1 Department of Economics, Aarhus School of Business, Aarhus BSS, Aarhus University2 Centre for Research in Integration, Education, Qualifications and Marginalization (CIM), Aarhus School of Business, Aarhus BSS, Aarhus University3 Department of Economics and Business Economics, Aarhus BSS, Aarhus University4 University of Applied Sciences Nuremberg5 Department of Economics and Business Economics, Aarhus BSS, Aarhus University
ABSTRACT: To reduce unemployment targeted hiring subsidies for long-term unemployed and profiling techniques are often recommended. To analyze the effects of these instruments, our model combines two search methods: the public employment service (PES) and random search. Jobseekers choose between an active and a passive search strategy. Labour market policy has two options available. First, only the medium-term and long-term unemployed MLTU) placed by the PES are subsidized. Second, the subsidy is paid for each match with a MLTU. We show that under both regimes equilibrium unemployment is increasing with re-spect to the hiring subsidy. The hiring subsidy raises not only the job destruction rate, but in-creases contrary to the Mortensen-Pissarides model also the duration of unemployment. Like the subsidy, profiling measures, which improve the search effectiveness of the PES, crowd-out the active jobseekers and reduce total employment as well as social welfare.