Active Labor Market Policy and Endogenous Search

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Abstract
We analyze the effects active labor market programmes (ALMPs) have on wages and unemployment in a union wage-setting framework where workers decide on their optimal search intensity. We assume ALMPs increase match efficiency. The matching process improves if search intensity increases, leading to higher wages. Unemployment tends to fall because of less mismatch and tends to increase because of higher wages. Firms have hiring costs, wherefore the improved matching process leads to a positive job supply effect in addition to the negative wage effect. The effect on unemployment is negative when search intensity increases and ambiguous when search decreases.