The Decentralization of Public Employment Services and Local Governments’ Responses to Incentives*

Working Papers 337 Ohto Kanninen, Hannu Karhunen, Jeremias Nieminen

We examine how the decentralization of public employment services (PES) affects the behavior and service provision of PES offices and the labor market outcomes of job seekers. We utilize a Finnish temporary reform during which PES were decentralized for specific target groups of job seekers in 23 treated municipalities and remained centralized for others. The form of the temporary reform presented the treated municipalities with the possibility of shifting costs to the central government. We estimate the causal effects of the temporary reform using individual-level difference-in-differences in a matched sample. We find no evidence of better labor market outcomes and find evidence consistent with municipalities being able to shift 10% of their unemployment benefit costs to the central government.