How should social transfer programmes and the tax system be reformed to increase incentives to work?
The largest source of labour that could potentially be activated is disability beneficiaries, who in 2001 numbered slightly less than 1 million (about 9 per cent of the working age population), of whom about 200 000 work part time. Tougher reintegration obligations before applying for disability benefit (DB) and the anticipation of future reforms together with the effects of the current economic downturn contributed to a 25 per cent reduction in inflows into the DB scheme in 2003. The stock of disabled is to be re-tested according to new, stricter criteria in the run-up to the introduction of the new DB scheme, planned for January 2006. In the new scheme, fully disabled persons will only receive a full DB if their disability is assessed to be permanent while it is planned to strengthen work incentives for the partially disabled. In this regard it is important that the requirement to use the residual earnings capacity to the full be implemented, as planned. Strict testing of disability claimants is crucial for the success of the new partial disability scheme (WGA) since there remains a risk of self-selection. To strengthen the reform of partial DB, the government should: i) reduce the duration of first stage (and of unemployment) benefits, which effectively rise with age, for persons in the second half of their career to discourage the continued use of the scheme as a route to early retirement; and ii) prevent topping up of partial DB to ensure that the risk of self-selection is not higher than in the current situation.
Unemployment benefit duration in selected OECD countries
1. Work record of 18 years, single worker.
2. Unlimited duration for Belgium. Duration independent of age or work record in Iceland, Norway, Ireland, Canada, Korea, Czeck Republic, United Kingdom and United States. Duration independent of age or work record but longer duration for older workers in Luxembourg, Switzerland, Italy and Denmark.
3. Not accounting for initial access conditions and reduced follow-up benefits (unemployment assistance). As in many countries the unemployment benefit duration is also based on age, the figure assumes labour market entry at age 20 and uninterrupted work or insurance record.
Source: OECD Benefits and Wages 2002; European Commission (2003); and Unédic (2004) for France.
Making municipalities fully financially responsible for the payment of welfare benefits from the beginning of 2004 should increase their incentives to favour reintegration over benefit payment. This is because they have to pay back unused money from the reintegration budget they receive but keep unused money from the social welfare benefit budget. Efficiency and transparency in the reintegration market should be further improved by systematic evaluation of private providers’ value added. Moreover, incentives for clients to co-operate actively should be strengthened by giving reintegration firms the possibility of initiating benefit sanction procedures. Poverty traps, which remain substantial despite several recent measures, should be addressed by reducing the level of welfare benefits. The government should also strengthen work incentives by pushing through with its plans to increase the minimum work record required for access to unemployment benefits.
Labour force participation of persons above age 55 is currently below the Lisbon target and well below the level of the best performing countries in the OECD, suggesting that there remains considerable scope for improvement. The termination of second-stage unemployment benefits and the reinstatement of job-search requirements for the older unemployed as of 2004 are welcome steps in the right direction. The government should also push ahead with its plan to end tax-incentives for early-retirement schemes by 2006. GDP per capita could also be increased by raising the annual number of hours worked per employee, which is the lowest in the OECD area, partly on account of widespread female part-time employment. The government should reduce barriers to increased hours worked, such as regulations that unnecessarily inflate childcare costs and reduced working time in collective agreements, while aiming at reducing the tax burden on labour in the medium term. The government plans to introduce the ‘life-cycle scheme’, a tax-favoured arrangement for employees to save up to 2.1 years of salary to be used at any time in their career, with the details subject to negotiations with the social partners. The government should make the tax subsidies for employees taking their saved salary just before retirement conditional on continuing to work part-time so as to prevent the scheme from being used as an alternative route to early retirement.
The measures to increase labour force participation should be complemented by an easing in strict employment protection legislation (EPL), which penalises groups with low participation rates, especially as there are likely to be more job seekers from these groups following the reforms to social transfer schemes. Loosening EPL could also reduce the significant lag in labour-market adjustment to economic conditions. In particular, the government should reduce the cost of dismissals, notably by lowering requirements for third-party authorisation and severance pay.
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