Employer Screening and Optimal Unemployment Insurance

This paper studies how firms’ screening behavior and multiple applications per job affect the optimal design of unemployment policies. We provide a model of job search and firms’ recruitment process that incorporates important features of the hiring process. In our model, firms have limited information about the productivity of each applicant and make selective interview decisions among applicants, which leads to employer screening. We estimate the model using German administrative employment records and information on job search behavior, vacancies and applications. The model matches important features of the hiring process, e.g. the observed decline in search effort, job finding rates and interview rates with increased unemployment duration. We find that allowing for employer screening is quantitatively important for the optimal design of unemployment insurance. Benefits should be paid for a longer period of time and be more generous in the beginning, but more restrictive afterwards, compared to the case where we treat the hiring and interview decisions of firms as exogenous. This is because more generous benefits lead to lower search externalities among job seekers and because benefits change the composition of the unemployment pool which alleviates screening for the long-term unemployed.