Remarks by Angel Gurría, during a joint press conference held with the Minister of Economic affairs for the launch of the OECD Economic Survey of the Netherlands.
The Hague, 31 January 2008
Good morning Ladies and Gentlemen,
It is a great pleasure to be here in the company of Minister van der Hoeven, to present the OECD Economic Survey of the Netherlands. I come to talk about an economy which has made a successful comeback. This is very welcome in these difficult times of economic uncertainty. No room for complacency, however. The consolidation of this recovery will depend on the capacity to maintain the course and take important, sometimes difficult, decisions. And timing will be crucial.
Global slowdown, Dutch recovery
In spite of the current global economic slowdown, the Netherlands is still growing at a strong pace. As a result, new jobs are being created and unemployment is among the lowest in Europe.
The reforms undertaken in a wide range of policy areas have been crucial for this strong performance. The consolidation effort that has brought the fiscal position back into balance has also been very important. This recovery has helped maintain living standards in the Netherlands among the highest in the OECD.
The challenge now is to consolidate such recovery. And to achieve this objective it will be essential to address a key issue for the economic future of the Netherlands: the rising labour shortages.
Labour shortages on sight
The supply of labour that fuelled growth over the past years will run out of steam if the present trends are maintained. The strong demand for labour has already resulted in record numbers of unfilled vacancies. The greying of the population will accelerate over the coming years; thus, more people will be leaving the labour market than entering.
The good news is that there is still a large unexploited potential in the Dutch labour force.
A number of groups with weak labour market participation represent an important potential addition to the labour supply. These include the many women who work part-time, older workers who retire early, and people on various benefit schemes, such as social assistance beneficiaries, the partially disabled, and the long-term unemployed. Immigrants, which represent nearly 11% of the population and have high unemployment and relatively low participation, constitute another pocket of underutilised labour.
Well designed reforms could help activate these groups.
I know this call for adjustments at a time when the political climate for reforms is not particularly good. Just think of the problems of reaching a consensus on how to reform the severance payment system. Perhaps, the reluctance is due to some kind of reform fatigue following the wide range of structural reforms that was implemented in the first half of the decade. However, incentives to mobilise available pockets of under-utilised labour are nonetheless needed.
We must avoid risk that the current upswing ends like the previous one of six years ago, where labour market pressures led to an acceleration of wages even after the recession had begun. This took years to correct. It is also necessary to ensure the long-term prospects of the Dutch economy and to address the challenges associated with an ageing population. In only 30 years, a quarter of the population will be over 65.
So what are the policy options?
Boosting labour market participation: The Way Forward
Many different measures are needed to boost labour market participation of under-represented groups. Some reforms have already been implemented. Tax incentives for early retirement have been abolished, activation of social assistance beneficiaries have been stepped up, more child care has been provided, to mention a few examples. The results have been positive, but more needs to be done.
Let me give you a brief “degustation” of our main proposals on how to address this key economic challenge:
To further increase participation of older workers, the government should move ahead with its planned reforms and make them more encompassing. Particularly, the new levy on pensioners who stopped working before the official retirement age could be implemented faster and not be applied only to higher income levels. In addition, measures should be taken to reduce the possibility of using the unemployment benefit system, in combination with generous severance payments, as a transition into early retirement.
To increase the participation of women in the economy, the government should help women to better combine child care responsibilities and full-time career choices. To achieve this, the marginal effective tax rate faced by second earners should be reduced. We know the Government also has plans to phase-out the transferability of the tax credit for second earners, which is good news; but it should be implemented over a shorter period. To boost the availability of child care, recent measures should be complemented by designating child care as an essential facility in the zoning law, stipulating minimum opening hours.
To improve activation of social assistance beneficiaries, job search requirements should be strictly enforced; with no exemptions, such as the currently contemplated for single parents. Indeed, recent reform in this area has been successful, but the remaining stock of beneficiaries is probably the hardest to activate, which reveals the need for further efforts.
To further improve the successful disability reform, the government should reconsider, for example, its decision to apply lighter testing criteria to older beneficiaries (for example, in the age group between 45 and 50 years old). A worrying development is the sharp increase in the number of young disabled, who risk never having the possibility to enter gainful employment. To enhance their chances for entering the labour market, applicants who want to register in the special disability programme for younger people should first be required to apply for social assistance and thus be exposed to the activation measures applied here.
To further improve the activation incentives, the duration of unemployment benefits should be reduced and the replacement rate should be lowered over time. Such a measure should be backed up by sanctions for insufficient job-search activities at an earlier stage.
To improve employment opportunities for outsiders, the strict employment protection legislation for workers with permanent contracts should be eased. For instance, the severance payment system should be simplified and made more predictable and less time-consuming. Moreover, to enhance the employability of older workers, the accumulation of severance payment rights of older workers should be aligned with that of other workers. This takes me to the last point I want to make:
The contribution of immigrants is essential
I would like to conclude this presentation touching on a strategic element for boosting labour market participation: the efficient integration of immigrants; which constitutes an increasingly important source of growth in all OECD countries.
Immigration policy in the Netherlands should mirror the needs of the labour market. The doubling of the old age dependency ratio during the next three decades is creating increasing “grey pressure”, which will demand a greater contribution of immigrants. In line with this objective, a selective migration policy should be enhanced by introducing supply-led schemes for employees. This means that work permits should be granted on the basis of the worker’s qualification rather than on an ex-ante requirement of a job offer.
The government’s decision to abolish the labour market test for workers from most of the new EU member states is helping to ease labour shortages. If insufficient, the government should introduce a transition scheme for workers from Bulgaria and Romania similar to the one that used to be in place for workers from other new members of the EU. In addition, the labour market test required for lower-skilled workers from outside the EU should become less bureaucratic and time consuming to allow sectors with worker shortages to respond faster.
To improve the integration of immigrants and other low-skilled workers, labour market interventions such as the high minimum wages and strict EPL should be reformed. Also, to improve the poor educational achievement of immigrants’ children, orientation into academic and vocational lines in secondary education should be postponed and made more flexible. Geographical and social mobility could be improved by changing the regulations in rental housing, such as rent control, rent subsidies and waiting list rules.
Ladies and gentlemen,
Boosting the labour supply will be crucial to maintain the current economic dynamism; it will also help to secure fiscal sustainability, but it cannot be a stand-alone measure. The government intends to pre-fund some of the future ageing-related cost by securing a surplus of 1% of GDP on the government structural budget. At least equally important are measures to control ageing related costs. The recent health care reform goes in this direction, but little has been done to rein in spending on state pensions. In this area, the official retirement age should be increased in several steps to 67 years to reflect already realised gains in life expectancy. Reform of the state pension scheme should also be considered.
These are strategic decisions, because with 1.7 children per woman the Dutch birth rate is too low to maintain the current level of the welfare state in one or two generations. As I mentioned above, Statistics Netherlands calculates that in 30 years the ageing means that a quarter of your population will be over 65 and the number of Dutch people will start declining. The Netherlands cannot build its future without a dynamic contribution of key groups like immigrants and women; two of the main economic engines of the 21st Century.
Your debates and policies to activate the participation of under-represented groups will be crucial, not only to avoid the slow-down economic forecasts for 2008 and 2009, but to secure for the prosperity of future generations. The OECD is eager to help.
Thank you very much.