Do Targeted Hiring Subsidies and Profiling Techniques for Long-term Unemployed Reduce Unemployment?

To reduce equilibrium unemployment targeted hiring subsidies and profiling techniques for long-term unemployed are often recommended. To analyze the effects of these two instruments, our model combines two search methods: the public employment service and random search, jobseekers choose between an active and a passive search strategy, while labour market policy has two options available. First, only the long-term unemployed placed by the public employment service are subsidized. Second, the subsidy is paid for each match with a long-term unemployed irrespective of the search method used. We show that under both regimes the equilibrium unemployment rate is increasing with respect to the hiring subsidy. The subsidy like the profiling measures, which improve the effectiveness of the public placement service, crowd-out the active jobseekers among the shortand the long-term unemployed and reduce total employment. KEY-WORDS: Matching model, hiring subsidy, endogenous separation rate, active labour market policy, PES, search market JEL-CODE: J41, J63, J64, J68 a Harvard University Center for European Studies; IAB, University of Erlangen-Nuremberg, IZA, 27 Kirkland Street at Carbot Way, 02138 Cambridge, MA, USA; [email protected]. b University of Applied Sciences, Nuremberg, Burgschmietstr. 18, 90419 Nuremberg, Germany, [email protected].