Optimal Use of Labor Market Policies: The Role of Job Search Assistance

This paper studies the role of job search assistance programs in
optimal welfare-to-work programs. The analysis is based on an
adapted version of the framework developed by citet{PV06}. This
framework allows for endogenous choice of benefit types and levels,
wage taxes or subsidies, and activation measures such as monitoring
and job search assistance for each period of unemployment in a
dynamic environment with negative duration dependence in exit rates
to employment and potentially depreciation in reemployment wages. We show that the main role of job search assistance is to delay or
prevent situations in which it is no longer optimal to incentivize
the worker to provide positive search effort. It is used to restore
or maintain some minimum exit rate to employment which increases
with the cost-effectiveness of job search assistance. We also find
that in line with existing policies, these programs should mainly be
used at the beginning of unemployment and for short durations.
However, contrary to existing schemes they should exclusively be
targeted at unemployed workers with low initial exit rates to
employment in this case. For all other workers they should only be
used if they fail to find a job within reasonable time despite high
expected initial exit rates.