This paper explores the optimal design of subsidies for hiring unemployed workers (?employment vouchers? for short) in the context of a dynamic model of the labor market. Focusing on the short-term and long-term effects of the vouchers on employment and unemployment, the analysis shows how the...

The analysis provides a new explanation for two widespread problems concerning European unemployment policy: the disappointingly small effect of many past reform measures on unemployment, and the political difficulties in implementing more extensive reform programs. We argue that the heart of...