Can active labor market policy be counter-productive?

• Active labor market policy (ALMP) may reduce welfare if search takes place along an extensive margin.
• This is because additional workers reduce average job seeker quality due to worker heterogeneity.
• Despite this, a coalition may emerge in favor of ALMP.

We study active labor market policies (ALMP) in a matching model with heterogenous workers. ALMPs are modeled as a subsidy to job search, and search takes place along an extensive margin. An additional job seeker affects the quality of unemployed workers. As a result, the Hosios conditions for efficiency are no longer valid: to replicate the optimum the worker share in bargaining must exceed the Hosios level, and one must impose a tax on job search activity. We also characterize the coalition in favor of ALMP.