Thumbscrews for Agencies or Individuals? How to reduce unemployment

To which extent does an increase in effectiveness of a public employment agency on the one hand and a reduction of unemployment benefits on the other reduce unemployment? Using the recent labour market reform in Germany we find that an improved agency explains substantial part of the observed post-reform unemployment decline: 34%. If disincentive effects of the agency reform were avoided, this impact would have become 51%. Contribution of benefit reduction, to the contrary, is modest: 7%. We underline public employment agency as a much more promising target in restructuring welfare states, in contrast to commonly discussed unemployment benefits.