Labor Market Equilibrium with Public Employment Agency

The Public Employment Agency (PEA) provides intermediation services in the labor market. We investigate the implications of having such an additional market place using a tractable search model, and explain why only a fraction of firms use the PEA as search channel despite its free service. We highlight the registering firms’ tradeoff between the negative selection of applicants and the lower wages possible at the PEA. Our theory also explains which job-types are more likely to be registered. We test these theoretical predictions empirically using the German Job Vacancy Survey and the German Socio-Economic Panel and find strong support for them.