Dutch Treat: Holland's labor market reforms create exceptionally low unemployment

While Europe (and much of the developed world) continues to reel from high unemployment in the wake of the global economic recession, at least one small, peaceful corner of the continent continues to enjoy very low jobless rates.

According to Eurostat, the statistical arm of the European Union (EU), the Netherlands currently has an unemployment rate of 4.4 percent, far below the 10.1 percent average for the euro zone (and 9.8 percent for the U.S.). By contrast, Spain suffers under an unemployment figure of more than 20 percent.

Even among youth, Netherlands (along with Germany) has the lowest unemployment rate for people under the age of 25 at 8.5 percent, versus 20.1 percent for the euro zone. (The comparable rate in Spain is well in excess of 40 percent.)

Although joblessness has been creeping up in Holland since the summer of 2008, it still remains at such relatively modest levels that it demands observation.

How have the Dutch managed such a “miracle”?

There appears to be no single answer to this question – but rather the Dutch worker and economy seems to have benefitted from a confluence of factors (some unrelated to each other) in recent decades.

Professor Hans Keman, professor and chair in comparative political science at The Free University of Amsterdam, cites, among other things, a shift in the economic base to services and infrastructure (accompanied by a proportional decrease in industrial workers); the payment of government wage subsidies to companies to hire workers in sectors that are in transition; a sharp increase in part-time workers (particularly women); unusually high cooperation between government, labor unions and corporations to encourage maximum employment; significant government subsidies to allow for enrollment in higher education (thereby keeping youth joblessness at a minimum); heavy involvement of the government in counseling and re-training of citizens (i.e., an active labor market policy); and a well-educated, highly-trained workforce.

Thus, Keman calls Holland’s modest unemployment a manifestation of a “balanced de-industrialization,” and not a “miracle” at all.

Stephen Bronars, senior economist at Welch Consulting in Washington D.C., points out that low unemployment in Holland is a relatively recent phenomenon and has likely stemmed for a plethora of substantial reforms in the labor market that the Dutch government has implemented over the past two decades.

Indeed, at one point in the early 1980s, unemployment in Holland breached 10 percent.

“It’s hard to compare unemployment rates across countries because of possible differences in the definition of unemployment -- which is generally more restrictive than being jobless, Bronars said.

“But having said that, the employment-to-population ratio is still exceptionally high in Holland compared to OECD countries, suggesting that their efforts to keep joblessness down has been genuine and very impressive.”

Basically, Bronars said, the Dutch government has created incentives both for corporations to hire workers and for unemployed workers for seek jobs.

“For example, the government changed the tax treatment for married couples, such that unused tax credits can be transferred to the spouse,” he said.

“Also, the government has made its child-care benefits program more valuable to lower and middle income families, thereby making it easier for both husbands and wives to work rather than worry about childcare.”

Bronars explains that the Dutch government has adopted an unusual “carrot and stick” approach to workers unemployment, which, judging solely by the numbers, have produced wondrous results.

“For instance, if an unemployed worker does not comply with the rules of the unemployment insurance system, because of insufficient search efforts, fraud, or an unwillingness to participate in a training program, the worker can be sanctioned and have jobless benefits temporarily reduced. These sanctions are generally intended to encourage the unemployed to search with more diligence,” he said.

“Also, if you have been unemployed for as long as a year, the government will encourage you to accept a part-time job or one that pays a lower salary – and they will cover part of the discrepancy in salary.”

Bronars points out, ironically, that while the U.S. government is considering extending unemployment insurance, the Dutch (long regarded as a quasi-Socialist welfare state) has been doing the opposite -- reducing and the maximum amount of time one can collect unemployment.

“To get unemployment benefits for half-a-year [26 weeks], a Dutch person would have had to have worked at least four out of the last five years,” he said. “Thus, to get 99 weeks of unemployment benefits (the maximum allowable in the U.S.), one would have to have been employed for 21 years. This means that our current system of extended benefits in the U.S. has fewer restrictions and rules than the Dutch system.”

Thus, in the Dutch paradigm, the government seems to have adopted a “tough love” approach to unemployment. They punish people for not working, and reward them (and their companies) for working.

“This has been made possible through the tri-partite concerted action by organized interests (unions and employers) and government of whatever ideological complexion,” Keman said.

The Dutch appears to have a more hands-on attitude towards their workforce.

“They spend the most per capita among the advanced countries in trying to get unemployed workers counseling and re-training,” Bronars said.

However, not everything is rosy with the Dutch labor markets and, in some cases, the attractive employment figures might also be pumped by some ‘fudging’ of data.

Consider the rise of female participation in the workforce (which has occurred concurrently with a huge rise in part-time workers). Although the government generally subsidizes part-time employees in part (to make up for the hours they are “missing”), these people are fully counted as being “employed” (whereas in some other countries, they may not be).

In fact, Keman indicates that anyone who works more than 28 hours is automatically counted as “full time.”

It is estimated that about one-quarter (25 percent) of the Netherlands’ work-force is employed part-time – itself a result of efforts by the government and unions to reduce work hours in order to save jobs.

Moreover, wage growth in Holland is rather stagnant -- Keman points out that the salaries of state employees have not risen at all in recent years; and has climbed only moderately in the private sectors.

“There is a minimum wage in Holland, but the dispersion of income is far more limited there than in the U.S.,” Bronars said. “But this is true for many other European countries as well.”

Also, in what may be unique to Holland, there is a very high rate of disability among the workforce – perhaps as much as 12 percent. Although benefits for the disabled has been reduced since the 1980s and 1990s, many companies would rather put an employee on disability if they can’t fire them.

In addition, the Dutch pay very high taxes – which they seem resigned to if they want to maintain high employment and superb social services.

Yet, as OECD figures show, Keman commented, “the welfare state has been reduced since the mid-nineties in terms of entitlements and expenditures.”

Kemans also indicates that Norway and Switzerland (which are not members of the EU) also enjoy very low unemployment, so the Dutch example is hardly unique in Europe.

Bronars concludes that while much of the Dutch labor market system may not be transferable to countries with high unemployment (particularly much larger, more complex economies like the U.S.), its success bears a closer examination.

Keman's view is that Holland’s concerted tri-partite model -- like in Germany, Switzerland and Scandinavia – is quite unique and difficult to copy, however parts of its policy measures may well work elsewhere.

“It’s too early to say what parts of their labor market reforms have worked, and which haven’t.” Bronars said.

“But given the Dutch success, I think it’s worthwhile to consider what parts of their system might be adaptable to countries like the U.S., Spain and U.K. which are coping with high joblessness.”