications
1
Economic Analysis in Health Care — Morris, Devlin, Parkin & Spencer, 2nd Edition ed., 2012 (John Wiley & Sons)
A core textbook for advanced undergraduate and postgraduate health economics students, covering both the economics of health care systems and the evaluation of health care technologies, with international case studies and a strong balance of theory and application.
BookView source →
Frequently Asked Questions (6)
What is the friction cost method?
A productivity loss valuation approach estimating only the cost of the finite period needed to restore normal production, generally lower than human capital estimates.
Source: Koopmanschap et al. 1995
What limited period does the friction cost method count?
The friction cost method values the productivity lost to illness or death by counting only the cost of the short period needed to restore normal output, not the whole of a person's lost working time. It reasons that a sick or deceased worker is eventually replaced, so society loses production only during the friction period until that replacement is up to speed. This yields far lower estimates than the human capital method, which counts every hour of lost work, and it is used to give what its proponents see as a more realistic figure. The cost only until output is restored is what it counts. Koopmanschap and colleagues (1995) describe this.
Source: Koopmanschap et al. 1995
How does the friction cost method work?
The friction cost method works by estimating productivity loss as the cost of the finite period needed to restore normal production, such as the time to replace a worker, rather than counting all the forgone earnings over the absence. So the friction cost method works by valuing the restoration period, which is why it gives lower estimates, since it counts only the cost until production is restored rather than all lost earnings, and this limits the productivity loss to the friction period, making the friction cost method's estimate generally lower than that of the human capital method.
Source: Koopmanschap et al. 1995
Why does the friction cost method give lower estimates?
The friction cost method gives lower estimates because it counts only the cost of the period needed to restore production, rather than all forgone earnings, since it assumes production is restored after a finite period, for example by replacing the worker. So the friction cost method gives lower estimates by limiting the loss to the restoration period, which is why it differs from the human capital method, since it does not count all lost earnings but only until production resumes, and this assumption that production is restored after a friction period produces the generally lower estimates of the friction cost method.
Source: Koopmanschap et al. 1995
How does the friction cost method differ from the human capital method?
The friction cost method differs from the human capital method in that it counts only the cost until production is restored, while the human capital method values all the forgone earnings, so the friction cost method generally gives lower estimates. So the friction cost and human capital methods differ in scope, which is why their estimates differ, since the human capital method uses full forgone earnings whereas the friction cost method limits the loss to the restoration period, and this difference means the friction cost method, counting only the friction period, generally produces lower productivity cost estimates than the human capital method.
Source: Koopmanschap et al. 1995
Why is the friction cost method used?
The friction cost method is used to value productivity loss in a way that accounts for production being restored after a finite period, giving an estimate some consider more realistic and generally lower than the human capital method. So the friction cost method is used for a more limited productivity estimate, which is why it counts the friction period, since assuming production is restored may better reflect reality than counting all forgone earnings, and using the friction cost method provides a productivity cost estimate that accounts for restoration, generally lower than the human capital method, offering an alternative valuation approach.
Source: Koopmanschap et al. 1995
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Verified by Dr Darrin Baines
British health economist
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Verification date: 10 Jul 2025
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