Economic surveys and country surveillance

Economic survey of the Netherlands 2008: Coping with labour shortages: How to bring outsiders back to the labour market?

 

Contents | Executive summary | How to obtain this publication | Additional info

The following OECD assessment and recommendations summarise chapter 3 of the Economic survey of the Netherlands published on 31 January 2008.

 

Contents                                                                                                                   

Labour market participation is high; even so, there are pockets of under-participation among various groups of the population

Dutch governments have successfully sought to encourage labour market participation. Recent measures include the closing of early-retirement routes and greater emphasis on activating (long-term) unemployed, the partially disabled and social assistance recipients. Nonetheless, labour supply is still restrained by comprehensive social entitlements for those out of work, which benefit almost 17% of the working-age population. In addition, the tax-and-benefit system and labour-market policies continue to discourage participation of several groups and to incite working short hours.

 

Incidence of inactivity remains large(1)

1. In percent of working-age population.
Source: CPB, 2007.

 

Further measures are needed to stimulate continued work at older ages

Labour market participation of older workers remains low, although it has increased in recent years following the removal of tax incentives for early retirement and pre-pension schemes. The government plans to increase the work-related tax credit for workers older than 57 years. In addition, the government plans to introduce a new levy for pensioners who stopped working before the age of 65. However, this measure is only being phased in gradually and affects only people born after 1945 and with pension income above a certain threshold. Thus, a more encompassing and rapid implementation of this measure would further strengthen incentives to participate. Continued work is also discouraged by the possibility of using the unemployment benefit system in combination with generous severance payment as a transition into (early) retirement, indicating a need for reform in these areas (see below). Moreover, tax favoured saving schemes such as the life course scheme can be used for retiring early, pointing to the need for phasing out such schemes. In addition, firms that employ workers aged 65 and over must pay their wages during sickness absence (as for their other workers) for a period of up to two years, even though they cannot insure against this risk. Thus, to strengthen labour demand for older workers, the government should consider easing the obligation on enterprises to pay wages during periods of sickness leave for workers older than 65 years. Such support should be provided socially.

Activation of social assistance beneficiaries can be improved

The number of social assistance recipients has declined over recent decades, but their share of the labour force remains high internationally. Various tools have been used to enhance job-search incentives and facilitate labour market reintegration. As well, activation has been well served by transferring the budgetary and implementation responsibilities of the social assistance scheme (WWB) to the municipalities and allowing them to use budget surpluses in this area for other purposes, thus providing strong incentives to monitor and activate benefit recipients. To ensure continued success, existing availability for work requirements should be strictly enforced and the envisaged exemptions from these requirements should be reconsidered.

Successful reform of disability benefits should be continued

Several reforms since the 1990s have reduced the inflow of new recipients into the disability benefit scheme, notably by introducing more restrictive entry requirements and expanding the sickness period paid by the employer from one to two years. Nevertheless, the number of disability benefit beneficiaries remains high internationally. A sensible strategy in these circumstances is to conduct regular assessments of work capacity and encourage individuals, when possible, to resume labour market participation. In this respect, the government should reconsider its decision to apply lighter testing criteria to current beneficiaries in the age group 45 to 50. Moreover, the reduction of inflows has been concentrated on the age group 25 45, with less progress achieved in partially reintegrating older and younger benefit recipients into the labour market. A worrying development is the increasing inflow (often for unspecified psychological disorders) of young people into the special Wajong scheme for young disabled, which offers limited reintegration services. This creates a risk of excluding an increasing number of young people permanently from the labour market. To avert this risk, those registering in the Wajong scheme should be requested to first apply for social assistance and receive disability benefits only as a top-up after some waiting period. This would allow case managers in appropriate cases to apply the full range of activation measures associated with social assistance.

 

Incidence of disability in the OECD
2003-2004(1)

1. 2003 for the Czech Republic, Finland, France, Germany and Italy.
Source: OECD, Going for growth, 2006.

 

Further reform of the unemployment benefit system is needed

Although unemployment is low, the incidence of long-term unemployment is relatively high in comparison to countries with similarly low unemployment rates reflecting, among other factors, the generosity of unemployment benefits. The duration of unemployment benefits has been reduced from 5 years to a maximum of 38 months, which is a welcome move, but benefit duration remains long by international standards, especially for workers with long seniority. In combination with non-decreasing benefits, this is likely to dampen job-search incentives and create paths into early retirement. Thus, the government should further reduce the duration of unemployment benefits. Alternatively, the replacement rate could be reduced with the length of the unemployment spell. As well, the use of sanctions penalising insufficient job-search activities could set in earlier.

Employment protection legislation should be eased

The incidence of long-term unemployment may be raised by strict employment protection legislation, which tends to reduce labour market fluidity and prolong unemployment spells for those at the margin of the labour market. A reform of the dismissal system is therefore under consideration. At present, layoffs can occur through two channels: employers can address their request to the individual employment service (CWI), but the procedure is bureaucratic, involves long notice periods and comes with unpredictable results; alternatively, employers can request a local court to dissolve the individual employment contract, which is faster but also more expensive, as firms face much higher severance pay obligations. The system should be reformed to become simpler, more predictable and less time-consuming for both employers and workers; accordingly, the rules governing layoffs should be clearly specified in law, making dismissals a more predictable process, with appeal to local courts only possible as an ex-post option, in case one of the parties feels unfairly treated. In addition, severance payments are currently quite costly by international comparison. Dismissed workers can be entitled to payments equivalent to one month of salary per year of service, which may result in costly redundancy costs for workers with long job tenure. This can also contribute to lower mobility incentives for workers concerned about losing severance pay rights. A funded severance payment system, like in Austria, could be used to preserve severance payment rights during job transfers, thus helping to increase the fluidity of the job market. Under the present system, workers see their severance pay rights increase to two months of salary for years worked after the age of 50. This is likely to be harmful to the hiring of older workers and therefore have the perverse effect of encouraging earlier retirement. Hence, the accumulation of severance payment rights of older workers should be aligned with that of other workers.
 

How to obtain this publication                                                                               

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of the Netherlands 2008 is available from:

Additional information                                                                                             

 

For further information please contact the Netherlands Desk at the OECD Economics Department at eco.survey@oecd.org.  The OECD Secretariat's report was prepared by Jens Hoj, Ekkehard Ernst and Jasper Kieft under the supervision of Patrick Lenain. Research assistance was provided by Laure Meuro.

 

 

 

 

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