Economic Survey - Belgium 2005: Increasing the employment rate

 

Belgium has considerable scope to attenuate the effects of population ageing by raising the employment rate

Belgium’s low employment rate (60%) leaves great room for improvement and can even be a potential advantage compared with other countries in coping with population ageing in that there is considerable scope to offset some of the ageing-related deceleration in labour supply by drawing inactive members of the population into employment, although this will require challenging reforms. Employment rates are particularly low for older workers (28% of the population aged 55-64), younger workers (27% of the population aged 15-24) and ethnic minorities; by contrast, rates are near international averages for prime-age workers. It was estimated in a recent OECD study that if a set of very ambitious reforms to increase employment rates were implemented – reforms that go significantly beyond what is presently being considered in Belgium – employment would increase by 12% over the period to 2050 instead of declining slightly in the unchanged policy scenario. As noted above, the HFC assumes that only part of this potential will be exploited, which may be a reasonable assessment of Belgian popular preferences in this regard. Insofar as it would be possible to go further, that would attenuate the slowdown in growth in living standards as well as creating room for reductions in the tax burden whilst maintaining public finances on a sustainable path.

Government should phase out public subsidies for early retirement

In order to achieve the HFC employment projection, it will be essential to reduce incentives further for older workers to leave the labour force prematurely. Older workers are encouraged to retire before age 60 through attractive income replacement options – pre-pension and “Canada Dry” arrangements (older unemployment benefit plus a top-up from the employer) that are mainly publicly financed. This also suits employers as steep age/seniority premiums in pay scales mainly for white collar workers make older workers relatively unattractive. These schemes were introduced in the 1970s and 1980s in response to widespread industrial restructuring. The idea was to make room for younger workers by facilitating the early retirement of older workers. Such schemes have manifestly failed in this regard as Belgium, like other countries with such schemes, has low employment rates for both older and younger workers. The government has increased the minimum age for entry into the older unemployment benefit scheme, which exempts beneficiaries from job-search obligations, from 55 in 2002 to 58 in July 2004. The government should phase out these schemes by progressively aligning access conditions with those for early retirement pensions. Once these schemes were merged, candidates for early retirement would have to have a significantly higher age or longer career history to qualify for a benefit than is currently the case. In addition, pension entitlements would no longer continue to accumulate for retired persons up to age 65, as occurs with pre-pension and “Canada Dry” arrangements. Top-up payments to early retirees should also be taxed in the same way as regular labour earnings instead of at preferential rates or not at all, as is currently the case. In the transition phase, the top-up payments in pre-pension and “Canada Dry” arrangements should either be subject to full social security contributions or beneficiaries should not accumulate pension rights. Early-retirement pension should also be reduced on an actuarially fair basis relative to an old-age pension taken at age 65. Moreover, the accumulation of pension rights while receiving unemployment benefits should be limited to active job seekers, thus excluding early retirement and equivalent spells. It could reasonably be expected that if attractive routes to early retirement were closed and job search requirements for older unemployment beneficiaries enforced (see below), the social partners would find it more rewarding to invest more in continuing education for older employees and to negotiate pay scales that do not price older workers out of the market and to improve working conditions.

Job-search requirements should be more rigorously enforced and ALMPs redirected from job creation to job placement to reduce long-term unemployment

There remains considerable scope to reduce the structural unemployment rate (around 7%), and especially long-term unemployment (almost half of the total) by more rigorously enforcing job search requirements for unemployment beneficiaries. The federal government has begun reviewing unemployment beneficiaries, starting with the youngest, to verify that they in fact fulfil their job-search obligations. It is expected that all beneficiaries up to age 50 will have been examined by mid 2007, at which point the exercise will be reviewed. This process should be extended as soon as possible to cover unemployment beneficiaries aged 50 to 57 who are no longer exempted from job search obligations. Subsequently the exemption from job-search requirements for unemployed persons aged 58 and over should be phased out and these obligations should equally be enforced. More efficient use of ALMP resources would also help to reduce unemployment. While Belgian expenditure on ALMPs is around the European average as a share of GDP, a much higher proportion is devoted to public job creation schemes than in other countries. Redirecting such resources to career guidance and orientation would contribute to lowering the unemployment rate in the medium-term by reducing the duration of unemployment. It would also result in placement in more productive jobs with more potential for employees to enhance their human capital.

Unemployment rate by region, age and attainment

Better education outcomes for the less educated, less strict EPL and lower barriers to student work would increase employment in the younger age group

The low employment rate for the younger age group is not the counterpart of a high proportion of the population acquiring tertiary qualifications – indeed a high employment rate for this age group and a high proportion of young people obtaining tertiary qualifications tend to go together in OECD countries. Rather, it reflects poor education achievement in the French Community, high school drop-out rates, strict EPL for temporary contracts and fiscal and social security barriers to student work. The French Community is refocusing school curricula on core general skills (reading literacy, foreign languages, mathematics, and sciences) and devoting more resources to students from lower socio-economic backgrounds. This should also help to reduce drop-out rates. The Belgian authorities aim to strengthen the transition from education to work by emphasising job search requirements and closely monitoring search efforts. If this reform fails to increase employment of younger age groups, benefits for persons who have never worked should be abolished. This would increase the effectiveness of the various activation measures proposed by regional public employment services. In addition, the government should ease EPL on temporary employment contracts and remove fiscal and social security barriers on student work to enable more young people to find a job. This, together with an improvement in education achievement and attainment, would help to reduce the high (national) unemployment rate (19%) for this age group. Less strict EPL and lower fiscal and social security barriers to student work would also make it easier for students to finance their studies by working part time.

 

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