Duration dependence, targeted employment subsidies and unemployment benefits

This paper is concerned with the economic justification of targeted employment-training subsidies. It deals with the question: Is the policy of providing training subsidies to employers to hire from a target group of 'long-term' unemployment benefit recipients preferable to that of providing unemployment benefits alone in the sense that it can yield a cost reduction? If so, what are the optimal durations of waiting period for enrolment into the training program and the period of subsidy? The answer is shown to depend upon, inter alia, four effects - the disincentive effect on job search of the target group, substitution between subsidised and nonsubsidised workers, negative duration dependence, and the effectiveness of training. The existence of the first two reduces the potential net benefit of the subsidy, whereas that of the last two increases it. Analytically the problem is complex, so a numerical simulation is conducted to provide insights into the interactions between these effects. The nature of duration dependence is shown to be of crucial importance.