Optimal Job Retention

Working paper 855
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Published: 02 April 2026

This paper analyses the efficiency of employment subsidies versus job retention schemes in a random search-and-matching model with human capital depreciation during unemployment and endogenous job destruction. Unlike under exogenous destruction, employment subsidies aimed at correcting inefficient hiring now distort the job-destruction margin, resulting in excess job destruction and turnover. Accordingly, employment subsidies no longer suffice to correct the inefficiency of the decentralised allocation: welfare can be further improved by optimally combining employment subsidies and job-retention schemes.

Keywords: Skill loss; Endogenous job-destruction; Job retention; Optimal policy
JEL codes E24; J63; J64

Working paper no. 855

855 - Optimal Job Retention

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Research highlights:

  • We analyse the efficiency of employment subsidies vs. job retention schemes in search-and-matching model with human capital depreciation (HCD) during unemployment and endogenous job destruction.
  • Unlike under exogenous job destruction, employment subsidies no longer suffice to correct for the composition externality under HCD.
  • Employment subsidies raise hiring but also increase turnover by raising the value of unemployment.
  • Job retention schemes reduce separations and complement employment subsidies.
  • Combining both policies improves welfare beyond using each subsidy separately.

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