Abstract

To reduce unemployment targeted hiring subsidies for long-term unemployed are often
recommended. To explore their effect on employment and wages, we devise a model with
two types of unemployed and two methods of search, a public employment service (PES)
and random search. The eligibility of a new match depends on the applicant’s unemployment
duration and on the method of search. The hiring subsidy raises job destruction and extends
contrary to Mortensen-Pissarides (1999, 2003) the duration of a job search, so that
equilibrium unemployment increases. Like the subsidy, organizational reforms, which
advance the search effectiveness of the PES, crowd out the active jobseekers and reduce
overall employment as well as social welfare. Nevertheless, reforms are a visible success for
the PES and its target group, as they significantly increase the service’s placement rate and
lower the duration of a job search via the PES.