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In the standard macroeconomic search and matching model of the labor market, there is a tight link between the quantitative effects of (i) aggregate productivity shocks on unemployment and (ii) unemployment benefits on unemployment. This tight link is at odds with the empirical literature. We show that a two-sided model of labor market search where the household and firm decisions are decomposed into job offers, job acceptances, firing, and quits can break this link. In such a model, unemployment benefits affect households' behavior directly, without having to run via the bargained wage. A calibration of the model based on U.S. JOLTS data generates both a solid amplification of productivity shocks and a moderate effect of benefits on unemployment. Our analysis shows the importance of investigating the effects of policies on the households' work incentives and the firms' employment incentives within the search process.

This paper presents a theory of the labor market matching process in terms of incentive-based, two-sided search among heterogeneous agents. The matching process is decomposed into its two component stages: the contact stage, in which job searchers make contact with employers, and the selection stage, in which they decide whether to match. We construct a theoretical model explaining two-sided selection through microeconomic incentives. Firms face adjustment costs in responding to heterogeneous variations in the characteristics of workers and jobs. Matches and separations are described through firms' job offer and firing decisions and workers' job acceptance and quit decisions. Our calibrated model for the United States can account for important empirical regularities, such as the large volatilities of labor market variables, that the conventional matching model cannot.

This paper examines the implications of different types of employment subsidies for employment, welfare, and inequality. It investigates how these effects depend on what target groups the subsidies address. Our analysis focuses on policies that are "approximately welfare efficient" (AWE), i.e. policies that (a) improve employment and welfare, (b) do not raise earnings inequality and (c) are self-financing. We construct a microfounded, dynamic model of hiring and separations and calibrate it with German data. The calibration shows that hiring vouchers can be AWE, while low-wage subsidies are not AWE. Furthermore, hiring vouchers targeted at the long-term unemployed are more effective than those targeted at low-ability workers.

This paper sheds new light on the effects of the minimum wage on employment from a two- sided theoretical perspective, in which firms' job offer and workers' job acceptance decisions are disentangled. Minimum wages reduce job offer incentives and increase job acceptance incentives. We show that sufficiently low minimum wages may do no harm to employment, since their job-offer disincentives are countervailed by their job-acceptance incentives.

What are the challenges that globalization makes on welfare states and how should welfare states respond? How should welfare states be designed to enable countries to reap the benefits of globalization? These are the main themes of Hans-Werner Sinn's book, Can Germany Be Saved? We view Germany as a case study of how a welfare state can go wrong in reacting to the pressures of globalization. We present two views of globalization—the “specialization view” (of Sinn) and the “Great Reorganization view” (ours)—and examine the policy implications of each for the welfare state design.

We explore the far-reaching implications of replacing current unemployment benefit (UB) systems by an unemployment accounts (UAs) system. Under the UAs system, employed people are required to make ongoing contributions to their UAs and the balances in these accounts are available to them during periods of unemployment. The government is able to undertake balanced-budget interpersonal redistributions among the UAs. At the end of their working lives, people could transfer the remaining balances on their UAs into their pensions. We present an analytical framework to analyse the incentive effects of UAs and calibrate our model for the high high-unemployment countries of Europe. Our results suggest that this policy reform would significantly change people's employment incentives and could achieve reductions in unemployment without reducing the level of support to the unemployed.

This paper provides a new perspective by classifying active labor market programs (ALMPs) depending on their main objectives and their relevance and cost-effectiveness during normal times, during a crisis, and during recovery. We distinguish ALMPs that provide: (i) incentives for retaining employment, (ii) incentives for creating employment, (iii) incentives for seeking and keeping a job, (iv) incentives for human capital enhancement, and (v) improved labor market matching. Reviewing evidence from the literature, we discuss direct and indirect effects of various interventions, their cost-effectiveness, and draw lessons for transition and developing countries. The paper concludes by providing a systematic overview of how, why, when and to what extent specific ALMPs are effective. In particular, the paper shows that ALMPs retaining employment, like work sharing schemes, should be applied in severe recessions for a limited time period of time only. ALMPs creating employment, like hiring subsidies, perform much better on cost-effectiveness and strengthen the outsiders' position in the labor market, especially during recoveries. In-work benefits and public works are not very cost-efficient in terms of raising employment, but might be cost-efficient in reducing poverty and inequity. Policies readjusting distorted employment incentives, such as activation and sanction measures, have proven to provide cost-effective results during normal times.

Long-term unemployment can lead to skill attrition and have detrimental effects on future employment prospects, particularly following periods of economic crises when employment growth is slow and cannot accommodate high levels of unemployment. Addressing this problem requires the use of active labor market policies targeted at the unemployed. In this context, hiring subsidies can provide temporary incentives for firms to hire unemployed workers and, when sensibly targeted, are a very cost-effective and efficient means of reducing unemployment, during both periods of economic stability and recovery.

We present a proposal for reforming unemployment assistance in Germany through the introduction of unemployment accounts (UAs). Instead of paying taxes that finance the unemployment assistance, employed people make ongoing contributions to their UAs and can make withdrawals from these accounts during periods of unemployment. The aim of this policy proposal is to improve employment incentives without significant changes in the current redistribution scheme. We provide a detailed account of how such a system of UAs can be designed and implemented in Germany. To make the influence of UAs as transparent as possible and to avoid introducing other reforms that may make significant bodies of people worse off, we assume that UAs are integrated within the existing unemployment support system, keeping all institutional rules regarding conditions, duration and size of entitlements as well as interpersonal redistribution unchanged.

We explore the far-reaching implications of replacing current unemployment benefit (UB) systems by an unemployment accounts (UA) system. Under the UA system, employed people are required to make ongoing contributions to their UAs and the balances in these accounts are available to them during periods of unemployment. The government is able to undertake balanced-budget interpersonal redistributions among the UAs. At the end of their working lives, people could transfer the remaining balances on their UAs into their pensions. We present an analytical framework to analyse the incentive effects of UAs and calibrate our model for the high unemployment countries of Europe. Our results suggest that this policy reform would significantly change people's employment incentives and could achieve reductions in unemployment without reducing the level of support to the unemployed.