This paper demonstrates how economic theory can be combined with state-of-the-art empirics to make quantitative statements about optimal policy. Using a large administrative data set for West Germany as well as nonparametric and semiparametric estimation techniques, I parameterize the model proposed by Pavoni and Violante (2005, 2007) for the optimal choice of different financial and activation measures for unemployed workers. The parameterized model is used to study the role of job search assistance in optimal welfare-to-work programs and assess the optimality of the West German policy in the period 2000 to 2002.

We estimate short‐run, medium‐run, and long‐run individual labor market effects of training programs for the unemployed by following program participation on a monthly basis over a 10‐year period. Since analyzing the effectiveness of training over such a long period is impossible with experimental data, we use an administrative database compiled for evaluating German training programs. Based on matching estimation adapted to address the various issues that arise in this particular context, we find a clear positive relation between the effectiveness of the programs and the unemployment rate over time.