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The following OECD assessment and recommendations summarise Chapter 3 of the Economic Survey of the Netherlands 2005 published on 15 December 2005.
How could increased labour-market flexibility foster macroeconomic resilience?
While special factors have undoubtedly exacerbated the recent downswing, the slow speed at which the economy is returning to trend suggests that re-equilibrating forces are weak. Empirical evidence presented in this Survey shows that inflation is slow to respond to cyclical conditions, especially in comparison with non EU countries. This appears to be so because adjustment channels have operated weakly, notably the response of labour costs to cyclical downturns. As firms have difficulty adjusting their levels of employment owing to employment protection legislation (EPL) for regular contracts, which is strict by international comparison, labour productivity growth falls sharply during the initial stages of an economic downturn, holding up unit labour costs, and therefore eroding international competitiveness and limiting the extent to which inflation falls. Even though there is a reasonable degree of wage moderation when there is labour market slack, this occurs only after a significant lag. In the latest cycle, labour hoarding was unusually large because many employees recruited during the economic boom of the late 1990s had permanent contracts,, employers had faced high hiring costs and they had initially anticipated a quick recovery. Also, labour costs were inflated by large increases in pension premiums. All of this suggests that the adjustment of unit labour costs has occurred only slowly in the face of economic slack, thus lengthening the period of stagnation required for market forces to operate. On the whole, the slowness of adjustment appears to result, for the most part, from the strictness of EPL on regular contracts, which increases employment adjustment costs.
EPL on regular contracts is strict by international comparison
Overall strictness of EPL in 2003
Source: OECD Employment Outlook (2004)
The government has announced measures to ease EPL, which come into effect in October 2006, and the Social and Economic Council will advise on further reforms. The announced measures, lower the administrative costs of dismissals and increase flexibility for employers. Even so, EPL will remain strict by international comparison. In this context:
What is being done to increase employment rates?
A number of measures have been implemented or are in the pipeline to shift people from dependence on social benefits into employment. Disability benefit recipients aged less than 50 are being re-tested for eligibility and incentives for the partially disabled to use their residual work capacity are being strengthened. The reform of social assistance in 2004, which decentralised this programme to municipalities and gave them strong incentives to encourage the return to work of social assistance beneficiaries, also goes in the right direction. As well, the government plans to reform unemployment benefits (UB) by reducing maximum benefit duration from 5 years to 38 months, which nonetheless remains long by international comparison, and by making duration more dependent on the employment record and less on age. On the other hand, the government has introduced a new welfare level benefit for older unemployed persons which, in contrast to social assistance, is not subject to an assets means test for people aged 50 or over nor to a partner income test for people aged 60 or over. The scheme is subject to a sunset clause and will be evaluated in 2010.
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The impact of the reform of the UB-scheme on its use as an exit-route to early retirement should be closely monitored. Even after the reform, the maximum duration of the benefit is relatively long compared with other countries, where duration of 1 2 years is more usual.
The Dutch authorities have reduced unemployment and poverty traps in recent years. A notable exception concerns sole earner households with children earning a modal income, as they gradually lose a tax credit when their income increases. The government has rightly decided to integrate the various tax credits for people with children in 2006 and progressively withdraw the tax credits from the modal income at a taper rate of 6%.
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The government should see whether further action is feasible to reduce unemployment traps by examining further the trade-off between increasing in-work benefits, so as to reduce remaining traps, against the adverse effects on labour supply further up the income scale.
The reforms to shift some people off social benefits and into employment should help to increase the employment rate for older workers (45%), which is below the OECD average (50%). In this regard, the recent reforms of disability benefits, unemployment benefits and social assistance are important. These changes complement the termination of tax subsidies for early retirement schemes from the beginning of 2006. However, a new (tax favoured) life course savings scheme offering opportunities to take leave that should help workers to cope with their family responsibilities and to invest in training, potentially prolonging working lives, can also be used as an individual early retirement scheme.
What can be done to increase working time, especially for women?
Even though employment rates are relatively high, labour utilisation is held back by the shortest annual working time in the OECD (1357 hours in 2004). An important factor reducing average working time is the high proportion of women working part time. Many women have chosen to work part-time because of the high cost of suitable childcare, school hours that are ill adapted to the needs of working parents (many schools send children home at lunchtime and on Wednesday afternoons) and the absence of affordable pre- and after-school facilities. A new Childcare Law was implemented in January 2005 that aims at making it easier for parents (in practice, mothers) to reconcile family responsibilities and work. The government pays a subsidy that on average amounts to 1/3 of childcare costs. Employers are on average expected to pay a further one third, with the remainder to be paid by parents. The government subsidies are means tested, which enables a larger subsidy to be paid at lower incomes out of a given budget but increases marginal effective tax rates at higher incomes. The government recently increased the budget for childcare subsidies by € 130 million to reduce the taper rate at which its subsidy is withdrawn as household income rises, making childcare more affordable for middle income households. The employers' contribution to child care will be monitored in 2006. The government also rightly increased the budget for lunchtime and after school care facilities by € 70 million, which appears to be particularly cost effective for increasing female working time. More could be done to increase working time by making it easier for parents with youngsters to reconcile family and work life:
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Notwithstanding the 2006 evaluation, the government should consider further reducing the taper rate for withdrawing childcare subsidies as household income rises. The government is rightly considering increasing its support for "out of school hours care", so that mothers can work longer hours. Furthermore, schools should be required to make arrangements so that children are not sent home when teachers are absent.
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To increase incentives to work more hours, marginal effective tax rates should be reduced. Budget room for such reductions could be found by broadening the income tax base. An option could be to further limit tax deductions for mortgage interest payments on owner occupied housing; the government already has taken some steps in this regard (for example, for owner-occupiers moving house, tax deductibility is limited to interest on that part of the mortgage that is equal to the home's purchase price less equity realised from the sale of the previous home.
Labour utilisation is held back by the shortest annual working time in the OECD
Annual hours worked per person employed, 2004
Source: OECD Productivity Database.
The short duration of working time in the Netherlands, like in other European countries, can be explained partly by the activities of trade unions, which have tried to cushion employment losses through lower number of hours worked per employee. Now that the government has dropped the distinctions in regulations between overtime and normal working time on the one hand, and standard and agreed time on the other, in favour of a maximum duration of 48 hours per week averaged over a period of 13 weeks (as stipulated in the EU working time directive), only collective agreements stand in the way of extending working time if employers and employees find that mutually advantageous.
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Social partners should review the existing working time clauses in collective agreements, inasmuch as they reduce labour utilisation and lower income per capita, with a view to phasing out existing obstacles (notably, high overtime premiums) for individual employees wishing to work longer hours to earn more, doing so.
Return to the Economic Survey of the Netherlands 2005
A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
To access the full version of the OECD Economic Survey of the Netherlands:
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Readers at subscribing institutions can go to SourceOECD, our online library.
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Non-subscribers can purchase the PDF e-book and/or printed book at our Online Bookshop.
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Government officials can go to OLISnet's Publication Locator.
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For further information please contact the Netherlands Desk at the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by David Carey, Ekkehard Ernst, Jelte Theisens and Rebecca Oyomopito under the supervision of Patrick Lenain.
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