Effect of labor market policies on unemployment when firms adapt their recruitment strategy

•I model recruitment behavior of firms where firms choose number of interviews.•Recruitment behavior affects both job creation and destruction rates.•Labor market policies can alter number of interviews firms choose.•Unemployment increases less with firing tax if firms adopt recruitment strategies.•Contrary to the literature, hiring subsidy can increase unemployment in this model.

Firms conduct interviews to select who to hire. Their recruitment strategies affect not only the hiring rate but also job destruction rate as more interviews increase the chances of finding the right worker for the job; a link mostly overlooked in the literature. I model this recruitment behavior and investigate the effects of labor market policies on unemployment. These policies change the value of hiring the right worker, altering firms' incentives to conduct interviews. Policies further affect job creation and destruction when firms adapt their recruitment strategies. Net effect of a policy on unemployment depends on the magnitude of change in job creation versus destruction. Qualitative analysis reveals that the effect of a policy on unemployment is mostly weakened with the introduction of firms' recruitment behavior to the model. Firing taxes still increase unemployment, albeit at a lower rate. The effect of hiring subsidies on unemployment is even reversed: Unemployment increases with hiring subsidies if firms adapt. Minimum wage and unemployment insurance policies are also analyzed.