Prolonged experience of high and long-term unemployment has led many governments to a renewed interest in active labour market policies. In particular, targeted wage subsidies have been seen as a means of both directly getting longterm unemployed people into work, and improving their future prospects of finding and keeping jobs. We examine three issues. Firstly, we look at the macroeconomic theory of targeted wage subsidies, and, to a lesser extent, job search assistance, within efficiency wage, union bargaining and search theoretic frameworks. Subsidies directly increase labour demand, but we also find that their effectiveness is enhanced by general equilibrium effects from targeting: wage pressure is reduced; and the average quality of the unemployed pool rises as long-term unemployed workers are removed from it, increasing the incentives for other firms to open vacancies. Secondly we address the optimal degree of policy targeting, using an extension of the Mortensen-Pissarides job creation and destruction model. We argue that there are real gains to targeting the long-term unemployed, but also diminishing returns. Hence, as the level of policy expenditure rises, the extent of targeting should fall. Simulating the model for the UK, we find that policy could have a significant impact on equilibrium unemployment, with more modest welfare gains. Finally, we look at longer-term employability effects by evaluating the Australian Special Youth Employment Training Program (SYETP). Controlling for selection bias using a bivariate probit, we find that participation increased the chances of having a job by 26% between 8 and 13 months after subsidy expiry, and 20% a year later. Much of this gain arose from retention of initially subsidised jobs, but even excluding this, participants were significantly more likely to be employed in subsequent years than if they had not gone on the programme.

Essay I: Employment Security Agreements, which are elements of Swedish collective agreements, offer a unique opportunity to study very early job search counselling of displaced workers. These agreements provide individual job search assistance to workers who are dismissed due to redundancy, often as early as during the period of notice. Compared to traditional labor market policies, the assistance provided is earlier and more responsive to the needs of the individual worker. In this study, I investigate the effects of the individual counseling and job search assistance provided through the Employment Security Agreement for Swedish blue-collar workers on job finding and subsequent job quality. The empirical strategy is based on the rules of eligibility in a regression discontinuity framework. I estimate the effect for workers with short tenure, who are dismissed through mass-layoffs. My results do not suggest that the program has an effect on the probability of becoming unemployed, the duration of unemployment, or income. However, the results indicate that the program has a positive effect on the duration of the next job. Essay II: The well-known positive relationship between the unemployment benefit level and unemployment duration can be separated into two potential sources; a moral hazard effect, and a liquidity effect pertaining to the increased ability to smooth consumption. The latter is a socially optimal response due to credit and insurance market failures. These two effects are difficult to separate empirically, but the social optimality of an unemployment insurance policy can be evaluated by studying the effect of a non-distortionary lump-sum severance grant on unemployment durations. In this study, I evaluate the effects on unemployment duration and subsequent job quality of a lump-sum severance grant provided to displaced workers, by means of a Swedish collective agreement. I use a regression discontinuity design, based on the strict age requirement to be eligible for the grant. I find that the lump-sum grant has a positive effect on the probability of becoming unemployed and the length of the completed unemployment duration, but no effect on subsequent job quality. My analysis also indicates that spousal income is important for the consumption smoothing abilities of displaced workers, and that the grant may have a greater effect in times of more favorable labor market conditions. Essay III: Evidence from around the world suggest that individuals who are awarded disability benefits in some cases still have residual working capacity, while disability insurance systems typically involve strong disincentives for benefit recipients to work. Some countries have introduced policies to incentivize disability insurance recipients to use their residual working capacities on the labor market. One such policy is the continuous deduction program in Sweden, introduced in 2009. In this study, I investigate whether the financial incentives provided by this program induce disability insurance recipients to increase their labor supply or education level. Retroactively determined eligibility to the program with respect to time of benefit award provides a setting resembling a natural experiment, which could be used to estimate the effects of the program using a regression discontinuity design. However, a simultaneous regime change of disability insurance eligibility causes covariate differences between treated and controls, which I adjust for using a matching strategy. My results suggest that the financial incentives provided by the program have not had any effect on labor supply or educational attainment.