September 2013

No. 7659: Thumbscrews for Agencies or for Individuals? How to Reduce Unemployment

substantially revised version published as 'The Employment Effect of Reforming a Public Employment Agency' in: European Economic Review, 2016, 84, 140-164

To which extent does an increase in operating effectiveness of public employment agencies on the one hand and a reduction of unemployment benefits on the other reduce unemployment? Using the recent labour market reform in Germany as background we find that the role of unemployment benefit reduction for the reduction of unemployment is very modest (7% of the observed decline). Enhanced effectiveness of public employment agencies, to the contrary, explains a substantial part (34%) of the observed post-reform unemployment decline. If disincentive effects of PEA reforms had been avoided, the effect could have increased to 51%.