Exit Polder Model?: Socioeconomic Changes in the Netherlands

EXIT POLDER MODEL? Socioeconomic Changes in the Netherlands

Lei Delsen

PRAEGER

EXIT POLDER MODEL?

EXIT POLDER MODEL? Socioeconomic Changes in the Netherlands

Lei Delsen

Library of Congress Cataloging-in-Publication Data Delsen, Lei, 1952Exit polder model?: socioeconomic changes in the Netherlands/Lei Delsen. p. cm. Includes bibliographical references and index. ISBN 0-275-97700-5 (alk. paper) 1. Netherlands—Economic policy

2. Netherlands—Social policy.

HC325 .D386 2002 330.9492—dc21

2002067946

British Library Cataloguing in Publication Data is available Copyright © 2002

by Lei Delsen

All rights reserved. No portion of this book may be reproduced, by any process or technique, without the express written consent of the publisher. Library of Congress Catalog Card Number: 2002067946 ISBN: 0-275-97700-5 First published in 2002 Praeger Publishers, 88 Post Road West, Westport, CT 06881 An imprint of Greenwood Publishing Group, Inc. www.praeger.com Printed in the United States of America

The paper used in this book complies with the Permanent Paper Standard issued by the National Information Standards Organization (Z39.48-1984). 10

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I. Title.

Contents

Illustrations

vii

Preface

xi

1

Introduction

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2

Successes of the Polder Economy

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3

Drawbacks to the Polder Model

51

4

Flexibility in Dutch Work Organizations

83

5

Costs and Benefits of the Consultative Economy

109

6

The Dutch Welfare State

135

7

The Dutch Pension System

161

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Does the Polder Model Have a Future?

185

Bibliography

209

Index

225

Illustrations

FIGURES Figure 1.1

The Dutch Consensus Economy

15

Figure 2.1 Core Figure of the Collective Sector as a Percentage of GDP, 1982–2000

26

Figure 2.2

28

Labor-Income Share of Companies, 1979–2000

Figure 2.3 Development of the Number of Jobs of Employees by the Kind of Labor Contract, 1987–1999 (1987
100)

41

Figure 2.4 Unemployed Labor Force and Registered Unemployment as Percentages of the Labor Force, 1982–1998

43

Figure 3.1 People Receiving an Unemployment Benefit Expressed as a Percentage of the Labor Force, 1982–1998

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Figure 3.2 Net Minimum Benefit Expressed as a Percentage of the Net Average Wage, 1979–2000

75

Figure 4.1

84

Forms of Flexible Labor Input

Figure 5.1 Decentralized Bargaining and Investments in Human Capital

110

Figure 5.2 Number of Applications to RDAs for a Dismissal Permit and Requests for Dissolution Dismissal by the District Judge, 1980–1998 (in Thousands)

131

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Illustrations

Figure 6.1 Social Security Share (Excluding Health Care Sector) as a Percentage of GDP, 1980–1998

144

Figure 7.1

162

Old-Age Dependency Ratio, 1990–2050

TABLES Table 2.1

Table 2.2 Table 2.3

Annual Growth of Compensation per Employee and Unit Labor Costs in the Business Sector, 1983–2000 (Percentage Changes from Previous Period)

30

Average Mortgage Interest Rate and Number of New Mortgages on Dwellings in the Netherlands, 1995–1998

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Annual Growth of Employment and of the Labor Force, 1983–2000 (Percentage Changes from Previous Period)

40

Table 2.4

Standardized Unemployment (Percentage of the Labor Force) and Share of Long-Term Unemployed in Total Unemployment, 1985–1998 44

Table 2.5

Public Expenditure on Passive and Active Labor-Market Programs as a Percentage of Gross Domestic Product, 1985–1998

46

Table 2.6

I/A Ratio (Benefit Recipients/Employed), 1980–1997

47

Table 2.7

Number of One- and Two-Earner Households, SinglePerson Households, and Remaining Households, 1977–1997 (in Thousands)

48

Employment-Participation Rate Expressed as Full-Time Equivalents, 1985–2000

56

Number of Paid Overtime Hours Worked by Employees Divided According to Terms of Engagement, 1987–1997

57

Number of Hours Worked per Week in the Main Job in Several EU Member Countries (Percentages) during the Period 1995/1996

58

Employees Who Work under Pressure in Several EU Member Countries

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Increase in Number of Jobs in the Netherlands According to Type of Employment (in Thousands), 1987–1999 (First Quarter)

62

Table 3.1 Table 3.2 Table 3.3

Table 3.4 Table 3.5

Table 3.6 Table 3.7 Table 3.8 Table 3.9

Illustrations

ix

Job Duration and Job Mobility in Several EU Member Countries and the United States, 1985, 1991, and 1995

65

Average Annual Growth in Labor Productivity of Persons, 1970–1998 (Percentages)

67

Decomposition of Growth Rates of Real GDP per Capita from 1987 to 1994

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Developments in Differences in Income, 1975–1995

71

Table 3.10 Households with Income Less than 50 Percent of the Average Income in Several EU Member Countries in 1993 (Expressed as a Percentage in Each Type of Household)

76

Table 3.11

Environmental Pressure in the Netherlands, 1990–1992

79

Table 4.1

Working Irregular Hours by Employees in 1992 and 1997

87

Table 4.2

Types of Jobs of Employees, 1988–1998

89

Table 4.3

Internal Job Mobility by Organization Size in the Netherlands (as a Percentage of the Number of Employees), 1988–1998

94

Remuneration Flexibility in the Netherlands by Staff Category

96

Table 4.4 Table 4.5

Employer’s Costs and Revenues of Permanent Part-Time Workers and Temporary Workers Compared with Permanent Full-Time Workers

102

Table 4.6

Sources of Payment for Training (Percentages)

104

Table 5.1

Training of Employed Adults (Age 30 or Older) According to Age in 1996 (in Percentages)

114

Effect of Collective Negotiations on Wage Rate (in Percentages)

119

Differences in Wages between Sectors, 1970–1990 (Coefficients of Variation)

122

Nominal and Real Wage Flexibility in Several Countries, 1965–1985

123

Numbers of Applications for Individual Dismissal Permits, 1992–1997

129

Gross and Net Public Expenditure on Social Security (Excluding Health Care), 1993 (in Percentages of Gross Domestic Product)

144

Table 5.2 Table 5.3 Table 5.4 Table 5.5 Table 6.1

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Table 6.2 Table 6.3 Table 7.1

Table 7.2 Table 7.3 Table 7.4 Table 8.1 Table 8.2

Illustrations

Standardized Sick Leave and Disability, 1990 and 1995 (in Percentages of the Labor Force)

145

Volume Development of Sick Leave and Disability, 1993–2000 (in Percentages of the Labor Force)

148

Participation Rates, Number of Pension Recipients, and Accrued Pension Capital in the Second Pension Pillar in Several Countries

167

Pension Funds Divided by Type of Pension System, 1993 (in Percentages)

168

Male Benefit Recipients in the Age Group 55 to 65 per Allowance (in Thousands)

179

Employment/Population Ratios of Older People (55 to 64), 1979–2000

180

Judgement of Several Social Security Systems in the Netherlands, 1993

202

Simulation Results of Proposal

206

Preface

The polder model (poldermodel) refers to a unique Dutch combination of policies, culture, and institutions. “The Netherlands is the paradise-like ideal of the world, the way each country would like to be, so peaceful, so democratic, tolerable, prosperous, and structured, but also equal, local and boring, although this has seemed to change the last couple of years.” This statement is made in the novel The Discovery of Heaven by the Dutch author Harry Mulisch (1996:506). Not only is the Dutch model praised in literature, but also the national and international media have lauded the implemented policy and the recent changes of institutions in their socioeconomic news coverage. Policy makers look upon the Netherlands as a guiding example. The Dutch polder model and Dutch institutions in particular are in the center of policy and scientific interests at this time. Not only in continental Europe, but also in the United Kingdom and the United States, the Dutch model is seen as an example of the much discussed third way. It is widely believed and argued that the Dutch experience shows that welfare states are flexible enough to adapt to new circumstances and that the Dutch approach and its results constitute a clear case of policy learning. The adaptive welfare state and the so-called Dutch employment miracle are considered an example for European economic policy making in the European Union (EU) to reduce long-term unemployment. The polder model has become an important export product of the Netherlands, next to flowers and vegetables. This book aims to refute a number of persistent myths and misunderstandings concerning the polder economy, both in the Netherlands and in other countries. In the book, I critically discuss and review the theoretical and empirical relationship between changing Dutch economic institutions and Dutch socioeconomic policy over the past two decades and Dutch socioeconomic per-

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Preface

formance. A comparative institutional economic analysis of Dutch policy and institutions is applied to explain the performance of the Netherlands, relative to other countries. The United States, the United Kingdom, Germany, Sweden, Belgium, and the EU average are used as benchmarks. Attention has been paid to addressing the most important socioeconomic and legal aspects of the polder model in a coherent way. An effort has been made to establish the right dosage of theory, institutions, and practice. Next to a retrospective view of the socioeconomic developments and policies in the 1980s, a number of recent socioeconomic developments and the socioeconomic policy implemented by the present “purple” government are analyzed and reviewed. The theoretical basis and the practical considerations that have played a part in motivating the implemented socioeconomic policy and the institutional “innovations” are examined. Also, the effectiveness of this policy and these institutional changes is determined. Because of its multidisciplinary approach, this book is suitable for lecturers and students in economics, law, and sociology and for politicians and policy makers who are interested in the theory and practice of Dutch socioeconomic policy. The present book is a slightly revised and translated version of Exit poldermodel? Sociaal-economische ontwikkelingen in Nederland published by Van Gorcum (Assen, 2000). During the writing of this book, I have profited from my tutoring experience at the University of Nijmegen. I would like to thank my immediate colleagues within the Nijmegen School of Management of the University of Nijmegen for their comments on parts of this book.

1

Introduction

FROM DUTCH DISEASE TO DUTCH CURE In the 1970s and early 1980s, the Dutch economy performed poorly compared with other European economies. As a result of the two oil crises of 1973 and 1979/1980, considerable increases in wages, and an expansionist policy, inflation increased, economic growth and the growth in employment slowed down (stagflation), and the welfare state expanded. Initially, these expansions were financed by the increasing income from natural gases, but soon tax increases became necessary and a vicious circle was formed (the Dutch disease), resulting in low growth, high unemployment, considerable governmental interference, and a high tax burden and high social security contributions, despite the income from natural gases. In the 1980s, the Dutch economy was regarded as an example of “Eurosclerosis.” At the time, this viscosity was primarily blamed on the consultative structure. Therborn (1986) attributed the dramatic decrease in employment to the paralyzing effect of bipartite and tripartite consultative institutions such as the Foundation of Labor (Stichting van de Arbeid—STAR) and the Social-Economic Council (Sociaal-Economische Raad—SER), which failed to generate sufficient commitment for the necessary crisis management. However, times have changed. Nowadays, the Foundation of Labor is praised as an institution because it enabled the famous Wassenaar Agreement to be concluded in 1982. In 1997, the Foundation of Labor was awarded the German Carl Bertelsmann Prize in recognition of the Dutch polder model. The Dutch economy is currently in the international spotlight once again. Excellent macroeconomic results, which are above the European Union (EU) average, have drawn attention from abroad. This is due to relatively high economic growth, the significant increase in employment, low inflation, the reorganiza-

2

Introduction

tion of government finances and the welfare state, and limited inequality in income. The Netherlands is currently considered an example for other countries. The creation of the European Economic and Monetary Union (EMU) has played an important role in this respect. Countries were forced to adapt their welfare state and socioeconomic policy in order to comply with the convergence criteria for entry into the EMU. Unlike countries such as Belgium, Germany, and France, the Netherlands succeeded in reaching consensus at a central level. The Dutch collective-bargaining economy is scoring relatively well and has encountered relatively few problems in complying with the criteria laid down for entry into the EMU. An important reason for this is that the necessary adaptations of policy had already been implemented in the 1980s. Since 1983, the Netherlands has acquired experience in a type of monetary union. In that year, the Dutch guilder was pegged to the German deutsche mark. This reduction in monetary autonomy and the absence of the exchange-rate instrument created the need not only for a flexible labor market to cushion any eventual negative economic shock, but also for a policy of wage restraints to escape from the deep economic crisis of the early 1980s. The recessions in the 1970s had a more profound effect on the Netherlands than on other European countries. The economic situation in which the Netherlands found itself at the start of the 1980s was very dramatic. Unemployment soared due to negative economic growth and the absolute drop in employment. In 1982, standardized unemployment reached 11.4 percent, well above the European Union average (EU 15, 8.9 percent) and twice as high as the figure of its main trading partner, Germany (5.9 percent). In addition, 60 percent of all unemployment was long term—periods of unemployment exceeding 12 months. The profitability of Dutch business reached an all-time low: in 1981, the labor-income share of companies reached a peak of almost 80 percent. In 1982, the government budget deficit totaled 9.5 percent of the gross domestic product (GDP), and the longterm interest figure reached nearly 10 percent. Trade unions, weakened by this major economic crisis, were forced to moderate their wage demands by the Lubbers government, which threatened to take action with respect to wages, as well as by the Dutch central bank, the Netherlands Bank (De Nederlandsche Bank—DNB), which linked the Dutch guilder to the German deutsche mark. The government backed this policy by cutting government expenditure, reducing the tax burden, and allowing deregulation and market working. In other words, policy adaptations and institutional changes in the Netherlands during the 1980s were based partly on autonomous considerations in the country itself and not in Europe in general. From 1985 onwards, employment increased significantly (CPB 1997c:32–33). During the period 1985–1997, the number of jobs, including “minor” part-time jobs, increased from 5.5 million to 6.9 million, an average annual increase of 1.6 percent. During the same period, the total number of jobs in the 15 EU member states increased by 0.2 percent annually.

Introduction

3

Many EU member states have experienced problems with the adaptation process in the light of the European Economic and Monetary Union and the introduction of the euro in January 1999. As a result of the EMU, the socioeconomic policies of the member countries will converge. The economic and institutional structures of these countries differ considerably. Adapting these structures is a long-term process. The question that could be asked is the direction in which the convergence of the economic order will occur. According to Albert (1993), a distinction can be made between the Rhineland model and the Anglo-Saxon model of market capitalism. The “new balance” is expected to be more similar to the Anglo-Saxon model. The economic union has mainly been the result of negative integration: national protection constructions and trade barriers are abolished, allowing the market to function. Less space is being allocated in Europe to a “demand-side policy,” which is becoming increasingly ineffective. Policy competition via the supply side, on the other hand, is becoming increasingly important at national, regional, and local levels. This implies that structural policy and institutions are increasingly becoming the means to attain competitive advantages. The resulting policy competition has two dimensions, one positive and one negative (Dercksen 1996:111–112). Negative policy competition involves deregulation and “flexibilization,” abolishment or “relaxation” of protective regulations, including privatization, and reduction of the public sector and concerns reduction of costs. Positive policy competitions involves constructive measures aimed at improving the investment climate, such as investment in the material and immaterial infrastructure. Positive and negative policy competitions are at odds with each other. Social cohesion and stability are conducive to the investment climate. The welfare state also plays a positive role in this respect. Social policy at a European level also demands positive integration. The social climate is often excluded in economic analyses and is often undeservedly overlooked by politicians during the reforms of national welfare states (NYFER 1997). A recent study conducted by Hall and Jones (1999) revealed that differences in the social infrastructure determine disparities in countries with respect to the accumulation of capital and productivity and therefore the output per worker. This means that institutions and government policies issue certain positive and negative stimuli to individuals and companies. A sound social infrastructure means that the private and social yields of productive activities are similar. This stimulates productive activities such as the accumulation of skills and knowledge or the development of new products or production techniques. The government is able to protect economic agents against theft, dispossession, and corruption. This also requires taxes with a disruptive effect to finance this social infrastructure. Social policy at a European level has not yet been given shape since national governments still have to transfer substantial powers to the European decisionmaking structure. Consequently, the danger of “social dumping” is not merely hypothetical. Social dumping refers to dishonest competition between national

4

Introduction

systems. Since a large part of labor costs in continental Europe comprises taxes and premiums, there is a direct relationship between the macroeconomic competitive position and social protection. This definitely is the case in the Netherlands, which has a small open economy, high collective expenditure, and a high tax burden and total of social security contributions. In 1982, the collective expenditure and the tax and premium burden amounted to 58.4 percent and 46.7 percent, respectively, of the GDP. Moreover, much of the success of the polder model can be attributed to this negative policy competition. Reorganization of government finances played a central role not only in the three Lubbers governments (1982–1992), but also in the two Kok governments (1994–present). The presidents of the central banks of Belgium, France, and Germany have praised the reorganization of the institutional structure in the Netherlands. Also, central bankers in the United States have praised the adaptability of the Dutch model. Belgian, French, and German politicians consider the constructive role of the Dutch unions and the strong growth of part-time employment to be exemplary. The Dutch policy of wage moderation is viewed as a cure (the Dutch cure) for the European problem of unemployment and as an alternative to the Anglo-Saxon model. According to influential foreign newspapers and magazines such as Le Monde, Die Zeit, the Financial Times, and the Economist, the Dutch model shows that the adaptation of the labor market and the system of social security can have a positive effect on employment without increasing social differences, as is the case in the United Kingdom, or creating social unease, as is the case in France (Delsen and De Jong 1998; Visser and Hemerijck 1997). In other words, the Dutch experience reveals that the welfare state can be flexible enough to adapt to new circumstances and that complying with EMU criteria can go hand in hand with social policy and increasing employment. Synonyms for the Dutch model include the tulip model, the delta model, and the polder model. The tulip model refers to a Dutch export product known around the world. The delta model refers to the fourth letter in the Greek alphabet—the symbol for change—as well as to the estuary called the Rhine Delta (Geelhoed 1997). The term polder model is used in this book. Apart from appealing to the reader’s imagination, the term also characterizes the Dutch culture and refers to the role of economic institutions. The attention paid to consensus and solidarity and the emphasis placed on the accomplishments of the Dutch culture are often associated with the small community, the polder, which has resisted the rapidly rising waters. Water makes everyone equal. Dikes form a polder. Institutions can be regarded as the dikes of the markets (Waarden, F. van 1995). They improve the market’s efficiency by reducing the uncertainty and in turn the transaction costs. While other countries applaud consultative institutions, the Dutch consider these institutions and the social security system to be incompatible with the rapidly changing environment. Examples of such surroundings are the internationalization of economies and the individualization of societies (Van der Geest and Van Sinderen 1995; Dutch Ministry of Economic Affairs 1995, 1997). Dereg-

Introduction

5

ulation and the withdrawal of the government are regarded as the only correct answer to this changing environment. The Netherlands has to choose between consultation and coordination or market working and competition (Wolfson, D. J. 1994). P. Korteweg argued in the Dutch newspaper NRC Handelsblad (July 10, 1993:9) that the Netherlands requires a “fighting economy” to solve its problems. The government should only take care of matters that cannot be dealt with by markets and people; the rest should be left for the market to handle. The first “purple” cabinet (named after the mixture of the blue liberals and red socialist political parties, 1994–1998) launched the project “Market working, deregulation, and quality of legislation” (Marktwerking, deregulering, en wetgevingskwaliteit—MDW project). The second purple cabinet (1998–present) has extended the MDW project. The aim of the project is to improve competition in markets and to formulate fewer and improved regulations. The Dutch economy is expected to perform better, leading to an increase in the level of prosperity and employment (ESB Dossier MDW, 1998). From a neoclassical economic perspective, additional market working—additional competition—results in improved allocation and therefore increased efficiency. The concept of market working, as used in the MDW project, has a normative meaning. This means that increasing transaction costs resulting from increased competition are not taken into consideration. The classical idea of the “perfect” market—in which institutions and regulations have a disruptive effect—as a basis for the socioeconomic policy that is to be pursued is outdated for practical and theoretical reasons. Overconfidence in market working can undermine the social cohesion of society. In today’s knowledge economy, the price mechanism is only partially implementable. Some markets can be overrated. The assumption that competition and flexibility are the keys to solving the problem of unemployment disregards the fact that knowledge-based work is a social process that can only flourish within a stable, coherent society. In a society characterized by polarized development, it is far more difficult to generate the confidence required to enable the knowledge economy to perform efficiently (Klamer, Van der Laan, and Prij 1997). In an economy with perfect employment contracts, companies need not worry about how they should motivate their employees. In practice, “incomplete” contracts are the rule rather than the exception, and mutual trust between the employer and the employee is an important source for motivation and commitment. This leads to wage rigidity, but can also be looked upon as an “invisible handshake,” which is profitable for both the employer and the employee (Agell 1999). The scientific foundation of the argument for additional market working is also rather weak. Kuipers (1995) concludes that rigidity in wages and prices is not necessarily a symptom of insufficient market working. Markets are never “perfect,” which is not due to institutions and conventions that reduce uncertainty, but to uncertainties connected to the exchange itself. Rigidity in wages and prices (contracts) decreases these uncertainties and thus improves market working in such a way that all market parties will be able to improve the results

6

Introduction

of the exchange. Contrary to neoclassical theory, these institutions and conventions increase economic stability. Networks of social relationships between players are also important. They form the basis for trust and discourage misbehavior. As a result, uncertainties and transaction costs decrease. Policy makers who point out that these institutions and conventions disrupt free-market enterprise are not fully aware of this. They usually refer to the general equilibrium theory, where complete price or wage flexibility generates the best solutions by definition. In reality, complete flexibility is a deceptive concept. Who would like to stand at the gates of a factory on a daily basis prior to starting work to negotiate, depending on supply and demand of labor, about wages and the required amount of work? After all, this is what complete flexibility entails, but prohibitively high transaction costs are also involved. Van Waarden (1995) is correct in wondering when the Netherlands will breach its dikes.

THE BATTLE OF THE MODELS Production costs occupy center stage in the neoclassical analysis. Contrary to this, institutional economic theories emphasize transaction costs, the costs required to keep the economy afloat. Another contradiction to the simple neoclassical paradigm is that information is neither free nor immediately available. The existence of transaction costs implies that contracts are “incomplete.” It is impossible to record all possible future circumstances in advance, in other words, before economic agents decide to make relation-specific investments. This may lead to opportunistic behavior on the part of contracting parties after a specific investment has been made, resulting in a holdup problem: specific investments will not be made since the one party fears that the other party will force it into accepting less favorable contract terms. Institutional economic theories acknowledge the fact that information is less than perfect. Lack of information leads to coordination problems. Institutional economy assumes that economic agents are rationally restricted by “bounded rationality” (Williamson 1985). Bounded rationality means that individuals are rational, but are only capable of receiving and processing information up to the limit of their capacities. People cannot anticipate and monitor everything. In other words, market results are determined not only by incomplete information, but also by the inability of people to process all information. Asymmetrical information may cause market parties to exploit their information advantage. Such opportunistic behavior leads to uncertainty and inefficiency. This in turn results in the development of behavioral norms, rules of thumb, or social conventions geared towards the reduction of energy required for processing new information and for neutralizing opportunistic behaviors. An economic order can be defined as the network of relations that coordinates the economic process—all transactions of separate economic subjects. Apart from the coordination mechanism, an economic order is also characterized by its in-

Introduction

7

stitutions and the behavior of economic subjects. Institutions are “the humanly devised constraints that structure human interaction” (North 1994:360; see also Van der Lecq 2000:129). These institutions are related to formal legislation, jurisprudence, and organizational structures as well as to customs and informal codes of behavior. A convention is a self-maintaining norm; an institution requires a sanctioning authority. In economics, this primarily involves formal and informal regulations related to transactions and contracts. Many of these regulations refer to the transfer and safeguarding of proprietary rights and sanctions in case contracts are not observed. Standards and values ensure that institutions perform properly and determine their operation and shape. Stable or self-maintaining systems of norms form the point of departure for explaining the institutional differences between countries. In principle, there are two coordination mechanisms available: economic transactions of the subjects are tuned via price determination on the market (trade economy) or by means of regulations from the top (state-planned economy). In the case of coordination via the functioning of the price mechanism, the individual perspective is central. In the case of coordination by the government or state, collectivism is central. These types of economic order do not exist in a pure form. Both the market and the state can fail. Like a hybrid, the economic order essentially manifests itself in two coordination mechanisms, namely, the market mechanism and the budget mechanism. If society is intent on doing something about the failures of the market, it often refers to the public sector or budget mechanism. This is how the welfare state is created. But even the welfare state can fail (Wolfson 1988:302). From an economic point of view, the consensus economy is also a mixed economic order, one in which there is a third coordination mechanism, namely, discussion and consultation, in addition to the market and government. For example, consultation between employer organizations, employee organizations, and government enables these three bodies to shape socioeconomic policy. In particular, product markets, production organizations, consumer organizations, and the government discuss matters such as quality requirements and prices. Tripartism and corporatism are relevant terms in this context (Slomp 1996). Tripartism comprises regular contacts between a limited number of representative national organizations of employers and employees and national government in order to discuss socioeconomic matters such as labor legislation, taxation, social security, and employment policy. Wage policy is the main topic discussed during these meetings. Corporatism is a far broader term that comprises not only tripartism, but also labor relations characterized by tripartism and social partnership between trade unions, employers, and national government. Corporatism involves a common effort to shape and implement national socioeconomic policy by labor unions, employer organizations, and national governments. Corporatism’s ideological roots can be traced back to the Roman Catholic Church in the late nineteenth century, which strove for a social organization bordering on capitalism and socialism. Social organizations of employers and

8

Introduction

employees strive for cooperation and coordination at national, sectoral, and company levels instead of focusing on the contradiction between capital and labor. In line with the theory of the optimal economic order, the Dutch economist and Nobel Prize laureate Jan Tinbergen developed his convergence theory. He argued that in the long term West trade economies and East state-planned economies would converge (Tinbergen 1959). The collapse of the Berlin Wall put an end to this discussion. Albert (1993) has turned this discussion into a battle between different forms of capitalism: the Anglo-Saxon model versus the Rhineland model.1 Freeman (1998) even refers to “a war of the models.” Belgium, the Federal Republic of Germany, and the Netherlands represent variants of the Rhineland model. The Rhineland model is based on the assumption that institutions exist to cushion a failing market. Moreover, instead of an adverse effect, these institutions have a positive effect on economic results. This model is characterized by its relatively high degree of government intervention, an extensive welfare state, and tripartism—its main coordination system. Discussion, particularly at the sectoral level, that is, within branches of industry, is often used instead of conflicts. The control structure within companies, the influential role of commercial banks, and the modest role of stock-market capital enable these countries to focus on long-term goals and mutual interests. The Rhineland model views a company as an organizational unit. According to Van den Toren and Vos (1997:103–113), the core of the Rhineland model comprises a horizontal decision-making structure, organized decentralization, orientation towards social problems, solidarity goals, and the ability to learn. The United States and the United Kingdom are examples of the Anglo-Saxon model. This model is known for its relatively low degree of government intervention and a limited welfare state. The market functions as a coordination mechanism, and the countries focus on short-term goals. The Anglo-Saxon model is based on the assumption that the correction of market imperfections will lead to new imperfections and rigidities. Regulations are regarded as restrictions for the individual, preventing him/her from competing with other market players to his/her own advantage, and therefore from serving the public interest. Government intervention is the last resort. The Anglo-Saxon model regards the company as a commodity that the owner, the shareholder, can make free use of. The Anglo-Saxon model and the Rhineland model differ not only with respect to financiers and managers, but also in the relations between the company and other parties on the market, such as employees and suppliers. In this context, the Anglo-Saxon model is also referred to as “shareholder capitalism,” whereas the Rhineland model is referred to as “stakeholder capitalism.” Rhineland economies are consensus economies; Anglo-Saxon economies are called free-market economies. Comparative studies of the relationship between institutions and economic results have concluded that the Rhineland model and the Anglo-Saxon model do not actually exist (Delsen and De Jong 1998). Significant differences between institutional design and economic results exist within these models. Countries with similar institutions show different eco-

Introduction

9

nomic results, while countries with different institutions show identical economic results. This is mainly due to cultural differences: the effectiveness of institutions is, in large part, connected to the cultural values in a society. None of the models are dominant all the time and everywhere. They are not dominant all the time since the preference for a particular economic system depends on specific economic circumstances. They are not dominant everywhere since the characteristics of economic institutions are a reflection of the cultural values of that country. This indicates that every country has its own model. The polder model is the example model at this time. Many other socioeconomic models have already preceded the Dutch model, for example, the French “Marianne model” in the 1960s and the Swedish model in the 1970s followed by the Japanese model. In the mid-1980s, it was the turn of the United States and the United Kingdom with their Anglo-Saxon model. In the early 1990s, the New Zealand “kiwi model” and the Danish “lego model” served as examples.

CHARACTERIZING THE POLDER MODEL The polder model is not a constructed model, but rather the result of a historical developmental process. It refers to a unique Dutch combination of policies, institutions, and culture. In accordance with policy, the polder model can be characterized as a collaboration between employers, employees, and government in order to tackle socioeconomic issues. The Wassenaar Agreement of 1982 is commonly, though wrongly, as we will see, regarded as the beginning of the polder model (Bout et al. 1999; Vos 1999; Visser and Hemerijck 1997). The Dutch have discovered that three conditions are required to reach consensus at a macro level (Van den Toren and Vos 1997; Visser and Hemerijck 1997): problem acknowledgment, institutions, and a cultural basis. These conditions were satisfied in the Netherlands in the early 1980s. The common “problem definition” (a dramatic increase in unemployment levels) was emphasized. The existing institutional structure was used and modernized at the same time, while the socioeconomic culture, based on solidarity, discussion, and consensus, formed a breeding ground for the policy of moderation. An agreement was not reached in 1979 due to opposition of the Netherlands Trade Union Confederation (Federatie Nederlandse Vakbeweging—FNV), the largest and most influential Dutch trade-union federation. It took three hard years to conclude the Wassenaar Agreement, named after the village of Wassenaar near The Hague where the accord was signed. This illustrates the difficult negotiation process required to reach an agreement, despite the notion of consensus. The goal of the Wassenaar Agreement was the restoration of profitability to increase employment, which led to a breakthrough. Free wage negotiations are the essential point of this agreement: the market takes care of moderation, while restoration of profitability and redistribution of labor are explicitly taken into consideration. At the same time, the government’s role is reevaluated. Wherever possible, social partners try to resolve employ-

10

Introduction

ment-related issues, labor conditions, and wage increases among themselves. On the one hand, the government undertakes to intervene in the discussion as little as possible, while on the other hand, it pursues a financial-economic policy that provides tax and social security contribution cuts to social partners to reward them for their discipline. According to Katzenstein (1985), small European countries, such as the Netherlands, have stronger motives and better conditions for policy coordination. The openness of the economies, their dependence on exports, and the fact that they are not able to control economic changes create the sense of vulnerability. This results in centralized national consultation bodies geared towards maintaining social peace and improving economic progress. Forced adaptation to the world market has resulted in institutional cooperation between the government and social partners. This is why wage moderation is often used in smaller European countries exposed to world markets. This has stimulated centralization of wage negotiations as well as institutional relationships aimed at wage moderation. In these small countries, wages are considered a cost factor, not a demand factor, on the one hand, because the effect of higher wages partly disappears abroad via imports, on the other hand, because this also has a negative effect on exports. Wage agreements therefore have more the development of productivity as a guide. The persistent policy of wage moderation is often regarded as an essential part of the polder model (see Delsen and De Jong 1998; Theeuwes and Van den Toren 1998; Vos 1999). In a broader sense, the polder-model policy refers to an integrated policy of wage moderation, a reduction in the tax and social security contribution burden, a reduction in collective expenditure, and the linking of the Dutch guilder to the German deutsche mark (Baartman and Van de Kerkhof 1997; Pallada 1999). Watson et al. (1999) correctly point to the fact that the policy pursued is neither a Dutch miracle nor uniquely Dutch. It was a standard solution for existing problems in the 1980s that is mentioned in every textbook on economics. Experience acquired in the Netherlands clearly shows the mutually reinforcing influence of the relatively orthodox reforms, both macroeconomic and structural, and that this effectiveness was positively influenced by the broad base of support. This broad base enabled this policy to be pursued for a long period. This is what makes the Dutch policy so special. The experience acquired by the Dutch with respect to the quasi-monetary union—the linking of the Dutch guilder to the German deutsche mark—also provides a number of important lessons for other EMU member states. A well-coordinated implementation of the policy in the Netherlands was essential for its success, which led to the strong complementarity of several policy components, thereby increasing their effectiveness. This is indicative of the importance of the Dutch culture and, in turn, of the importance of consultative institutions. Consultation and cooperation between government and social partners have been essential for effective reforms. Harmonious labor relations also contributed to the success. The polder model, consultation and cooperation, not

Introduction

11

only contributed to wage moderation but also contributed to industrial peace. No other Western country loses so few days to strikes and other industrial conflicts as the Netherlands. In the period 1982–1993, the Netherlands lost an annual average of 17 days per thousand employees due to strikes. In comparison, Germany lost 19 days, the United States 78, Sweden 97, and the United Kingdom 109 (Van de Meerendonk 1998:109). Indeed, strikes are not very compatible with conditions aimed at reaching consensus. All the same, some measures have led to strike action. This occurred not only in 1983, shortly after the Wassenaar Agreement was concluded, but also when the Lubbers government intervened in the Disability Insurance Act (Wet op de Arbeidsongeschiktheidsverzekering—WAO) in 1991. In 1995, the Netherlands endured the longest strike by construction workers since the Second World War. Points of dispute included the margin for wage increases, retention of the voluntary earlyretirement scheme (Vrijwillige Vervroegde Uittreding—VUT), restrictions on remuneration for overtime, and the conclusion of extralegal arrangements at an industrial level (Vos 1999). Even though Dutch economic policy might not be as unique as it is often considered to be, Dutch institutions are. The Dutch economic order is unique in the world. The unique institutional characteristics of Dutch society apply to labormarket institutions in particular. The institutional differences between countries can be traced back to cultural differences. Culture can be described as the collective “mental programming” of people in a society. This culture serves as the basis of the economic order (Jeurissen 1997:52–53). The rationality of the existing institutions can therefore be sought in the Dutch culture. Institutions are formed in such a way that all participants benefit. If the interests of a particular group are not promoted by the regulations of the institutions, they will be changed in the course of time. In other words, institutions will only survive if they are beneficial to society. As long as they are beneficial, they will continue to exist since it is in the interests of everyone that they be preserved (Muysken 1998). The polder model is deeply rooted in the consensus-oriented culture of the Dutch, in which consultation plays an important role. The Dutch culture is also very individualistic. In the Netherlands, consensus is often used to reconcile an individual and the community. The Dutch like negotiating and are prepared to make concessions, sometimes even at the cost of their own cultural values. But they do think analytically (Hampden-Turner and Trompenaars 1995). Another characteristic of the Dutch culture is the importance that is attached to solidarity and equality. Intercultural research carried out by Hofstede (1980) shows that the Netherlands is one of the most “feminine” countries in the world. The emphasis is placed on cooperation and consensus between heterogeneous parties concerned (stakeholders) and on an equal division of income and power. Organized solidarity and decentralization exist in the Netherlands. Consultation at a central level between the government and social partners forms an essential part of the Dutch polder model. The International Labour Organization

12

Introduction

(ILO) attributes the success of the polder model to the centralized wage negotiations (Vos 1999). The agreements reached at the macro level have an effect at the meso level of labor conditions, social security, pensions, and education. The meso level facilitates and structures the decision-making process and implementation at the company level. This is done via regulation and policies as well as via social partners. Such multistage coordination enables decentralized flexibility to be embedded in macroeconomic considerations. Consultation at a central level internalizes external effects. According to Van den Toren and Vos (1997), this organized decentralization— the harmonization between national, industrial, and company levels—is the basis of the Dutch model. Vos (1999) also characterizes the polder model as directed decentralization. The directing is mainly done at a central level. Such a structure, combined with the absence of major ideological conflicts, improves the adaptation of Dutch policy to changing conditions. That is how the ability to learn is created, in which not only the content of the policy but also the institutional structure changes. Policy learning is related to the conscious and considered strategy to adapt goals, instruments, and policy methods on the basis of past experience with the existing policy and new information and insights into causal connections behind specific policy problems (Visser and Hemerijck 1997; Hemerijck and Visser 1999). A necessary condition for policy learning is that these new insights are used to enhance performance. However, it may very well be possible that the wrong lessons are drawn on the basis of selective reflection on policy and that the new policy leads to unwanted negative effects. Visser and Hemerijck view the reorganization of the social security system, the labor market, and labor relations in the Netherlands over the past 15 years as a successful form of policy learning. Van den Toren and Theeuwes (1998) also regard Dutch policy reforms relating to the labor market and labor-market institutions as a successful process of policy learning. Van den Toren and Vos (1997:119) view the current relative success of the Dutch model as a successful learning process involving competition between ideas (policy learning), that is, decision making on the basis of competitive ideas. In this way, the polder model relates to learning organizations in organizational science. Institutions impede exit mechanisms, but stimulate voice mechanisms. There is a positive link between the learning ability of organizations and the existence of countervailing power. If the decision-making process is open to organized objections, more ideas will be discussed than in a purely hierarchical model in which ideas from management will face no competition. The collective labor agreement (collectieve arbeidsovereenkomst—CAO) is one of the most powerful institutions of the Dutch economy (Van den Toren 1997; 1998). The collective labor agreement (CAO) is an agreement between one or more trade unions and one or more employers’ organizations that lays down the regulations that must be complied with by employees and employers party to the agreement when individual labor agreements, that is, contracts of employment, are concluded. The collective agreement has two major functions,

Introduction

13

namely, to record agreements relating to conditions of employment (legal certainty) in an unambiguous and recognizable manner, and to guarantee a certain equilibrium between both parties to the contract (industrial peace) (De Galan and Van Miltenburg 1991:277). Inequality in the social and economic position of the employee and employer can be settled in the collective agreement or rectified by the government. Legal textbooks reveal that this so-called inequality compensation is the most important goal and that it serves as an important theoretical basis for social law in the Netherlands (Jacobs et al. 1992; Rood 1998). This inequality compensation has also become an important legal basis for government measures in various areas for rectifying the market mechanism in the form of negotiations and freedom of contract where necessary (Jacobs et al. 1992:24). Two acts are of importance in relation to the collective agreement: the Collective Labor Agreements Act (Wet op de Collectieve Arbeidsovereenkomst) of 1927 and the Act on the General Application or Inapplicability of Collective Labor Agreements (Wet op het Algemeen Verbindend en Onverbindend Verklaren van Collectieve Arbeidsovereenkomsten—Wet AVV) of 1937. Under the Collective Labor Agreements Act, collective labor stipulations also apply to unorganized employees, even though they have not been party to the negotiations. The AVV act creates the possibility of a mandatory extension of collective agreements. According to the AVV act, all employers in a certain field or sector have to comply with collective stipulations that have been declared compulsorily applicable, even though some employers or employees have not been involved in the negotiations in any way. The legislation of 1927 and 1937 erased the unwanted effects of the collective labor agreement—competition between employers and employees. This legislation strengthens the position of the labor unions, encourages stable working relationships and industrial peace, and in turn increases labor productivity and competitiveness. It also facilitates the continuity of companies and forms a favorable economic climate. The responsibility is placed where it is preferred, and the negotiating agenda shifts to subjects other than wages, such as quality of labor and education (De Kam, Van Drimmelen, and Van Hulst 1995; Freeman, Hartog, and Teulings 1997). At the same time, the government can influence the content of the collective agreements by refusing to declare certain collective agreements binding or by declaring specific collective labor agreement stipulations nonbinding. The role of Dutch employers is less visible but just as important. They provide important financial support to Dutch labor unions, the so-called labor union tenner (vakbondstientje), in order that the unions represent the entire labor force and that they do not strive for specific advantages for their own members during negotiations with employers in the event of a reorganization, for example. The employers’ contribution varies, but averages around Dfl 30 per employee. This amount can be regarded as a contribution for representation by the labor unions of nonunion members who do not pay contributions and who are, in fact, free riders. Companies or branches of industry pay contributions. The

14

Introduction

money that is accumulated may not be used to oppose the employer, for example, to finance strike funds. The aforementioned solidarity and equality are also an effect of the development of the system of social security after the Second World War, in which the unemployed were guaranteed a minimum income. Another effect is the limited difference in wages. The social security system creates social harmony and therefore has a moderating effect on wages. The extensive welfare state is also an essential part of the polder model. It reflects the Dutch aversion to risks. Due to unemployment, a conflict can arise between the unemployed, who are willing to accept low wages, and the employed, whose position in the labor market is challenged by the unemployed. Unemployment insurance may be a solution to this problem and may in turn contribute to stable labor relations. For employers, this implies an important contribution to the reduction of uncertainty. The willingness to contribute to unemployment insurance indicates that employers will also benefit from preventing competition between employees and underbidding on the labor market.

FORMATION OF DUTCH CONSULTATIVE INSTITUTIONS The consultative nature of the renowned polder model is related only to the labor market. Cooperation, consensus, and wage negotiations at a central level are important for the polder model and have a long history. Immediately after the Second World War, the relationship between capital and labor was institutionalized in various forms of consultation (see Figure 1.1). This resulted in consensus on socioeconomic issues to some extent. Corporativistic organizations can only exist if individual employees and employers are prepared to delegate the authority to renegotiate certain contracts to the organizations in question. This delegation makes it necessary for these organizations to have a high degree of legitimacy in protecting the interests of their members. Whether this is the case is determined significantly by culture. In May 1945, the Dutch Foundation of Labor (Stichting van de Arbeid— STAR) was founded by the social partners. In STAR, representatives of certain organizations for employers and employees discuss economic developments. On the basis of the Extraordinary Decree on Labor Relations (Buitengewoon Besluit Arbeidsverhoudingen—BBA) of 1945, STAR was also the official general advisory organ for wage policy to the government. Moreover, the Social-Economic Council (SER) was set up in 1950 as the highest authority of the statutory industrial organization (Publiekrechtelijke Bedrijfsorganisatie—PBO) and is composed of representatives from employer and employee organizations as well as independent crown-appointed members. Both the Dutch central bank (De Nederlandsche Bank—DNB) and the CPB Netherlands Bureau for Economic Policy Analysis (Centraal Planbureau—CPB) are crown-appointed members. Under the Industrial Organization Act (Wet op de Bedrijfsorganisatie) of 1950, the gov-

Introduction

Figure 1.1.

15

The Dutch Consensus Economy

ernment was obliged to consult the Social-Economic Council on all important measures it wished to take relating to social and economic issues. The SER became the official advisory body of the Dutch government on socioeconomic policy. The arrival of SER should have meant the abolishment of STAR. However, the social partners decided that the Foundation of Labor should not be abolished, despite the fact that the same people on the board of STAR would regularly meet as members of the board of SER (Windmuller and De Galan 1970:22). Since 1970—the year in which the Wage Bargaining Act (Wet op de loonvorming) took effect—STAR has not had an official function within the framework of wage formation. However, STAR has continued to exist as a consultative body for trade and industry and still plays an essential role. STAR makes recommendations to employee and employer organizations at a sectoral level in order to influence collective negotiations. STAR also holds discussions with the government. The aim of this tripartite consultation is that all three parties reinforce each other’s policies in an attempt to reach common goals. STAR also serves as a platform for informal consultations and can make recommendations, solicited or unsolicited, to the government with regard to labor relations. The spring and autumn consultations—the half-yearly meetings—held by social partners and the cabinet are among the highlights of the Dutch consultative economy. The aim of these meetings is not really to enter into agreements, but rather to exchange views and to create an atmosphere of trust. The importance of cooperation and consensus in the polder model is also reflected in the prominent role of the CPB Netherlands Bureau for Economic Policy Analysis (CPB). The CPB was founded in 1945 and serves as a technical ad-

16

Introduction

visory body for the Dutch government by carrying out preparatory work on Dutch socioeconomic policy. The CPB provides objective and, wherever possible, science-based information for policy making. In particular, the quality of the prognoses plays a positive part in this. In this way, the Social-Economic Council is provided with macroeconomic figures, analyses, and recommendations that are trusted by all parties involved (Windmuller and De Galan 1970:36). The role of the CPB not only expresses consensus, but also contributes to consensus building. The fact that social partners are members of the Central Planning Board of the CPB is also relevant in this respect. In both STAR and SER, the government and social partners use dialogue to determine the basis for socioeconomic policy, wage negotiations, and the policy concerning employment. Joint analyses and common diagnoses pave the way towards common solutions. A breakthrough such as the Wassenaar Agreement or compliance with EMU criteria would never have been possible without this institutionalized and frequent form of consultation and the long history of consultation. Moreover, consensus is not a gift but something that must be earned on a daily basis. Consensus and cooperation are inextricably linked to mutual trust and trust that develops on the basis of the past conduct of other players.

RECENT CHANGES IN THE CONSULTATIVE ECONOMY A core element of the Dutch polder model is the joint responsibility of social partners—employee and employer organizations—and the government for socioeconomic aspects of Dutch society. In the past, the government and social partners regarded the fulfillment of goals relating to socioeconomic policy as a joint responsibility. At present, social partners are primarily responsible for the development of employment conditions, while the government occupies itself with general economic policy. Employment policy is the joint responsibility. The nature of the agreements has also changed. Binding agreements at a central level have been replaced by common policy orientations, while specific quantitative objectives have been replaced by qualitative recommendations relating to particular themes such as training and lower wage scales (CPB 1997:76). The previous section showed that the SER has long been the government’s formal and official advisory body. In the early 1990s, the Dutch consultative economy was in the middle of a major crisis. The abolishment of the SER was one of the issues discussed. The influence of foreign countries, which praised and still praise Dutch consultative institutions, ensured that this never occurred. In 1995, however, the Dutch parliament decided to abolish the government’s statutory obligation to consult the SER on every socioeconomic issue. This abolishment went hand in hand with the assurance that the cabinet intends to consult the SER on important matters in the future (De Vries 1997:124; Visser and Hemerijck 1997:91). Decreasing the role and influence of consultation at the central level, in which consensus is replaced by recommendations, strikes at the

Introduction

17

core of the polder model. Moreover, at the beginning of 1996, the numbers of seats held by the SER and STAR were reduced from 45 to 33 and from 20 to 16, respectively, within the framework of the current decentralization process. As a result of the Wassenaar Agreement, consultations involving conditions of employment were decentralized from macro level to meso level during the 1980s, that is, from the central to the sectoral level. The government is carefully withdrawing and is being given a role that is less central. At the same time, collective bargaining has been extended to include social issues such as employment, social security, and social cohesion. This institutional shift continued during the 1990s. The agreement Een Nieuwe Koers (A New Course) reached by the Foundation of Labor in 1993 can be regarded as a plea for further decentralization of the negotiations on employment conditions to the company level, aimed at increasing the authority of employees at this level. The need for differentiation and tailor-made solutions within the collective agreements is emphasized. According to Fruytier (1998), the substantial increase in the involvement of labor unions in the internal organizational policy of companies or a group of companies in certain branches of industry is one of the crucial characteristics of the Dutch polder model. Fruytier also states that one of the characteristics of the polder model is that labor unions—unlike those in the countries surrounding the Netherlands—have created possibilities at a central level for changes in operational relations and contractual relations at a decentralized level. Labor unions have also acknowledged that making work organizations more flexible was necessary for employees in the long term. Wage moderation is important, but it is not the only component of this policy. Most important, labor unions have become responsible for the effectiveness and efficiency of work organizations. They have entered a domain that, until recently, was exclusively reserved for the employer: the organization of work. Trade unions have realized that the original and highly successful centrally controlled neocorporativistic Rhineland regulatory model is no longer effective. Collective regulations in flexible organization and an individualized society can no longer influence the behavior of people sufficiently, according to Fruytier (1998:90). This decentralization can be risky. The consultative economy was partially abandoned and replaced by the market as a coordinator as a result of this decentralization. The main problem associated with this development is that the government can no longer prescribe the developments it desires because of decentralization and privatization. Contrary to 1982 and 1993, the government cannot enforce consensus relating to wage moderation or the increase of efficiency. Nowadays, the government is increasingly dependent on consensus reached between social partners at a decentralized level. The paradox of the polder model is that a successful common policy simultaneously makes social partners less visible to the rank and file, culminating in problems of legitimacy. Decentralization also intensifies these problems. The wish or need of central organizations to create a distinct profile for themselves undermines the polder model. As a result, the polder model is mainly tested in times of economic prosperity.

18

Introduction

Deregulation, decentralization, and individualization also have a major effect on the content and role of the collective labor agreement in the labor system. The character of collective agreements has changed during the past years, and their effectiveness has also been subjected to wear and tear. As a result, the collective labor agreement has lost part of its collective character, and differences in employee categories have increased. An increasing number of collective agreements contain only global regulations, which form a type of framework that companies or institutions can flesh out later. This means that the works council or the representational body for employees within every company should act as a counterbalance with respect to the employer. Also with regard to primary employment conditions, decentralization occurs in the direction of consultations between the works council and the employer. This trend is expected to escalate due to the changes in the Works Councils Act (Wet op de Ondernemingsraden— WOR) as of January 1, 1998, and due to the preferences of employers and works councils (Delsen and Visser 1999). At the same time, the changing content of collective labor agreements—differentiation—has influenced the cohesion of society and solidarity between stronger and weaker groups on the labor market, between employees, and between employees and the unemployed. In addition, the decentralization of collective agreements and collective labor relations at the company level may be at the expense of collective company-exceeding interests (Fruytier 1998:77). This increasing differentiation of labor agreements at the company and individual levels was the reason why the Foundation of Labor concluded an agreement (Naar Arbeidsvoorwaarden op Maat Towards Tailor-made Labor Conditions) at the beginning of 1999. This agreement contains recommendations on how to give substance to the flexibility that is desired in the collective labor agreement while ensuring that it does not lose its essential functions. These essential functions include improving the judicial equality of employees, providing employees with guarantees relating to conditions of employment, and counteracting competition between employees in a branch of industry with respect to labor conditions. The question is whether such a balance between justified individualization, on the one hand, and collective structuring of labor conditions, on the other hand, can exist in increasing negotiations at the company level without doing any harm to solidarity. Further decentralization according to the American model means that most wages will be determined during negotiations held between individual employers and employees and that only a minor role has been set aside for the collective agreement. The transition from collective agreements with standardized labor conditions to tailor-made agreements (à la carte collective labor agreements) means not only the disappearance of advantages of economies of scale, but also increasing transaction costs. Employer and employee organizations will be less visible to their supporters. Other means will have to be used to bind members to their organizations in order to retain the basis of the policy.

Introduction

19

Compared to other countries, Dutch labor unions have a cooperative attitude, but only a few exclusive advantages exist for union members. This may pressurize the unionization rate (Van den Toren 1997:75). If wage negotiations are held at the company level, there is no longer any room to declare labor agreements generally binding. The AVV act, the legal extension of collective agreements, however, is an important institution that is responsible for wage moderation despite the limited union density (25 to 30 percent of the labor force) in the Netherlands. Abolishment of the legal extension will have far-reaching consequences for the position and policy of labor unions. At present, the labor-union movement is in fact jointly responsible for socioeconomic policy. The absence of the mandatory extension of provisions in the collective labor agreement implies more direct promotion of interests for its members, resulting in highmoney contracts and short-term policies. Nor does the Social-Economic Council have any time for negotiations (Teulings 1996). The Dutch model is turning into a “money model.” This naturally has consequences for employer organizations and individual employers. The latter will now have to determine and negotiate their labor conditions themselves.

STRUCTURE OF THE BOOK The content of the book is divided as follows. Chapters 2, 3, and 4 describe the content and effectiveness of the implemented socioeconomic policies in the Netherlands. Chapter 2 examines to what extent the Dutch employment miracle can be explained on the basis of the policy pursued within the polder model. The central question that has to be answered is this: From what does the success of the polder model stem? This chapter also examines how the government, social partners, and the Dutch central bank have contributed to this success. To this end, the chapter examines to what extent the positive economic results can be attributed to a combination of moderate wage development and redistribution of employment, cutbacks in government expenditure and a reduction in the burden of taxation and the total of social security contributions, a stable guilder exchange rate, and the acceptance of deregulation and market working. The conclusion is that not all of the Dutch economic success can be attributed to the polder model. Economic luck and cultural factors have also contributed considerably to this success. The Wassenaar Agreement played a limited part in the moderation of wages in the market sector in the 1980s. Chapter 3 deals with a number of drawbacks to the polder model. The central question that is answered is this: Is the employment miracle indeed a success? A few comments relating to the policy that has been pursued are included. The chapter also examines several intentional and unintentional negative effects of the polder policy that has been pursued, including the increasing inequality in income and the poverty issue, segmentation of the labor market, declining

20

Introduction

growth in productivity, high environmental pressure, and low environmental quality. One of the paradoxes of the Dutch labor market that has been signaled is that one section of the labor force is permanently overworked while the other is permanently without work. The Dutch labor market is starting to resemble the American labor market more and more. It is concluded that the substantial increase in employment would have been a true employment miracle if this growth had occurred in highly productive jobs in the services sector. Praise from abroad for the Dutch economy is based primarily on macroeconomic analyses. Hardly any microeconomic analyses of the polder model exist. Chapter 4 describes the motives and consequences of making the work organization flexible. The analysis concentrates on numerical, functional, and pay flexibility. Literature regards the flexibility of the Dutch work organization as an important explanation of why the Dutch polder model has been such a success. According to this line of reasoning, a flexible labor contract enables fixed costs to be reduced. The question is whether it is possible to empirically perceive the positive effects for the employer that can be expected according to neoclassical theory, namely, increased profitability and lower costs per product unit. Another question that is answered is how the aim for more external numerical flexibility relates to the aim of employability of people. An observation is made that the major emphasis on the financial interests of shareholders has influenced Dutch businesses, which are starting to resemble American companies more and more. The time horizon is becoming smaller. This forms an important basis for making labor more flexible. The conclusion is drawn that a trade-off exists between short-term and long-term results. The expected cost advantages of making labor more flexible are not always recovered. The unilateral implementation of flexibility has a boomerang effect. In chapters 5, 6, and 7, the effectiveness of institutional changes within the polder model occupies central stage. Chapter 5 looks at the significance of the most important labor institutions for the short- and long-term efficiency of the Dutch economy. The efficiency of the Dutch wage-determination process is also analyzed. The chapter also examines how this efficiency has been affected by the changes that have occurred during the past two decades in consultative institutions and other labor-market institutions, including decentralization of the bargaining system, the changing role of the collective labor agreement, and employment protection. The conclusion is drawn that allocative and dynamic efficiency are greater in the Netherlands than in the United States. Underutilization is also lower. Differences in wages that are not in line with market standards are smaller in the Netherlands than in the United States. In addition, wage flexibility is greater in the Netherlands than in the United States. Consultative institutions create a particular order and stability in markets and prevent market failures, such as the holdup problem, the prisoner’s dilemma, and the freerider problem. This stimulates a long-term orientation. Chapter 6 considers the social and economic functions of the Dutch welfare state. The central question that has to be answered is whether the welfare state

Introduction

21

is a cost item or an investment. The socioeconomic effects of recent reforms of the Dutch welfare state are also examined. Privatization of the Sickness Act (Ziektewet—ZW), the Disability Insurance Act (Wet op de Arbeidsongeschiktheidsverzekering—WAO), and the Unemployment Act (Werkloosheidswet— WW) are important elements from the strategy of additional market working, which has received extensive attention from abroad. The conclusion is that the welfare state and the market are complementary. A sound social security system enables the expansion of markets and is of great importance to the small open economy of the Netherlands. Public and private social security are each other’s substitutes. Market working and differentiation in contributions are neither effective nor efficient instruments for controlling the costs of social security and for decreasing the volume of social security. An active reintegration policy is the solution to the problem of inactivity in the Netherlands. Double aging, an increase in the number of older people combined with an increase in life expectancy, and dejuvenation, a relative decrease in the number of younger people, form a core problem for the Dutch polder model. These developments have major consequences for the social security system, the labor market, and the pension system in particular. The pension system forms an important part of the welfare state. The manner in which one retires from the labor process is a reflection of the interaction between the welfare state, labor relations, the production structure, and labor-market policy. Chapter 7 analyzes the effectiveness and efficiency of the Dutch pension system against the background of demographic and social developments. It also examines which structural solutions can serve as a response to these developments. The Dutch pension system consists of a combination of pay-as-you-go financed statutory basic old-age pension (first pillar), a fully funded compulsory supplementary occupational pension (second pillar), and voluntary individual pensions (third pillar). The conclusion is that the Dutch pension system is well prepared for these developments thanks to a mixture of pay-as-you-go financing and capital funding. The Dutch pension system is both effective and efficient and is, therefore, rightly considered an example in Europe. The introduction of additional market working—increasing choice—has its price. Not only does reasonable doubt exist as to whether private insurers will function more efficiently than pension funds, but the abolition of the obligatory character also implies a transition to the Anglo-Saxon model with its uncertain defined-contribution pension system and increase in “blind spots” in pension coverage. The fourth pension pillar—productive labor performed by older workers—in the Netherlands is still in its infancy. The polder model offers a sound cultural and institutional basis for the tenability of an efficient and effective pension system. Finally, chapter 8 examines the central question in this book: exit polder model? Labor-market-related institutions in the Netherlands have been adapted during the past few years. The internal and external policy environment has also changed. Do these changes point towards innovation or the end of the polder model? The conclusion is that the polder model is worth keeping. In addition,

22

Introduction

several policy options for the future are introduced. A mixture of “workfare” and welfare is proposed in order to close the poverty trap, the unemployment trap, and the productivity trap and, in doing so, to reduce divisions within Dutch society. The right to work must be maintained in full. On the basis of the complementarity between efficiency and effectiveness, there is an argument for the government to play a more active role in socioeconomic policy. The aim is to increase the degree of utilization of labor, reduce permanent inactivity, make labor markets more flexible, and prevent labor-market segmentation, which has been created by “insiders” and employers on a decentralized level. In addition to the material and immaterial infrastructure, social cohesion and stability are also beneficial to the business environment. The welfare state has a clear-cut role to play in this respect. A new concept of full employment is proposed: a combination of an active labor-market policy and an activating social security system. The core of this new concept of full employment is the combination of the legal right of all citizens to at least a part-time job guaranteed by the government and the right to a partial basic income, conditional on the acceptance of a part-time job offered by the government. Simulations by the new applied general equilibrium (AGE) model for the Dutch labor market of CPB National Bureau for Economic Policy Analysis show that this new concept promotes economic efficiency.

NOTE 1. The Latin model is the third variant of capitalism. This model is characterized by relatively far-reaching government legislation and the strong influence of government policy on economic development. The economic agents focus their activities on the government in order to enforce their demands. Spain, France, and Italy are variants of the Latin model.

2

Successes of the Polder Economy

INTRODUCTION This chapter focuses on those factors that form the foundation of the Dutch employment miracle. To what does the Netherlands owe its success? First, the budgetary effects of the implemented policy of the various governments starting from 1982 in relation to the collective expenditure and the collective burden are mentioned. Next, the influence that the policy of moderation of wages has had on the development of employment and the part that the 1982 Wassenaar Agreement has had in this are established. Then the role of the Dutch central bank in the Dutch economic successes is discussed. A number of favorable external factors are mentioned. Also, the effects of the implemented policy aimed at increased market working are examined. Next, the Dutch employment miracle is analyzed. This analysis focuses on the quantity and quality of the increase in employment. Finally, a number of cultural factors behind the success are reviewed. Some summarizing conclusions form the end of the chapter.

HEALTHY GOVERNMENT FINANCES The first Lubbers government (1982–1986) emphasized massive changes of government expenditure to enable the necessary reorganization of government finances. Also, it aimed at the reinforcement of the market sector through reduction of the burden of taxation and the total of social security contributions for enterprises. Minimum wages and minimum benefits were frozen (Knoester 1989). The second Lubbers government (1986–1989) wanted to finish the job and continued the implemented policy. The emphasis was on reorganization of

24

Successes of the Polder Economy

government finances and reduction of unemployment through gradual decrease of the difference between gross wage costs and net income (the wedge), schooling and training, redistribution of employment, and promotion of part-time employment. In 1986, the benefits level of a number of employees’ insurances was lowered from 80 percent to 70 percent of the last earned wages. The third Lubbers government (1989–1993) still continued the implemented financial-economic policy: tax reform, tax reduction, reduction of the government budget deficit, and the continued moderation of wages. In 1990, the largest tax operation since the Second World War was effectuated: the Oort operation. Tax tariffs were considerably simplified: the original nine tariffs were replaced with the present three tariffs of 36, 50, and 60 percent. The highest tariff was decreased from 72 to 60 percent. The government introduced a single uniform tax base for levying direct taxes and contributions to national insurances.1 This simplification was accompanied by tax reductions of over 4 billion guilders, which served as a “lubricant” to reduce the unwanted effect on purchasing power. The first Kok government (1994–1998) also put much effort into the reorganization of government finances and moderation of wages. The first purple government implemented a reduction of the tax burden and the total of social security contributions of 9 billion guilders. Reduction of collective expenditure was realized, among other steps, by cutting down expenditure on public employment service and on education and through privatizing of social security (Sickness Act Ziektewet—ZW and Disability Insurance Act Wet op de Arbeidsongeschiktheidsverzekering—WAO). Also, the second purple Kok government (1998–present) focused on reduction of the burden of taxation and social security contributions and moderation of wages while aiming to increase employment. Based on the Belastingplan 21ste Eeuw (Fiscal Plan 21st Century), the two upper tax tariffs of 50 and 60 percent were decreased to 42 and 52 percent. Another important part of the fiscal plan was the shift in tax pressure from direct to indirect taxes. The VAT (value added tax) tariff and the environmental levies were raised. This tax increase was overcompensated by a reduction of the income tax and thus the taxes on labor. An important goal of the tax reform of 2001 is to make the shift from benefits to work financially attractive. A uniform tax credit is introduced for those who work. Because of this, the difference in income between those who work and those who receive benefits increases. Inactive people are stimulated to accept work sooner. Also, the present tax-free amount, which rises alongside the marginal tax tariff, is replaced by a tax credit, equal for all individuals. This tax credit has the effect of leveling income. Because this reduction of tax is acknowledged individually, it becomes more attractive for married women, for example, to reenter the labor market. If the woman earns more than the annual tax deductions, the husband loses the basic tax deduction that is transfered until then. On balance, the tax saving can decrease, depending on the tariff of the spouse. The basic tax deduction is valid for the low first tax scale, while the spouse at the top of his income may reside in the higher second or third tax scale.

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In this tax revision by the present government—as well as with the Oort operation in 1990—a tax reduction was announced. This time the amount of 5 billion guilders was proposed as a “lubricant” to gain sufficient support for these reforms. The question is whether this is desirable under the present circumstances. Considering the economic boom, this means a strong procyclical budget policy. The downside of this increasing spending space is the threat that the economy will overheat: excess demand and inflationary gap. Enterprises will raise their prices. The reality of this shows from the high and rising inflation towards 3 percent compared to, for example, 0.5 percent in Germany. The increase of the VAT from 17.5 percent to 19.0 percent also increases inflation. Stability of prices no longer exists when inflation reaches 3 percent. In the long term, this is also a threat for employment and export. High inflation can also lead to increasing demands for wages. It is not imaginary that this tension on the product and labor markets puts pressure on the consensus on moderation of wages. This has negative consequences for employment and raises unemployment (the Phillips relation). This also means the end of the polder model. However, the government faces a dilemma. The government could have used the money for reducing the government debt or, more wisely, considering the present conjunctural circumstances, saving the money for a rainy day, thereby creating an increasing budget surplus. Other EMU member states practice this, such as Finland, based on the Stability and Growth Pact adopted by the European Council in 1997. This could also lead to increasing demands for wages, because employees finally want something in return for their net expenditure after years of moderation, and also because profits and share prices are rising. This also puts pressure on the consensus on moderation of wages and can mean the end of the polder model. What are the budgetary results of the implemented policy in relation to the public sector? The public sector includes the state government, other public bodies (among which are municipalities, provinces, and district water boards), and the social insurance sector. The public expenditure as a share of gross domestic product (GDP) dropped by more than 14 percentage points from 58.4 percent in 1982 to 43.7 percent in 1998 (see Figure 2.1). In 1999 and 2000 the share of collective expenditure in GDP dropped to 42.5 percent and 40.9 percent, respectively. A comparison with other countries shows the following (OECD 1999:252): In 1998, the share of collective expenditure—current expenditure plus net capital expenditure—as a percentage of GDP in the Netherlands (47.2 percent) was lower than in Belgium (51.0 percent) and higher than in Germany (46.9 percent) and the United Kingdom (40.2 percent). International comparison of collective expenditure shows the relevance of the fact that the Netherlands is, together with Denmark and Sweden, one of the few countries where benefits are granted in gross amounts, meaning that they include social security contributions that have to be paid (see also chapter 6). Figure 2.1 also shows that the collective taxation and premium burden—the total of taxes, social security contributions, and non-tax government income—as

26

Figure 2.1.

Successes of the Polder Economy

Core Figure of the Collective Sector as a Percentage of GDP, 1982–2000

Sources: CPB 1997a:186–187; CPB 2000:203–204.

a percentage of GDP decreased from 46.7 percent in 1982 to 43.4 percent in 1998. This gradual decrease especially occurred after 1990. In 1999 the collective burden of taxation and contributions increased again to 42.3 percent but dropped to 41.7 percent in 2000 (CPB 2000:203). Comparison with other countries shows the following: In 1996, the tax burden—the total of received taxes and social security contributions as a percentage of GDP—in the Netherlands (43.9 percent) was lower than in Denmark (51.9 percent) and Belgium (46.6 percent), but higher than in Germany (38.2 percent) and the United Kingdom (35.3 percent) (EZ 1997:48). The result of the developments of the collective revenue and expenditure is that the budget deficit of the collective sector decreased considerably and almost continuously from 9.5 percent in 1982 to 1.0 percent in 1997. The budget deficit has recently turned into a budget surplus. Estimates for the years 1999 and 2000, how-

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27

ever, show an increasing borrowing requirement (see Figure 2.1). The year 1999 actually shows a budget deficit of 0.2 percent, which turned into a surplus of 0.8 percent in 2000 (CPB 2000:203). The question is whether this is desirable during the present boom, considering the procyclical effect. Practice differs from the estimates. The persistent favorable economic development means considerable unexpected tax revenues (windfall) and lower expenditure on interest and social security. Together with a monitored development of government expenditure, this resulted in 1999 in a budget surplus of approximately 0.25 percent of GDP. Both the average wedge (the difference between wage costs and available income) and the marginal wedge (that part of the change in wage costs that is paid over for taxes and social security and pension contributions) disrupt the working of the labor market. Theoretically, the average wedge is at the cost of the demand for labor, that is, employment. A high marginal wedge is at the cost of both the quantity and quality of the labor supply, which means participation, motivation, and willingness for training of employees. Between 1983 and 1998, the tax wedge decreased considerably on all levels of income: on the average income level from 48 percent to 41 percent, on the level of twice the average income from 58 percent to 53 percent, and on the minimum-wage level from 34 percent to 16 percent. In 1996, the average wedge on labor income in the Netherlands (44 percent) was lower than in Belgium (56 percent), Germany (51 percent), Italy (51 percent), and France (50 percent) (Watson et al. 1999:21). Despite the considerable decrease of average tax pressures, the decrease of the marginal tax tariffs was less strong, and despite the Oort operation, these were still high in 1998 compared to other countries (Watson et al. 1999:22). Knoester (1989:169) considers further decrease desirable just to maintain the competitive position of the Netherlands. After a 10-year delay, the fiscal reform of 2001 acknowledges this plea for the first time.

THE WASSENAAR MYTH Moderation of wages is the main explanation of the strong increase in employment in the Netherlands after 1984. What was the influence of the 1982 Wassenaar Agreement? The Dutch disease led to strong increases of real wage costs on top of the increase of productivity in the 1970s. The labor-income share increased dramatically. The labor-income share of companies is regarded as a mirror of the profitability of companies.2 The labor-income share is a very important index figure in judging the Dutch economic situation and for planning the economic policy to be implemented. An increasing labor-income share implies decreasing profits. This means pressure on investments and hence on the creation of employment. A decreasing labor-income share implies restoration of profits. Figure 2.2 shows the developments in the Dutch labor-income share of companies since 1979. The labor-income share reached its peak in 1981. The trend of increase of the labor-income share can be explained from successful at-

28

Figure 2.2.

Successes of the Polder Economy

Labor-Income Share of Companies, 1979–2000

Sources: CPB 1997a:222–223; CPB 2000:240–241.

tempts of employees and their organizations to shift part of the increasing burden of taxation and social security contributions onto profits, with negative consequences for the level of investment and employment (Knoester 1989). The profitability of Dutch companies reached its lowest point in the early 1980s. The labor-income share shows that moderation of wages was implemented even before the closing of the Wassenaar Agreement at the end of 1982. Salverda (1999) concludes that moderation of wages was implemented from 1979. Real wages decreased by 5 percent between 1979 and 1982. The level of the labor-income share is heavily influenced by the economic situation: the rate of growth of production of companies and the development of the labor-income share form each other’s mirror image. This says nothing about causality. A rising labor-income share can be the cause or the result of a decline of the market. The labor-income share showed a downward trend in the 1980s, partly because of the influence of major unemployment. At the end of the 1980s, moderation of wages did not decrease the labor-income share, but led mainly to a more labor-intensive economic growth (Watson et al. 1999:28). In the first half of the 1990s, disappointing economic growth went hand in hand with an increasing labor-income share. The policy of moderation of wages was implemented once again. The agreements concluded in 1993 by the social partners

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29

were successful. The Dutch consultative economy reacted more alertly to the economic recession in the first half of the 1990s than to the structural problems of the 1970s. The threat of the government to institute measures on wages was needed to get this reaction in policy even in 1993 (CPB 1997c:75). As a result of tensions in certain parts of the labor market, the wage drift, the incidental component of wages (profit-dependent benefits and extra nonrecurrent allowances), recently increased. Because of this, the actual development of wages is above the development of wages in the collective labor agreements, the initial wage component (SZW 1999:110). The labor-income share was expected to increase after 1998 (see Figure 2.2). In 1999 this increase of the labor-income share was materialized (76.7 percent). This causes the risk of a reoccurrence of events of the early 1990s, when employment fell drastically after an increase of the laborincome share. In 2000 the labor income share dropped to 76.0 percent (CPB 2000:241). Even compared to international standards, the development of wages in the Netherlands during the 1980s was very moderate. Table 2.1 shows that the growth of both the nominal compensation of employees and the labor costs per unit product in the Netherlands was below the growth in the United States and the average of the European Union from 1983 to 1993.3 Both in Belgium and Germany, these growth figures were considerably higher than in the Netherlands. The nominal increase in wages was below the level of inflation from 1983 to 1993 in the Netherlands. The slower increase of wage costs per unit product compared to Germany is important considering the fact that Germany is the main trade partner of the Netherlands. An explanation of the slower increase in wage costs is the openness of the Dutch economy; approximately half of Dutch income is earned from foreign trade, and approximately one-third of Dutch export is directed towards Germany (Delsen and De Jong 1998). Because of foreign competition, the Dutch labor-union movement and employers became more aware of the necessity of adaptation. Because of the high degree of coverage of the collective labor agreements, Dutch trade unions have to take account of the effects of increases in wages on employment in economically weak companies, and because of the higher degree of centralization, the Dutch unions focus more on the interests of the unemployed (Roorda and Vogels 1997). Also, the fact that the highly unionized metal sector is less represented in the Dutch export packet means that Dutch unions have a weaker position than their counterparts in Germany, for example (Hollanders and Ziesemer 1999). This limited relative power of the unions can be the explanation for their openness to agreement on moderation of wages. Decreasing unemployment and the improvement of the economy not only resulted in the gradual increase in wages since 1993, but it also created another problem: vacancies for which personnel were hard to find. In some sectors of the Dutch economy, such as construction, engineering, and the financial sector, a shortage of highly qualified employees and administrative personnel was created. The number of unfilled vacancies increased from 39,000 in 1994 to well over 117,000 in 1998. Simultaneously, the percentage of positions for which it was hard to find

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Table 2.1. Annual Growth of Compensation per Employee and Unit Labor Costs in the Business Sector, 1983–2000 (Percentage Changes from Previous Period)

Sources: OECD Piggba:5; OECD 2000a:16; OECD 2001:16.

personnel increased from 20 percent to 45 percent. The share of these kinds of positions was high in construction (68 percent), agriculture and fishery (55 percent), and financial institutions (55 percent). Small and medium-sized companies especially are experiencing difficulties in finding appropriate personnel (SZW 1999:166). The tightening labor market led to a development of wages and growth of labor costs that was stronger than in neighboring countries and above the EU average (see Table 2.1). Another source shows that the growth of gross wages increased gradually from 2.8 percent in 1997 to 3.5 percent in 2000. In 1997, the increase of gross wages was 0.8 percent (the increase in contract wages was 2.2 percent) above the inflation rate, in 1998, 0.7 percent (increase in contract wages, 3.0 percent). The increase in gross wages for 1999 is 0.8 percent (increase in contract wages, 2.5 percent) and for 2000, 1.5 percent above the inflation rate (increase in contract wages, 3.25 percent) (CPB 2000). The polder model, and especially the policy of moderation of wages, seems to suffer from its own success. This is because the polder model and the consensus are based on a deep crisis. An enduring boom can strike at the roots of consensus. The Netherlands Trade Union Confederation (Federatie Nederlandse Vakbeweging—FNV) increased the maximum demand for wages from 3 percent to 4 percent in late November 1999. Absolute employment decreased in the early 1980s. Employment increased slightly in 1984, and after 1984 the growth in employment was considerably restored. Calculations of the CPB Netherlands Bureau for Economic Policy Analysis (CPB 1991) show that employment between 1975 and 1982 decreased by 250,000 persons in the market sector. Employment increased in the market sector by 500,000 persons between 1983 and 1990. National factors were crucial for this development. The difference of 750,000 jobs was mainly the result of a favorable development in wage costs. Only 135,000 jobs were related to the increased growth of world trade. The fact that the increase of real wage costs was less than

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31

the increase of the productivity of labor and the fact that the minimum wages fell behind the average development of wages (disengagement) led to an additional growth in employment of 415,000 persons in the 1980s, respectively, 380,000 and 35,000 persons. Over half of the actual growth in employment in the 1980s was due to moderation of wages. Redistribution of labor also played a significant part. The contribution of part-time employment has been calculated as 150,000 jobs; the contribution of the general reduction in working time is more limited: 35,000 jobs. The lower wage costs did not lead to increased production, but mainly to increased labor intensity, and through this, to increased employment (CPB 1991). Moderation of wages in the 1980s was partly due to coordination on the central level. The exact contribution is difficult to establish. According to the Wassenaar Agreement, almost all collective labor agreements canceled automatic price indexation between 1982 and 1985. The legal nominal minimum wages were lowered by 3 percent in 1984 and frozen until 1990. For 1993, 1994, and 1995, the minimum wages were frozen again at the level of 1992, based on the 1991 Act on Linkage with Optional Deviation (Wet Koppeling met Mogelijkheid van Afwijking—WKA).4 The actual minimum wages decreased less as a result of the collective labor agreements: In 1990 the lowest collective agreement wage scales in almost all agreements were above the legal minimum wage. The level of benefits for sickness, disability, and unemployment was lowered from 80 percent to 70 percent of gross wages earned in 1986. The favorable development of wages in the 1980s can be explained by high unemployment and the decrease of social security benefits and taxes as a result of the disengagement of salaries of civil servants and social security benefits from wage developments in the private sector. The rapid growth of the labor force and the swift increase of the degree of participation of women has had its effect on the moderation of wages (CPB 1991; Watson et al. 1999). Moderation of wages was supported by reductions of the burden of taxation and social security contributions and by benefits lagging the development of wages and because of the growth of the supply of labor, which through market forces put pressure on the increase of wages. The last factor meant that the Phillips curve— the trade-off between unemployment and increases of wages and prices—had taken effect. Research by the International Monetary Fund and the Dutch Ministry of Economic Affairs also shows that the effect of the Wassenaar Agreement on the moderation of wages in the 1980s was relatively limited. Decreasing costs of labor and decrease of the labor-income share between 1984 and 1989 can be explained by increasing unemployment (Phillips-curve effect), the decrease of taxes and contributions, the decrease of benefits levels, the development of productivity, and changes in the terms of trade, that is, the ratio between export and import prices (Watson et al. 1999:30). It is not surprising that Bolkenstein (1999) does not attribute the success of the Dutch economy to the polder model, but to the demise of it: the Netherlands has shifted towards the Anglo-Saxon model. This institutional process of changes was, in his opinion, formally initiated with the Wassenaar Agreement on mod-

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eration of wages and redistribution of employment, aimed at the restoration of profitability of Dutch enterprises and the restoration of employment. Moderation of wages was traded for a decrease of taxes and social security contributions. The focal point of the Dutch consensus economy was shifted from the central national level, dominated by politics, to the decentralized sectoral collective labor agreements parties, the social partners at the branch level. There was decentralization from the macro level to the meso level and in the 1990s, towards the micro level. This is not the entire truth. The total wage bill per employee increased by 55 percent between 1980 and 1992 in companies, but in the government by less than half of that: 23 percent. Salaries of civil servants were cut by 3 percent in 1984. As a result, the salaries of civil servants fell behind by 8 percentage points. From 1985 to 1990, gross wages of civil servants were not raised. The result of this was that contract wages in the government lagged by another 9 percentage points between 1983 and 1989, compared to the developments in companies (De Kam, Van Drimmelen, and Van Hulst 1995:153–154). Wage moderation in the 1980s was mainly related to wages under collective labor agreements of civil servants and the so-called trend followers, whose salary is linked to civil service scales, and considerably less to wages under collective labor agreements in the private sector. It has hardly contributed to the growth of exports or the improvement of employment in the export sector (see also Salverda 1999; Watson et al. 1999). The next section handles in detail the relation between the Dutch competitive position and the development of employment.

CONTRIBUTION OF THE DUTCH CENTRAL BANK Moderation of wages went hand in hand with appreciation of the Dutch guilder. The vision of the Dutch central bank, the Netherlands Bank (De Nederlandsche Bank—DNB), is that the appreciation of the guilder in the long run has no influence on the competitive position and the profit margins in the open sector of the economy. The positive effect of the appreciation is related to the low real interest rate. On balance, the appreciation will have a positive effect on economic growth. Research has nevertheless shown that appreciation of the guilder after 1985 affected the profitability of Dutch enterprises and, as a result, employment in exporting companies (Knoester, Van der Linden, and Schipper 1995; Watson et al. 1999). However, compared to Germany, for example, the Dutch increase of the exchange rate is overcompensated by the moderation of wages (Van Riel and Metten 1996; Vijselaar 1996). This explains why the Dutch competitive position hardly improved after 1985. Opposed to this is the fact that although exports are made difficult by an expensive guilder, foreign products become cheaper. This increases competition on the domestic market. Appreciation of the guilder also has other economic advantages for the Dutch economy. The composition and the quality of the export package and the development of labor productivity are also important for the competitive position. Companies are forced to increase

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33

their productivity to compensate for the relative increase of prices. Judging from Albert (1993), this is an incentive for management that in the long term works better than the threat of a takeover. Companies are stimulated to specialize in so-called up-market products, in which the price is not very important, but quality, innovation, and service are. This entails much research. The final result of this effort is a stronger economy. The Netherlands Bank linked the nominal value of the guilder to that of the German deutsche mark in 1983. This meant that as a result of the moderation of wages and, as a result, decreased inflation, a real depreciation of the guilder compared to the deutsche mark occured. A decreased terms of trade was the result: export prices lowered compared to import prices. This led to a national impoverishment because the spending space of the Netherlands became limited. The Netherlands would have to export more goods to be able to purchase the same amount of imported goods. This also happened because a deutsche mark purchased more Dutch goods. The effect of this real depreciation of the guilder is clearly showns by the trade balance. The current account of the balance of payments improved considerably, from a deficit of 0.5 percent of the GDP in 1980 to a surplus of approximately 6 percent of GDP in 1997 (Watson et al. 1999). In theory, higher exports lead directly to more employment in exporting companies and in suppliers. The openness of the Dutch economy plays a positive part in this. Also, an increasing surplus in the trade balance stimulates the domestic economy; other things being equal, this surplus generates income and improves economic growth through the multiplier effect. The openness of the Dutch economy reduces the multiplier effect. The effect of increased national expenditure slowly disappears towards the foreign countries through higher imports (import leak). Watson et al. (1999:8) conclude, however, that the strong Dutch growth in the middle of the 1980s was based on exports and investments, while from the end of the 1980s, consumption was an important source of growth. Consumption increased more strongly than in other European countries, despite the very moderate increase of real wages. This is partly connected to the strong growth in employment, through which the income of families increased (two-earner households), and an increased confidence of consumers, which led to a reduction of savings. Calculations by Schettkat and Reijnders (1998) show also that in the period 1987–1996, despite growing exports, the employment share of the export sector in the Netherlands decreased. This export sector mainly produces industrial products. An explanation for the relative decrease of employment is the increased labor productivity in industry. The demand in the goods market shifted to private consumption. This private consumption is service intensive, and services are labor intensive. Employment shifted from industry to the service sector. This shift was made possible through flexibilization and went hand in hand with a shift from full-time to part-time and flexible jobs. It can be concluded that Dutch industry has scored well in the last few years. Exports increased as a result of the increase of productivity and not—despite the polder model—through mod-

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eration of demands of wages (Salverda 1999). Increasing employment mainly sprang from consumptive expenditure through moderation of wages, which caused redistribution. The labor-income share decreased, and family income increased because of a growing number of two-earner households. Capital owners and managers especially prospered. The most important effect of the polder model is therefore a redistribution of both employment and income. The share of the service industry in total employment (73.7 percent in 1995) in the Netherlands is the highest in the EU and is increasing, while the share of industrial employment in total employment is one of the lowest (22.6 percent in 1995) and is decreasing. The development of the Dutch sectoral employment structure shows similarities with the American situation (Hollanders and Ziesemer 1999). Research by the CPB Netherlands Bureau for Economic Policy Analysis also shows that in the Netherlands, the added value in the open and in the sheltered sector of the economy increased by 31 percent between 1987 and 1996. Employment in the open sector decreased by 7 percent, and in the sheltered sector, employment increased by 33 percent (CPB 1997c:290). The solid guilder in combination with the open economy forced moderation of wages. Linking the Dutch guilder to the German deutsche mark meant that these two countries formed a quasi-monetary union. This loss of the exchange rate instrument meant that the development of wages became essential for the balance of payments in the short term. Not only did this lead to low inflation and wage moderation, but the credibility of this link also led to low interest rates. The solid guilder also was an incentive in the open sector for an increase of productivity and quality. Therefore, the Netherlands Bank has played an important part in the Dutch economic success. Wages are not just a cost factor, as is stated in neoclassical economic theories, but are also a source for an effective demand and provide employers and employees with positive incentives. The Dutch policy of wage moderation is more or less a “mixed blessing” because, apart from the pressure on domestic expenditure, moderation of wages coincides with a very moderate increase in productivity and decreased innovative dynamics (Den Butter and Broersma 1993; Kleinknecht 1996, 1998; Van Schaik 1994). Neoclassical economists are also opposed to moderation of wages because of its pointlessness: the market determines the wage level and should determine the wage level. Non-market-clearing wage differences—wages that are either too high or too low compared to the equilibrium wage—lead in this vision to disallocation of labor. This policy might be effective in the short term, but in the long term, moderation of wages has hardly any influence on the average wage level: this is determined by demand and supply in the labor market.

FAVORABLE EXTERNAL CIRCUMSTANCES: LUCK Circumstances have led to the fact that the previously mentioned drop in domestic effective demand did not occur (Delsen and De Jong 1997). The Nether-

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35

lands in the second half of the 1980s profited from the synchronized business cycle in the industrialized world. When the economic situation in the United States and Great Britain ended in a recession in the early 1990s, the Dutch economy prospered from the increased expenditure in Germany, which benefited the buildup of the former East Germany. Calculations of the European Commission have concluded that the Netherlands, together with Belgium and Luxembourg, has profited the most from the reunion of Germany. For both the Netherlands and the Belgium-Luxembourg Economic Union, the German unification resulted in an extra growth of 1.6 percent from mid-1990 until the end of 1991. The other EU member states at that time (excluding Germany) experienced a calculated extra growth of 0.6 percent (EC 1992:8). In the following years, continental Europe was also hit by a recession. Once again, the Netherlands was a positive exception to the rule. GDP rose in 1993 in the Netherlands slightly by 0.3 percent, while the average GDP for Western Europe decreased by 0.5 percent (CPB 1994:13 and 15). In this period and in the first period of the following conjunctural recovery (1994 and 1995), the Netherlands profited from its package of specialization. The Netherlands is very specialized in the agricultural sector and affiliated activities (the agro-industrial complex) and the chemical industry.5 The demand for products of the first sector is relatively insensitive to economic fluctuations. The demand for products from the chemical industry and other semifinished goods is high at the start of a trade revival when stocks are being replenished. Dutch industry benefited from this in 1994 and 1995. As an economic boom matures, the Dutch pattern of specialization has a more disadvantageous effect. The demand then focuses on investment goods and durable consumption goods, both sectors in which the Netherlands does not specialize. When in 1996 the Dutch pattern of specialization turned against the Netherlands, it was the low level of interest that offered support. The low interest rate ensured a strong increase in consumer credit and mortgages. The outstanding amount in consumer credit rose in the second half of 1996 by 890 million guilders to almost 23.5 billion guilders. The outstanding amount in consumer credit had never before increased that much in a half-year time (CBS 1997a). The number of mortgages on dwellings that have been concluded in the past few years has increased significantly more than the sale of existing and newly constructed houses. This points towards the fact that part of the new mortgages are being used for refinancing of existing mortgages and for financing consumer expenditure. Table 2.2 shows indeed that the number of refinanced mortgages has increased both relatively and absolutely, partly due to the decreasing mortgage interest rate. The mortgage interest rate reached its lowest point since 1969 in 1998 (5.1 percent), and refinanced mortgage amounted to 39 percent of the total of concluded mortgages on dwellings. The low interest rate also explains the fact that prices of shares on the Amsterdam Stock Exchange have increased more than those on other stock exchanges. The CPB Netherlands Bureau for Economic Policy Analysis (CPB

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Table 2.2. Average Mortgage Interest Rate and Number of New Mortgages on Dwellings in the Netherlands, 1995–1998

Source: Data provided by De Nederlandsche Bank.

1997a:67) estimates the real wealth profit as a result of the increase of housing prices to be roughly 50 billion guilders. Approximately 10 percent of this will result in increased consumptive expenditure. The influence of the increase of the value of shares on consumption is probably much smaller. Both developments can explain increased consumer confidence and the relatively high growth of consumer expenditure, especially on durable goods, of which the volume increased by 4.25 percent in 1996. The previous section has already shown that an important part of the present favorable economic situation and the similar growth is mainly due to the high consumer expenditure. The mortgage interest rate was raised several times in 1999. The fact that an increasing interest rate led to the selling of more houses and therefore to the closing of more mortgages points towards the existence of a speculative bubble on the housing market. An increase in interest rates leads most of the time to a decrease in house prices and share prices. The past has shown that a downward correction of the prices of houses, whether or not as a result of an increasing interest rate, can start a downward spiral. The collapse of the Dutch housing market after 1978 worsened the recession. The real prices of houses decreased significantly: in 1982, prices were 70 percent below the level of 1978. The collapse of the housing market then led to a major loss of wealth and a strong decrease of consumption. The CPB Netherlands Bureau for Economic Policy Analysis (CPB 1998a:55) does not think that there will be a reoccurrence, because Dutch families, unlike British families, for example, establish their mortgage debts for the long term. A higher interest rate does not directly lead to an immediate increase of the interest burden. This illustrates the value of durable relations within the polder model. This was also the case in 1978, but this could not prevent the collapse of the housing market. Moreover, the disadvantageous wealth effects—decreasing housing prices and decreasing share prices—can lead to an adaptation of portfolios. This can also have a negative effect on the economy.

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The fact that despite an increasing interest rate in 1999, more houses were sold could also have been caused by the increase in two-earner households.

INCREASING MARKET FORCES “More market, less government” was the motto of the first Lubbers government (1982–1986). Privatizing and deregulation were important instruments for this (Knoester 1989). Neoclassical economic theory suggests that an increase of market forces in product markets and labor markets leads to lower prices and wages and to increased efficiency and higher rates of economic growth. Increase of competition through the competition law, or what the Americans call antitrust policy (Gradus 1998), and the liberalized establishments law that is the licencing system that requires enterpreneurs starting a business to meet minimum general and profession-specific qualifications (OECD 1998b), contributes to this. This increases prosperity and employment. This is also the argument for abolishing the legal extension of provisions in the collective labor agreements. With the neoclassical theory in the back of its head, the Ministry of Economic Affairs under the first purple Kok government started the project “Market working, deregulation, and quality of legislation” (Marktwerking, Deregulering, en Wetgevingskwaliteit—MDW project). This MDW project was continued under the second purple Kok government. On the other hand, increased competition will lead to less investment in research and development. Inventions, innovations, and production of knowledge have positive external effects. This implies that a part of inventions made, of innovations, and of developed knowledge freely flows towards other entrepreneurs. This means market failure. These free-rider effects and the problems with the appropriation of revenues have a negative effect on efforts in research and development by private enterprises. External effects will cause an enterprise to invest less than is socially optimal (Kleinknecht 1998; Van de Klundert 1997:9). A certain measure of monopoly power improves the innovativeness of enterprises. Investments in research and development become more profitable when the market share of an enterprise increases. Increased competition will decrease these innovations and will have a negative effect on technological development. Deregulation of the sheltered sectors and branches of the economy and increased competition in these sectors can also decrease the quality of the products produced. When endogenous growth factors are also regarded, more competition will decrease prosperity in the long term. The cheaper and expanding sheltered sector results in a reallocation of production factors in the economy and in the crowding out of the open, innovative sector. On a macro level, this can mean less investment in research and development and other innovative activities, resulting in a decrease of productivity of labor (Van de Klundert and Smulders 1997). Privatizing can even lead to higher prices and can erode the quality of the supply of services, as is shown in the recent example of British

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Rail. Privatizing in 1996 has led to the fact that aiming for rapid profits will be at the cost of investments in safety and of labor conditions of the personnel. It also leads to a “take the money and run” attitude. The tariffs for transportation are among the highest in the world. According to a labor-union spokesperson, lives have been sacrificed to cut the costs (de Volkskrant, October 8, 1999). There is a real danger that labor will become a commodity. Generally it is not easy to find a direct connection between regulation and economic activity. Nickell (1996) has examined the relationship between competition and increase in productivity for a large number of enterprises in the United Kingdom. He found that there is indeed a positive connection. Several other studies also show a positive relationship between flexibilization and economic growth (Van Bergeijk and Haffner 1996; Van Hulst 1996; Koedijk and Kremers 1996; Lever 1997). These analyses have in common that they explicitly or implicitly rely on some sort of general equilibrium model, in which flexibility of prices is better by assumption, full competition is the norm, and coordination of economic activities does not require further analysis (Garretsen 1997). When this coordination is taken into account, the conclusion then is that competition will be at the cost of innovation (Nooteboom 1999). A market economy has a need for rules and institutions that will almost by definition involve a certain price rigidity. These institutions and conventions also decrease uncertainties and thus improve economic growth (Kuipers 1995, 1996). A comparison of achievements of Rhineland enterprises and Anglo-Saxon enterprises is always favorable for the Rhineland enterprises (H.W. De Jong 1996). Both the shareholders and the employees in Rhineland enterprises are better off in the long term (Van Witteloostuijn 1999). The contradictory conclusions of these examinations illustrate once again the difficulties of estimating the influence of regulating or deregulating the economy. Benchmarking the Netherlands: Test of Dutch Competitiveness, published in 1995 by the Ministry of Economic Affairs (EZ 1995), shows that the Dutch labor, capital, and product markets have a limited possibility for absorption. The differences in results are in large part caused by differences in institutions. The main lines of the system of social security, the system of wage formation, and the competition law have not changed in the last decade, while the environment has undergone major changes (globalization and individualization). The faulty economic dynamics, according to this test of competitiveness, are caused by the consultation economy and, coupled with it, far-reaching leveling of incomes. This leads to rigidity and works against a swift and efficient decision-making process. The former minister of economic affairs, Mr. Hans Wijers, also points to the faulty functioning of the labor, capital, and product markets. According to him, a modernization of the Dutch economic order by institutional renewal is needed. Related to this, two main lines of economic policy are distinguished. The first is regulatory reform aiming at a substantial wider use of the ordening capacity of the market mechanism. This includes a shifting of public to market allocation, reduction of the entry thresholds, and simplification of regulations or

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39

deregulation of the product, labor, and capital markets aiming at reducing the hidden policy costs and increasing flexibility. The second is strengthening of government’s role on the public supply side of the market sector. This covers efforts related to physical infrastructure, knowledge infrastructure, tax reduction, powerful competition law, and the recalibration of the social security system. This is repeated in the test of Dutch competitiveness of 1997, and it is explicitly stated that deregulation and increased market forces will lead to improved results and higher economic growth (EZ 1995, 1997; Van Sinderen and Van der Geest 1995). The examination The Dutch Welfare State from an International and Economic Perspective by the Ministry of Social Affairs and Employment (SZW 1996) concludes, based on international comparison, that the Dutch welfare state will withstand the international test. The examination shows that the disadvantages of Dutch institutions—the consultation model, the level of minimum wages, and the social security system—are not that bad and sheds a different light on the advantages (see also chapter 6). The Dutch welfare state has produced a flexible labor market with alert adaptations of wages, high mobility, and good achievements in the field of wage costs and productivity. However, the expenditure for social security—remunerated inactivity—is higher than the European average. The reasonably equal distribution of incomes and the relatively high levels of benefits together with the system of consultation generate a highly educated labor force and high social mobility. Because of the social climate, there is a high degree of involvement with the ups and downs of enterprises, which improves competitiveness (Van de Meerendonk 1998). In the MDW project, in several fields the policy aimed at increased competition has been initiated, for example, taxi transportation, hospitals, and accountants. This policy is in great part still in the implementation phase. The liberalization of shop opening hours has been realized. The entry into force of the Shop Opening Hours Act (Winkeltijdenwet) of 1996 enables shops to remain open between 6 A.M. and 10 P.M. on working days. These opening hours are longer than those in Belgium and Germany. Evaluation studies of the Shop Opening Hours Act (see Delsen 1999) show that employment in supermarkets has increased by 5 percent and the average opening hours have increased by 15–20 percent. Additional employment consisted mainly of part-time and on-call labor. The share of full-time employees decreased. Employment in shops that did not use this new act decreased as well. In relation to sales, a substitution of large and medium-sized shops at the expense of smaller shops took place. The total turnover remained the same. The costs per unit product increased. Working pressure—sales per hour—decreased as a result of this new act. The spread of sales over parts of the day increased as well. Thus the peak load dropped. There was no hard evidence for a positive relation between opening hours and the costs per unit product. This relation can very easily be negative. Part of the higher costs on the goods market is passed to personnel through decrease or abolition of irregularity or overtime allowances in collective labor agreements and through flexible contracts at the expense of the number of full-time employees in the

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chain store. The conclusion can be that less positive assumptions can be made about market thinking and the expected positive results of deregulation not only on theoretical grounds, but also on practical grounds.

THE DUTCH EMPLOYMENT MIRACLE The Dutch job machine runs full force. The annual growth of employment in the Netherlands in the past decade has been just about the same as in the United States and has been significantly higher than in Belgium, Germany, and the European Union as a whole (Table 2.3). In the second half of the 1990s, the growth in employment increased and is twice to three times as high as the EU average and the growth in Belgium and Germany and is also significantly higher than the growth in employment in the United States. The year 2000 shows a decreasing growth of employment in the Netherlands, although this is still significantly higher than in its neighboring countries and the EU average where employment growth increased and also higher than in the United States. Table 2.3 also shows that the growth of the Dutch labor force has been considerably higher in the last decade than the EU average and also higher than in the neighboring countries Belgium and Germany. In Germany and Belgium absolute decreases of the labor force have been recorded. In the 1980s, the Dutch labor force has grown more slowly than the American labor force. In the 1990s, this situation changed, and the Dutch labor force grew faster than the American. Apart from the quantity, the quality of the growth in employment is also important. Figure 2.3 shows the development of the number of jobs of employees by type of contractual engagement since 1987. This shows that the number of full-time jobs has hardly changed since 1987. On the other hand, the number Table 2.3. Annual Growth of Employment and of the Labor Force, 1983–2000 (Percentage Changes from Previous Period)

Sources: OECD 1996:3; OECD 2000a 14; OECD 2001:14.

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41

Figure 2.3. Development of the Number of Jobs of Employees by the Kind of Labor Contract, 1987–1999 (1987
100) aFirst

Quarter Source: Calculated from data provided by Statistics Netherlands.

of flexible jobs has almost doubled and the number of part-time jobs has increased by more than 60 percent. The flexible jobs include on-call labor, agency workers, and fixed-term contracts of less than one year. These currently form more than 12 percent of the total number of jobs of employees, against 8 percent in 1988. This share has decreased slightly in 1998 and 1999 due to the economic boom. The share of part-time jobs in total employment is now around 30 percent, compared to 24 percent in 1988. The share of full-time jobs in the total amount of jobs in the period 1987—1998 decreased by 10 percentage-points from 68 percent to 58 percent. More than in other EU countries, the development of part-time employment in the Netherlands can be explained by the demands of employees. Unlike other EU countries, where temporary employment is mainly introduced by employers, in the Netherlands the preferences of employees play an important part in temporary labor (Delsen 1995). Despite the very high share of part-time employment in total employment, compared to the other EU member states, there still is a considerable growth potential in the Netherlands. Research by the Institute for Labour Studies (OSA 1997) shows that almost 13 percent of all men would like to work fewer hours, while less than 4 percent would like to work more hours. Those who would like longer working weeks of more than 35 hours

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are mostly younger men. People over 45 years of age and women with a fulltime job especially would like to work shorter hours. In discussion with the partner in the household, 35 percent of all men would like to work less, while only 2 percent would like to work more. More than 18 percent of all women would like to work more, almost 12 percent less. Women who would like to work more mainly would like to change the small part-time job into a larger part-time job. In discussion with the partner, 26 percent want to work more hours, 15 percent less. With 69 percent of all women and 82 percent of all men, the actual number of working hours and the time they want to work are equal. In theory, it can be expected that in a decentralized economy, demands of employees are better cared for and are better represented in wage negotiations. It is very amazing that this is not the case in the United States or the United Kingdom. In 1997, the involuntarily part-time employment—the percentage of parttimers who claim that they work part-time because they cannot find full-time jobs—in the United Kingdom (12 percent) and the United States (8 percent) was higher than in the Netherlands (6 percent). Figures for 1994 also show that 29 percent of part-timers in the United Kingdom wanted a full-time job, compared to 8 percent in the Netherlands. On the other hand, the share of full-timers who seek part-time employment is higher in the Netherlands (16 percent) than in the United Kingdom (5 percent) (OECD 1999:33).

DECREASING (LONG-TERM) UNEMPLOYMENT Statistics Netherlands (Centraal Bureau voor de Statistiek—CBS) collects a number of different unemployment indexes. Figure 2.4 shows the development of registered unemployment since 1987 and the unemployed labor force since 1982.6 The registered unemployment is the number of people without a job or with a job but working less than 12 hours per week who are registered with a regional employment office and could start immediately at a job of more than 12 hours per week. Registered unemployment as a percentage of the labor force shows a cyclic development. The percentage decreased from almost 8 percent in 1987 to 5.3 percent in 1992. After this, registered unemployment rose to 7.5 percent in 1994, followed by a decrease to 4.1 percent in 1998. For policy purposes, these figures are no longer used; instead, the unemployed labor force is used. This is defined more broadly: people who are actively seeking employment of more than 12 hours per week. Registration with an employment office is here not important. The unemployed labor force also shows a cyclic development and is about 1 percentage point higher than the registered unemployment. The unemployed labor force decreased from almost 10 percent at the start of the 1980s to 6.6 percent in 1991. After 1991, the unemployed labor force increased to 8.7 percent in 1997. The Dutch unemployment index in 1997 was on the same level as in 1991. The unemployment index decreased to 5.2 percent in 1998. The unemployed labor force for 1999 was 4.0 percent. A continuous decrease to 3.6 percent was recorded for 2000.

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Figure 2.4. Unemployed Labor Forcea and Registered Unemploymentb as Percentages of the Labor Force, 1982–1998 aPeople

without work or with work of less than 12 hours per week who actively seek employment and are available for work of at least 12 hours per week. bPeople registered with an employment office who are without paid labor for 12 hours per week or more and who are available for work of 12 hours or more. Whether people are in fact actively seeking employment is not a criterion. Source: Calculated from data provided by Statistics Netherlands.

We have previously shown that the growth of the labor force in the Netherlands is higher than in the surrounding countries. Despite the strong growth of the labor force, the standardized unemployment (4.1 percent in 1998) as a result of the increased growth of employment in the Netherlands is the lowest in the entire Organisation for Economic Co-operation and Development (OECD) area after Luxembourg (2.8 percent) and Norway (3.3 percent). The share of the long-term unemployed in total unemployment is high, however (see Table 2.4). In 1998, almost 48 percent of all unemployed had been registered for more than 12 months at the regional employment office. An important part of these longterm unemployed have lost their employability. This means labor-market hysteresis: present unemployment can be explained from past unemployment. Here the hysteresis effect denotes cases where the natural or equilibrium level of unemployment (a proxy for unemployment due to market imperfections) is a function of past unemployment. Various factors can be mentioned to explain this duration dependency: human capital losses associated with long-term unem-

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Table 2.4. Standardized Unemployment (Percentage of the Labor Force) and Share of Long-Term Unemployed in Total Unemployment, 1985–1998

Sources: OECD 1989:217; OECD 1998a:208; OECD 2001:208 and 227; EC 1996:147.

ployment, no influence on wages, signaling (discrimination, unemployment duration as a screening device), decreased search activity, and sorting. This implies that there can be an increase of natural unemployment—unemployment with which there is no accelerating inflation (non-accelerating inflation rate of unemployment, NAIRU). A positive fact is that the share of long-term unemployed decreased considerably during the last decade until it dropped below the German level and the EU average. The Belgian share is above the European average. Compared to the United States, the share of long-term unemployed in total unemployment in the Netherlands is still very high. The reduction of long-term unemployment can be explained by the active labor-market policy, including, among other measures, Melkert jobs, job pools (banenpools), and Youth Work Guarantee Law (Jeugdwerkgarantienet—JWG) jobs, and the implemented reductions of costs (De Beer 1997). There are three variants of Melkert jobs, named after the minister of social affairs and employment in the first purple government. Melkert I jobs are permanent 32-hour jobs in the public sector for unemployed persons receiving a social assistance benefit for at least one year. The wages paid are between 100 percent and 120 percent of the minimum wage. Melkert II jobs are temporary 32-hour jobs in the private sector with the use of social assistance benefits as a two-year subsidy. These jobs have the same wage levels and target group as Melkert I jobs. Melkert III jobs are experiments by municipal social services to activate social security recipients by letting them perform activities while retaining benefits. Between 1994 and 1999, 40,000 Melkert I jobs and 20,000 Melkert II jobs were created. Youth Work Guarantee Law jobs are guaranteed supernumerary parttime jobs of 32 hours in the public sector for unemployed young people between 16 and 26 years of age.

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Job pools concern supernumerary jobs with employers in the public sector aiming at work experience for long-term unemployed. The participants receive the legal minimum wage. In 1990, the number of supernumerary jobs created within the job pools plus part-time jobs for young unemployed was 11,000. In 2000, it increased to 36,000 supernumerary jobs. Excluding the Sheltered Employment Act (Wet Sociale Werkvoorziening—WSW) that provides employment to disabled persons in sheltered employment workshops, the total number of people with jobs within labor-market measures increased from 11,000 in 1990 to 85,000 in 1999 and 86,000 in 2000 (SZW 2001:19). In addition to a general reduction of taxes and social security contributions, a selective reduction of costs has been implemented and fiscal incentives have been introduced, aimed at improving employment at the bottom of the labor market, for example, the Special Contribution Discount (Speciale Afdrachtskorting—SPAK) and the Regulation of Reduction of Contribution of Long-Term Unemployed (Regeling Afdzachtsvermindering Langdurige Werklozen—VLW). SPAK offers a subsidy to the employer for every low-paid (less than 115 percent of the full statutory minimum wage) worker on the payroll. In 1996, the discount was Dfl 1,185; in 1998, Dfl 3,660. More than 20 percent of all employees, 1.2 million persons, are subsidized through SPAK. VLW offers a special discount to employers for every long-term unemployed person engaged at a wage less than 130 percent of the statutory minimum wage. The maximum duration of the discount is four years. The VLW subsidy is Dfl 4,500 per person. In 1997, 60,000 persons were subsidized (Salverda 1998). Calculations by Douven (1998) have shown that the natural unemployment—NAIRU—decreased in the Netherlands after 1982. According to Douven, this can point towards an increasing flexibility of the Dutch labor market, partly influenced by the implemented deregulatory policy after the Wassenaar Agreement. The differences in the level of long-term unemployment can partly be explained from the underdeveloped Dutch active labor-market policy and the fact that the expenditure on passive labor-market policy as a percentage of GDP in the Netherlands is one of the highest in the EU (Table 2.5). Moreover, in the Netherlands, half of the expenditure for an active labor-market policy is related to the Sheltered Employment Act (WSW). Between 1994 and 2000, the number of persons active in the sheltered employment workshops increased from 86,000 to 93,000 (SZW 1999:18). Table 2.5 shows a recent change. The active labor-market policy has received more attention, causing the expenditure to increase. Other countries have experienced an opposite development. This also explains the decrease of long-term unemployment in the Netherlands. The high collective burden of taxation and social security contributions and the high tax wedge also discourage participation and partly explain the level of long-term unemployment. The Dutch marginal tax wedge is high compared to that in other OECD member states. This is not only the case for lower and average incomes but also for incomes of twice the average. The effective marginal tax tariff in the Netherlands can be even higher than 100 percent (OECD 1996b:52). However,

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Table 2.5. Public Expenditure on Passive and Active Labor-Market Programs as a Percentage of Gross Domestic Product, 1985–1998

aPublic employment services and administration, training, youth measures, subsidized employment, and measures for the disabled. bUnemployment benefits and early retirement for labor-market reasons. cFor 1985 and 1990, only West Germany. d1997. Sources: OECD 1991:245–252; OECD 1999:239–240.

a high marginal tax wedge forms an incentive for those who already are working to reduce the number of hours worked and, hence, to redistribute employment. In the early 1980s, the i/a ratio, the ratio between the number of benefit recipients (inactivity) and the number of employed (activity), in the Netherlands was still lower than in the surrounding countries, but above the level in the United Kingdom and the United States. The crisis led to strongly increased unemployment indexes and disability figures. The result was that the Netherlands in 1985 had one of the highest i/a ratios in the EU. After 1985, employment and inactivity in the Netherlands developed relatively favorably (see Table 2.6). This also caused the i/a ratio to develop favorably when compared to the ratio in other countries. The Dutch i/a ratio decreased from 0.84 to 0.78 between 1985 and 1997. In other countries, the i/a ratio increased. This is the reason for the Dutch i/a ratio at present being one of the lowest in the EU. The Dutch employment/working-age-population ratio in 1995 (64.3 percent) was higher than the EU average (60.2 percent) and also higher than in Belgium (55.7 percent). However, the Dutch employment rate was still lower than the German (65.1 percent) and the American (73.5 percent) rates (OECD 1996a:186). Comparability of these international data on i/a ratios and employment/population ratios is limited as a result of differences in age structure of the labor force between countries. The fact that the Dutch population and labor force are relatively young compared to those in other EU countries is not entirely unimportant. Calculations by Koning (1999) show that when this “bias” is corrected in an interna-

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Table 2.6. I/A Ratio (Benefit Recipients/Employed), 1980–1997

aFor

1980, 1985, and 1990, only West Germany. Sources: SZW 1998:102; SZW 1999:162.

tional comparison by adapting the age structure to the European average, the Dutch employment rate is approximately 2 percentage points lower, which is almost 200,000 persons.

CULTURAL FACTORS: THE END OF THE BREADWINNER MODEL The breadwinner family is losing ground. There is a clear shift from one-earner households towards two-earner households and single-person households. Between 1977 and 1997, the number of one-income households decreased from more than 1.9 million to more than 0.9 million, a reduction of 50 percent. In 1977, 51 percent of all households had only one breadwinner. This figure was only 18 percent in 1997. In this same period, the number of two-earner households doubled from more than 1 million to almost 2.4 million. The share of twoearner households in the total number of households rose from 27 percent to 45 percent (Table 2.7). This not only means more income but also changes in preferences in relation to work and working hours, for example, a greater need for part-time employment and more control over working hours. It is better to talk about one-and-a-half-earner households, because the wives of many breadwinners are working part-time and spend the remaining hours on care. When this factor is taken into account, the strong growth of jobs in the Netherlands— one of the successes of the polder model—can be attributed to women. This growth is not just the result of the government policy, but is mainly culturally determined. This tendency can also be measured in other countries. The strong increase in the degree of labor participation of women in the Netherlands has

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Table 2.7. Number of One- and Two-Earner Households, Single-Person Households, and Remaining Householdsa, 1977–1997 (in Thousands)

aHouseholds

with most-earning person younger than 65 years of age. mainly single-parent families and front-door sharers. cProvisional figures. Source: Data provided by Statistics Netherlands. bConcerns

mainly been a catching up with the European average. The low degree of employment participation of women was an ideal starting point for the expansion of employment in the early 1980s. The government has been an influence in the establishment of the reduction in the participation rate of men, partly due to early retirement, disability, and unemployment (Watson et al. 1999:32) (see also chapters 6 and 7). The moderation of wages in the 1980s and 1990s—the most important factor behind the success of the polder model—can also be partly attributed to women. The considerably increased number of working women has not only caused this moderation of wages through a supply effect, as shown in the previous discussion, but has also made this moderation of wages possible. The Jaarboek welvaartsverdeling (Distribution of prosperity yearbook) from 1998 by Statistics Netherlands (CBS) has shown that the purchasing power of certain groups of individual employees has hardly increased since 1983. The available income of single-person households and one-breadwinner households, measured in constant prices, was on almost the same level in 1996 as in 1982. Primarily as a result of the increasing employment participation of women, the available average income rose for multiple-person households between 1982 and 1996 by 8 percent. This illustrates that there has been a considerable redistribution of income in the Netherlands. Table 2.7 also shows that the number of single-person households is increasing fast. Between 1977 and 1997, this number tripled from 0.5 million to over 1.5 million. The share of single-person households in the total number of households doubled from approximately 15 percent to 29 percent. These are mainly

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elderly people 65 years of age or older and young people. This causes the growth of the number of households to exceed the growth of the number of inhabitants and has also led to changes in the supply of labor (Fruytier 1998:34–39). Young people who run a single-person household have a more flexible attitude regarding labor. In most cases, labor is not their main issue, whereas an education is. The need for employment security is less present. Between 1986 and 1995, a threefold increase took place in the share of young people in part-time employment. In 1995, 35 percent of young men (20–24 years) and over 60 percent of young women (20–24 years) were working part-time. For those 15 to 19 years of age, the figures were 80 percent and almost 50 percent, respectively (Delsen 1998b). This is partly related to increased part-time education, partly to the decrease of financial support and to the increase of college tuition fees.

CONCLUSIONS The success of the polder model is mainly related to the reduction of long-term unemployment, the creation of new jobs, and the growth of GDP. The most important explanatory factor behind this success is the moderate development in wage costs as a result of the reduction of the burden of taxation and social security contributions, cutbacks, and the effect of the working of the labor market. The contribution of the Wassenaar Agreement is limited. The improved competitive position can partly be explained by the moderation of wages, which overcompensates the appreciation of the guilder. The Netherlands Bank has an important role in the Dutch economic success. In the middle of the 1980s, economic growth was mainly based on export and investments. From the end of the 1980s, household consumption became the most important factor behind economic growth and growth in employment. The effect of increased market forces cannot be clearly established. It can be concluded that the consensus economy has brought about an enormous redistribution of work and income. The positive economic results cannot be completely explained by the implemented policy. Favorable temporary external effects also contributed to the employment miracle. External effects include the expenditure impulse as a result of the German reunion, the right product package (given the phase of the business cycle), and the positive effect of the low interest rate on expenditure. A final factor behind the success is the change in culture. The increased employment rate of women has not only caused the moderation of wages, but has also made it possible.

NOTES 1. As a result of the 1990 Oort operation, employees, including civil servants, started paying premiums for all public benefits. Before this year, apart from the General Old Age

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Act (Algemene Ouderdomswet—AOW) and the General Widows and Orphans Act (Algemene Weduwen- en Wezenwet—AWW), all costs for these public benefits were paid by the employers. Simultaneously, the employer was obliged to compensate the employee through the so-called transfer addition (overhevelingstoeslag). 2. The labor-income share of companies is the share of the production factor labor in the income generated in the sector companies, in which the self-employed are considered to have a labor income equal to the average wage of an employee. 3. The difference between the growth of compensation per employee and the growth of unit labor costs is the growth of labor productivity. 4. Effective January 1, 1992, the WKA linked all social benefits to the minimum wage. Differentiation from this link is possible on two grounds: excessive development of wages that is expected to have a disadvantageous effect on employment or such a growth in the volume of social security that a significant increase of the pressure of taxation and social security contributions is necessary. No social benefit is directly linked to the general development of wages. Since the end of 1991, the agreement has been concluded that there will only be a linkage with the development of wages if the inactive/active (i/a) ratio— the ratio between people receiving benefits and employed people—is at a maximum of 82.6. According to the government decree of 1994, the link would be implemented for half that is, social benefits would only be raised by 50 percent of the increase of wages, between 1996 and 1998. In fact, there has been a complete (100 percent) link since 1996 as a result of the considerable decrease of the i/a ratio after 1995, which dipped below the legal rate. 5. For the development of the Dutch pattern of specialization, refer to CPB (1993). 6. Registered unemployment figures are periodically published by Statistics Netherlands (Voorburg/Heerlen) in the publication Geregistreerde Werkloosheid. Data on the unemployed labour force are published periodically by Statistics Netherlands (Voorburg/Heerlen) in Enquête berosepsbevolking.

3

Drawbacks to the Polder Model

INTRODUCTION This chapter will focus on the drawbacks to the polder model. Several negative effects—intentional and unintentional—of the pursued policy will be discussed. As a result, the success of the polder model will be qualified. First, this chapter will examine the magnitude and distribution of inactivity in the Netherlands. Following an analysis of the growing volume of overtime and increasing work pressure, the dynamics of the labor market and the risks associated with segmentation will be examined. The impact of the pursued policy on the development of labor productivity will then be outlined. The chapter will also discuss the effects of the pursued policy on income distribution and examine the poverty problem and associated social exclusion. Finally, environmental pressure and environmental quality will be considered, and a number of conclusions will be stated.

HIDDEN UNEMPLOYMENT AND UNEMPLOYMENT INEQUALITY Due to the budgetary policy pursued by the government, social security expenditure has stabilized. In 1993, social security expenditure, health care excluded, amounted to just over 23 percent of the gross domestic product (GDP) and was at the same level as in the early 1980s. The Organisation for Economic Co-operation and Development (OECD) concluded in its 1998 country survey of the Netherlands that despite the absence of comparable figures, social security expenditure is expected to have decreased after 1993 (see OECD 1998b:80–81; also

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see chapter 6). The volume of social security did not follow this trend. The number of people aged between 15 and 65 receiving a social security benefit, expressed as full-time equivalents, rose from 991,000 in 1980 to 1,838,000 in 1996 (OECD 1998:34). The number of people participating in subsidized job-creation programs, measured in full-time equivalents, also increased from 74,000 in 1980 to 133,000 in 1996. Together, they constitute “broad unemployment.” “Broad unemployment” totaled 27 percent in 1996, hardly decreased after 1985 (27 percent), and is still clearly above the level of 18 percent in 1980. Recipients of a disability benefit form the largest group of inactive individuals. During 1995 and 1996, the volume of disability decreased. However, between 1997 and 2000 the volume of disability benefits increased again (see “Privatization and market section forces in social security” in chapter 6). At present, nearly 10 percent of the labor force receives a disability benefit, twice as high as in other member countries of the European Union (EU). The number of older unemployed people not seeking employment, people making use of an early-retirement scheme, and those receiving social assistance has either increased or stabilized. Chapter 2 revealed a significant decrease in registered unemployment and the unemployed labor force to 4 or 5 percent of the current labor force. Figure 3.1 shows not only that the number of people receiving an unemployment benefit is twice as high as the official unemployment percentage, but also that the number of unemployment-benefit recipients has decreased less during the past few years, namely, from more than 12 percent in 1984 to 9 percent in 1998. During the peak year of 1984, 675,000 people received an unemployment benefit, compared to 608,000 in 1998 and 550,000 in 1999. In 2000, this total dropped to 520,000 people. Full employment in the Netherlands is still a long way off. Moreover, unemployment is unevenly divided among groups of employees. In 1998, among indigenous persons the average unemployed labor force was 4.2 percent, among immigrants it was 13 percent, and among people with a low level of education 12 percent of the labor force was unemployed (SZW 1999:165). The productivity trap and the poverty trap are the main reasons why so few people with a lower level of education participate in employment. Together they constitute the unemployment trap, that is, hysteresis. The productivity trap occurs because the productivity of persons in search of employment is not in line with the minimum wage. As time goes by, unemployed people lose their skills: their human capital diminishes. As a result, a gap between the wage that has to be paid and productivity either develops or widens, making it less attractive for employers to take on such people. An explanation for the unemployment trap, however, may also be stigmatization by the employer. In addition, the longer people are unemployed, the more discouraged they become when they are searching for and applying for a job. Taxation and benefits can result in an unemployment trap because accepting a job goes hand in hand with the loss of benefits or subsidies that are higher or little lower than the wage that is to be earned. Due to the income test in bene-

Drawbacks to the Polder Model

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Figure 3.1. People Receiving an Unemployment Benefit Expressed as a Percentage of the Labor Force, 1982–1998 Sources: CPB 1997a:184–185; CPB 2000:200–201.

fits and income-related schemes, the income of people who accept paid work either does not improve or improves inadequately. This results in a poverty trap. In some cases, the implicit tax tariff (the effective marginal tax tariff) is indeed greater than 100 percent (OECD 1996b:52). Due to this, the disposable income of someone who accepts a better-paid job decreases instead of increasing. The high implicit tax tariff also discourages the employed and unemployed from participating in training courses since such an investment in human capital produces no or little additional income. The poverty trap therefore reinforces the productivity trap. People who are employed or receiving a benefit may be confronted by both traps. The poverty trap results in a high reservation wage. This is the evaluation of leisure time or the minimum wage that must be earned to ensure that accepting a job is worthwhile. The reservation wage increases due to benefits and income-related subsidy schemes such as rent rebates and extra earnings. On the other hand, features of the job that is offered such as a chance for promotion, an opportunity to develop oneself, and the like reduce the reservation wage. For the unemployed, the new jobs (low-wage flex work in the service industry) are

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not more advantageous than benefits. This applies in particular to unemployed men with a family benefit. The scale and significance of unemployment and thus the government’s policy problem extend far further than can be illustrated by unemployment statistics provided by the regional employment offices. First, this is because these statistics only relate to registered job seekers, even though there is a large group of people, including many women, who belong to the so-called hidden unemployed. This category includes people who are willing to accept a job but who are not registered as job seekers with an employment office, people who wish to work less than 12 hours a week, those who are not searching for employment but who are willing and able to accept a job, and finally people who fall under a disability insurance scheme but who still wish to perform certain types of work. Since January 1, 1982, the hidden unemployed also comprise people who are 571⁄2 years old and unemployed but who are no longer registered as such. Real unemployment therefore involves far more people than the registered number of unemployed. Including the hidden unemployed, more than one million people are currently unemployed in the Netherlands. Second, official unemployment figures do not provide a conclusive description of the significance of unemployment, partly because the division of unemployment—unemployment inequality—is not reflected in these figures. Despite the drop in unemployment figures and the decrease in the proportion of long-term unemployed in overall unemployment that was referred to in chapter 2, there is still a certain inability to provide a significant number of long-term unemployed, including unregistered unemployed people in the various benefit schemes and women who fall under the hidden unemployment category, with a genuine opportunity to work. According to De Beer (1997), this is the main drawback of the Dutch employment miracle. Salverda (1998) also concludes that the labor-market position of vulnerable groups such as immigrants, unskilled people, the long-term unemployed, young people, and women has hardly been improved by the Dutch government’s continued and developing program of immediate job creation such as job pools, Melkert jobs, and wage subsidies, including the Special Contribution Discount (Speciale Afdrachtskorting—SPAK) and the Regulation of the Reduction of contributions of Long-Term Unemployed (Regeling Afdrachtsvvermindering Langdurige Werklozen—VLW) (see chapter 2). The SPAK decreases the employer’s wedge, thereby reducing the problem of the productivity trap and in turn stimulating the supply of low-paid jobs. However, a shortage of suitable work is not the principal cause of high unemployment among these groups. De Beer (1998) mentions two reasons why the unemployed usually have difficulty finding a job even though there are many available. The odds of successfully applying for a job are influenced more by the fact that the applicant is unemployed than by his/her level of education or other aspects of his/her background (excluding age). This means that when vacancies are filled, preference will be given to employed job seekers instead of unemployed job seekers, but probably also to newcomers to the labor market such as women wishing to

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resume their careers and school leavers.1 This is partly the result of rational considerations and preconceptions of employers. In addition, there is the issue of displacement on the labor market: 75 percent of vacancies go to people with a better educational background, while those with fewer skills are pushed into lower positions. As a result, those with the fewest skills end up being covered by unemployment insurance (Salverda 1998; Wolbers 1998). School leavers, particularly those with a low level of education, are affected most by diploma inflation (Wolbers 1998). Diploma inflation or credential inflation means that it is no longer possible to obtain as high a position upon joining the labor market as one could in the past with the same diploma. Displacement and diploma inflation confirm the job-competition theory presented by Thurow (1975). Due to the collective labor agreement, individual employees can only compete for available jobs (job competition) and can no longer compete on the basis of wages (wage competition). Job competition occurs on the basis of qualifications possessed by employees. The employer views the labor supply as a queue, ordered according to the level of education, and uses diplomas to make a selection. Moreover, work in the service industry or administrative work is often not in line with work carried out by the unemployed person in the past. According to De Beer (1998), the “Melkert path” (Melkertpad) is only passable under favorable economic conditions. The reason for this is that a limited number of employees with a low level of education from industry can move from a Melkert job to a regular job in the growing services sector. Any economic headwind and a failure to significantly increase the number of Melkert jobs will destroy the gains made during the past few years. Praise for the polder model will diminish, according to De Beer. Salverda (1998) also concludes that the labor market is becoming segmented due to the extremely slow flow of people from Melkert jobs to regular jobs, low wages, the lack of career prospects, and poor fringe benefits. The effect of wage subsidies on employment is questionable. Immediate job creation and wage-cost reductions have scarcely improved the position of vulnerable groups. If there is no discrimination, there is displacement within the Dutch labor market. Research carried out by De Koning, Van Nes, and Van der Veen (1998) reveals that unemployment inequality in the Netherlands is considerable. Ten percent of unemployed persons account for 58 percent of overall unemployment figures. Mainly immigrants, people with a low level of education, women, and the elderly claim unemployment benefits. These characteristics are interconnected. These groups of people are not only highly likely to become unemployed, but are also extremely likely to develop a long-term dependency on unemployment benefits. De Koning, Van Nes, and Van der Veen conclude that the unequal division of unemployment has more to do with duration than with frequency. Combating long-term unemployment must remain a priority. Education and training in particular are of vital importance in the battle against the problem of unemployment inequality. Now that the economy is flourishing and regis-

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tered unemployment has dropped spectacularly, it appears as if the unemployment problem is going to disappear. However, the unemployment problem is a long way from being resolved, given the number of people receiving an unemployment benefit (see Figure 3.1). These people do not yet benefit from the additional jobs that are taken mostly by newcomers to the labor market. For this reason, there is a possibility that unemployment inequality has increased rather than decreased during the last few years. Due to the increase in the effective supply of labor, activating more than one million unemployed people with or without an unemployment benefit, a disability benefit, or a social assistance allowance will have a moderating effect on the development of wages. This may be important in view of rising wages influenced by the tightening labor market and may even be a selective solution to labor-market shortages. This is an important challenge for the Dutch consensus economy. The increased employment-participation rate, that is, the share of employment in the total population between 15 and 64 years of age (the potential work force) in the Netherlands, is mainly the result of a rise in the number of women with a part-time job. With respect to working years and hours, the increase in participation has been considerably less spectacular. The share of employed people, expressed as a percentage of the potential work force, measured as full-time equivalents (in which part-time jobs have been added up to full-time units), increased from 47 percent in 1985 to 57 percent in 2000 (see Table 3.1). The increase was relatively large during the second half of the 1990s in particular. On average, the employment/population ratio in the European Union decreased during the first half of the 1990s. This also holds true for Germany. The employment/population ratio increased after 1990 in the Netherlands and in Belgium. In 2000, the employment-participation rate in the Netherlands, expressed as full-time equivalents, was still low compared to neighboring countries and one percentage point below the EU average, in spite of this divergent trend and the relatively young labor force. The Netherlands still lags behind other countries as far as the utilization of the existing potential labor force is concerned. An inTable 3.1. Employment-Participation Rate Expressed as Full-Time Equivalents, 1985–2000

Sources: SZW 1998:97; SZW 1999:161; SZW 2001:161.

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57

Table 3.2. Number of Paid Overtime Hours Worked by Employees Divided According to Terms of Engagement, 1987–1997

Source: Calculated from data provided by Statistics Netherlands.

crease in broad unemployment and the growing number of part-time jobs explain not only why the rate of employment in full-time equivalents in the Netherlands is relatively low compared to other countries and why it has only increased moderately during the past 15 years, but also why it is still significantly lower than the 1970 level (59 percent) (OECD 1998b:34).

INCREASING OVERTIME AND RISING PRESSURE OF WORK One of the paradoxes of the Dutch labor market is that a section of the labor force regularly works overtime and is subjected to heavy pressure to work, while another section is permanently unemployed. During the past few years, many Dutch employees have not started working fewer hours but have in fact started working more. Many employees work hours that exceed the number stipulated in their collective labor agreements. Table 3.2 indicates that since 1987, the number of overtime hours paid out annually to full-time employees has increased from 26 to 32 hours, an increase of 23 percent. Unpaid hours are not included in the figures. If they are included, a full-time employee worked an average of 45 hours a week in 1997 instead of the 38 hours agreed on in the collective agreements (see Dur 1999). An overtime allowance is a bonus used to remunerate an employee for his/her willingness to work long hours. It also serves as an incentive for an employee to work long hours, provided he/she has the option to do

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so. The employer, on the other hand, may view the overtime allowance as a “penalty” for poor staff planning. Table 3.2 shows that the business cycle has a limited effect on the amount of overtime that is worked. There is a structural increase in paid overtime. In other words, employees no longer work overtime to cope with peak periods or work less overtime in the event of an economic downturn. This means that the extra hours also could be filled by engaging new employees on a permanent contract. Overtime worked by part-time and temporary employees in particular is advantageous to the employer as far as costs are concerned. Overtime allowances are often only paid out for hours worked on top of the number of standard fulltime hours. This is a major cost saving for employers, which may explain why part-time and flexible employees work relatively few paid overtime hours. Parttime employees worked more paid overtime during the second half of the 1980s compared to the 1990s. Economic activity has the greatest effect on paid overtime worked by flexible employees. However, there also has been a slight structural increase in paid overtime by flexible employees. The opinion that employees in the Netherlands work relatively few hours is not entirely consistent with the facts. At the end of 1995 and the beginning of 1996, 31 percent of employees in the Netherlands indicated that they worked 40–44 hours a week when they were asked how many hours they usually worked each week in their main job (see Table 3.3). This percentage is higher than the EU average of 26 percent and considerably higher than the averages of Belgium (21 percent), Germany (22 percent), and the United Kingdom (17 percent). In light of the collective labor agreements drawn up between 1994 and 1998 relating to an average 36-hour working week, these figures are remarkable and reveal that employees frequently work overtime on a structural basis. In the Netherlands, the percentage of employees who work 20–39 hours a week

Table 3.3. Number of Hours Worked per Week in the Main Job in Several EU Member Countries (Percentages) during the Period 1995/1996

Source: Paoli 1997:74.

Drawbacks to the Polder Model

59

is a little lower than the EU average and also lower than in Belgium, Germany, and the United Kingdom. The percentage of employees in the Netherlands indicating that they work more than 45 hours a week, 14 percent, is significantly lower than the EU average of 23 percent and the percentage in the three countries just mentioned. Table 3.3 also reveals that the number of small part-time jobs in the Netherlands and the United Kingdom is relatively high. Other sources also indicate that there are many very small part-time jobs in the Netherlands (Delsen 1995; OECD 1999; Schmid and Helmer 1998). The Dutch situation is therefore one of extremes: relatively few very long working weeks (45 or more hours) combined with relatively many and extremely small parttime jobs (less than 20 hours). This explains the relatively low average of worked hours in the Netherlands. How can the growth of structural paid and unpaid overtime be explained? The first explanation is amended legislation relating to working hours. Pursuant to the European Directive of 1993 concerning working hours, the Labor Act (Arbeidswet) of 1919 was replaced in 1996 by the Working Hours Act (Arbeidstijdenwet). The average number of working hours is now limited to 8 hours a day, 40 hours a week, or 520 hours per 13 weeks. The maximum number of working hours amounts to 9 hours a day and 45 hours a week. The aforementioned maximum totals can be increased to 10 hours a day, 200 hours per four weeks, or 585 hours per quarter via collective agreements or arrangements made with works councils and personnel representatives. The Working Hours Act therefore increases the opportunity to conclude flexible-year contracts. Like the Working Hours Act, the Shop Opening Hours Act (Winkeltijdenwet) of 1996 also led to collective labor agreements in which longer operating hours were exchanged for shorter but more flexible working hours. Between 1994 and 1998, many collective agreements were concluded with an average 36-hour working week. For permanent staff already employed, this means a bandwidth in which they must work longer or shorter hours each week. As a result, overtime arrangements on a daily basis become defunct (Tijdens 1998). The Working Hours Act and collective agreements restrict official paid overtime or overtime compensated by means of leave. Overtime can thus be limited to occasional overtime in order to deal with temporary and unforeseen circumstances due to the transition to annual hour systems, which makes labor patterns and work schedules more flexible. This improved match of supply and demand may not only help more unemployed people find a job, but may also reduce the use of temporary workers. Practice has also shown that the development in the differentiation of labor hours, working time, and the length of employment of people already employed (internal numerical flexibility) is clearly not in line with collective agreements made with regard to flexible working hours as a result of the new Working Hours Act and the Shop Opening Hours Act (see Delsen and Visser 1999; also see chapter 4). In addition, the volume of unregistered and uncompensated overtime will increase because of the new legislation and concluded collective labor agreements.

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Second, more overtime may be far more appealing to employers than the appointment of new employees because of the associated costs. Employers prefer to keep staffing levels to a minimum due to fixed costs per employee such as recruitment, breaking-in, and education costs (Dur 1999). Employers can accomplish this by allowing each employee to work as many hours as possible. The costs of appointing a new employee have increased due to the decentralization of the negotiations on employment conditions to the company level and the desire for tailor-made collective agreements: negotiations have to be held regarding the content of terms of employment when a new staff member is appointed. This is also a possible explanation for the structural growth in paid overtime in the Netherlands. The existence of fixed costs for each employee means that the costs per worked hour increase as a result of the implemented reduction of working hours. The same expenses have to be paid for part-time employees as for full-time employees, and the costs per hour are relatively high. Problems that arise in trying to fill in hours that have become vacant due to a reduction in the number of working hours may be another reason why the company chooses to allow its existing personnel to work more overtime even though the allowance has a discouraging effect. Moreover, the reduction of working hours by unions in order to increase the number of job opportunities for the unemployed results in working hours that (from an individual’s perspective) are shorter than the optimum number. In addition, a reduction of working hours with respect to overtime allowances increases the number of working hours desired by employees. These arguments do not hold for part-time work, as this involves an individual and voluntary reduction of working hours. Employees may wish to work longer for rational reasons. If work quality is difficult to measure, the willingness to work overtime is used as a selection criterion for personnel recruitment. The willingness to work a longer working week, if required, also plays an extremely important role in selecting employees for promotion. In this case, overtime is a prerequisite for making a career for oneself. Employers have a major incentive to maintain this system of overtime in order to test the loyalty of their employees. This is expedient, particularly in the business services sector. This indirect quality measurement, for want of an opportunity to measure quality directly, results in adverse selection and an inefficient labor-market equilibrium. Good employees who loathe working overtime are either not employed or not promoted, and employees work inefficiently if working a lot of overtime is regarded as an indirect indication of quality (see Den Butter 1996). Jobs have become busier. The Permanent Survey of Living Conditions (Permanente Onderzoek Leefsituatie—POLS) carried out by Statistics Netherlands (Centraal Bureau voor de Statistiek—CBS) reveals that the volume of work regularly carried out at high speed increased from 38 percent in 1994 and 41 percent in 1995/1996 to 43 percent in 1997. On the other hand, opportunities to organize one’s work at one’s own discretion have improved, particularly among men. Absence due to sickness is linked to autonomy in the workplace and pres-

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sure of work. The effect of stress at work on sickness absenteeism differs according to gender. In the case of men, only autonomy appears to be related to sickness absenteeism, while in the case of women, pressure of work is also relevant. Research carried out by Statistics Netherlands also reveals that sick leave would be 21 percent lower if all employees had a high degree of autonomy within the workplace. Limited pressure of work reduces sick leave by 9 percent. Stress at work due to intense pressure of work and long hours also leads to disablement. Indeed, data for the 1980s and 1990s show that more and more employees are turning to the General Disability Act (Algemene Arbeidsongeschiktheidswet—AAW) and the Disability Insurance Act (Wet op de Arbeidsongeschiktheidsverzekering—WAO) (see section “Description of the Dutch welfare state” in chapter 6) because they are suffering from mental disorders. In 1980, 20 percent of disability-benefit recipients suffered from mental disorders, a figure that increased to 26 percent in 1988 and to nearly 40 percent in 1994. Roughly half of all psychological complaints can be attributed to work, according to research recently carried out by TNO Work and Employment (TNO Arbeid) and the National Institute for Social Insurances (Landelijk instituut sociale verzekeringen—LISV). Thirty percent of overworked employees stated that poor labor relations were to blame (labor disputes), while more than 20 percent indicated that an excessive workload was the reason. Pressure of work develops not only when employees have too much work to do, but especially when certain tasks are too difficult. Employees who are not very highly educated and who hold lower positions have fewer opportunities to solve these problems since they have less autonomy within the workplace and fewer chances to plan their work at their own discretion. The increase in pressure of work is related more to the way in which work is organized and divided and less to personal factors (Schaufeli and Zijlstra 1999). Pressure of work has not only increased in recent years; recent statistics moreover reveal that Dutch employees work under pressure far more often than their European counterparts and that relatively few employees never or hardly ever Table 3.4. Employees Who Work under Pressure in Several EU Member Countries

Source: Paoli 1997:95.

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work under pressure (see Table 3.4). Dutch employees are the champions of Europe as far as complaining about work pressure is concerned. A major part of this problem is related to the fact that more work is done by fewer people. In real terms, this can be regarded as permanent understaffing. Increased pressure of work is also expressed in labor productivity, the output of each employee. Increasing labor productivity is partly related to technological developments and partly to continual reorganizations and staffing cutbacks. Staffing policy is becoming more commercialized. Increasing pressure of work is caused primarily by changing management strategies. Managers are becoming increasingly accountable for productivity, which manifests itself in the workplace and in staffing policy (see chapter 4). Companies are relying more and more on a minimal core staffing complement. Agency workers and on-call workers are used to absorb peaks in sales and absenteeism, despite the fact that this requires a great deal of tuning and coordination. Core employees have to shoulder the additional burden of helping these temporary employees, who are unfamiliar with the organization, to settle in. Apart from more varied and more interesting positions, the strategy of job enrichment also makes employees’ tasks more arduous.

DYNAMICS AND SEGMENTATION OF THE LABOR MARKET More than one-third (37 percent) of the recent strong growth in net employment in the Netherlands involved flexible jobs, compared to only 18 percent in the period 1987–1993 (see Table 3.5). These flexible jobs comprise on-call employees, agency workers, and employees with a contract valid for less than a year. In 1998, these employees accounted for 12 percent of the total number of jobs of employees, compared to 8 percent in 1988. The contribution of part-time work to the recent net growth in employment (49 percent) is lower than in the preceding period from 1987 to 1993. The portion of part-time jobs in the overall number of jobs increased from nearly 24 percent in 1988 to almost 30 percent in 1998. More than 20 percent of the overall increase in the number of jobs,

Table 3.5. Increase in Number of Jobs in the Netherlands According to Type of Employment (in Thousands), 1987–1999 (First Quarter)

Source: Calculated from data provided by Statistics Netherlands.

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roughly 29 percent of all new part-time jobs, involves small (less than 12 hours) part-time jobs (see Delsen and De Jong 1997). It can be concluded that during the period 1994–1999, more than half of the Dutch employment miracle comprised marginal jobs, that is, flexible jobs and small part-time jobs. In 1997 and 1998, the increase in the number of flexible jobs in the Netherlands leveled off. This was related in part to the economic situation and the new Flexibility and Security Act (Wet Flexibiliteit en Zekerheid) that came into force in January 1999. This act improves the employment protection of agency workers. An agency relationship is usually regarded as an employment contract for a definite period of time and that is subject to all of the regulations laid down under employment contract law. The Flexibility and Security Act has also improved the position of employees with a fixed-term contract. After three successive temporary employment contracts, the employee must be given a contract for an indefinite period. As employers can react in different ways, the effect of the “flexicurity” act is uncertain. Either the temporary employee is hired for an indefinite period of time or the employer starts looking for another temporary employee or another way to recruit flexible personnel. In anticipation of the “flexicurity” act, employment agencies are employing more and more permanent employees in labor pools, who are then deployed. These positions are counted as permanent jobs in statistics quoted by Statistics Netherlands (CBS). However, as far as employers are concerned, these people are temporary employees. After 1998, the number of temporary employees included in the CBS count will decrease even further (de Volkskrant, October 23, 1998). In addition, more and more people are sent on secondment, that is, temporarily transferred to work in another firm. “Secondment” means working on the premises of firm X but being on the payroll of firm Y. It is similar to posting. For example, of the overall turnover in the agency employment branch (more than 3 billion guilders), 20 percent thereof can be attributed to temporary transfers. Temporary transfers doubled during the first half of 1998 (de Volkskrant, September 29, 1998). These postings also are not expressed in the CBS figures. The fact that marginal jobs account for half or more of the increase in employment produces a number of major socioeconomic effects. These marginal jobs are not secure and are extremely sensitive to the business cycle. In the event that economic conditions change, the Netherlands, more than any other EU member country, will immediately be confronted with a considerable number of dismissals and thus a dramatic increase in unemployment figures. Moreover, this form of numerical flexibilization of the labor market creates several structural problems. The current flexibilization and deregulation trend in the Dutch labor market leads to greater job mobility, more flexible jobs, and additional uncertainty and may be at the expense of necessary investment in training courses for and delivered by personnel. The Organisation for Economic Co-operation and Development (OECD 1993:136) refers to three major drawbacks that arise when employees change jobs: The “stock” of specific skills in an economy is reduced, the

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fear of job changing may jeopardize investment decisions, and finally, there is a risk that the production process may be disrupted to such an extent that it affects the continuity required for effective training and upgrading. There is a positive relationship between strong social networks and sustained economic growth. The increase in the number of temporary jobs also affects the social infrastructure. This can pose a considerable threat to sustained economic growth (Van Dijk 1997). Due to the increase in the number of flexible contracts, employers are banking on the future. Job mobility or the duration of each job is often used as a criterion for labormarket dynamics. An increase in external mobility can discourage investment in training. Job stability stimulates requisite investments in human capital by employers and employees. International experience reveals that there is a clear link between employment stability and training (see Freeman and Soete 1994; Filer, Hamermesh, and Rees 1996; Delsen 1995). Empirical research carried out in the United States and France reveals a negative relationship between staff turnover and training; in other words, education and training increase along with job stability. This positive relationship does not involve a causal connection, but implies that education and job duration reinforce one another. On the one hand, too much job mobility is not conducive to the development of workplace skills (OECD 1993:148). High staff turnover is a major reason why investments in flexible labor relations are not cost effective. Educational expenditure becomes a cost item and not an investment because the period in which the investment can be recovered exceeds the duration of the contract (see Delsen 1995:80–83). On the other hand, the Dutch have learned that education and training and a staffing policy that is more social staff management help make personnel more involved, reduce staff turnover and sickness absenteeism, and ensure greater customer satisfaction (see Vonk 1997, for example). Between 1985 and 1991, external job mobility increased not only in the Netherlands, but also elsewhere in Europe (see Table 3.6). The decrease in average job duration was partly due to the policy of deregulation, the increase in the number of contracts for a limited period of time, and contracts with variable working time. Table 3.6 also shows that the percentage of employees employed for less than one year increased significantly in several European countries, particularly in the Netherlands. Compared to other EU member countries, the length of time spent in each job in the Netherlands was low and the percentage of employees with a contract valid for less than a year was high. In 1991, the dynamics of the Dutch labor market were more or less at the same high level of the deregulated American labor market. Since job duration and education reinforce one another, it can be concluded that this high and increased level of dynamics on the Dutch labor market had a negative effect on educational and training efforts and thereby on the employability of employees in the second half of the 1980s. After 1991, the relative position of the Netherlands clearly changed. The largest decrease in the dynamics of the Dutch labor market occurred between

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Table 3.6. Job Duration and Job Mobility in Several EU Member Countries and the United States, 1985, 1991, and 1995

a1984; b1986; c1990; d1994; e1983; f1996.

Sources: OECD 1994:65; OECD 1997:140.

1991 and 1995. Job duration increased the most and the percentage of employees employed for less than one year fell most sharply. Decreasing staff turnover stimulates investment in education and training. This is a remarkable trend, given the substantial increase in the number of flexible employment contracts (discussed earlier) that were entered into during the first half of the 1990s. According to Statistics Netherlands (CBS), this trend can be attributed in part to an aging labor force in the Netherlands; job mobility decreases with age. Economic conditions also play a role in this respect. The number of job changes decreases during an economic downturn and increases during an economic upturn. Between 1992 and 1995, employment growth was low.2 Another possible conclusion is that the “insider-outsider” problem is becoming more pressing. People already employed (insiders) remain where they are, while newcomers with flexible contracts (outsiders) are recruited. The latter are of course the first to be dismissed. Segmentation of the internal and external labor market is a fact. For some employees, job mobility decreases, while for another smaller but growing group—the flexible employees—it increases. The average job duration of full-time, part-time, and flexible employees is 8.7, 6.3, and 2.3 years, respectively. The final figure is an overestimation (see SZW 1996:101). On balance, job mobility decreases. Research has shown that staff turnover among permanent employees in companies has indeed decreased between 1987

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and 1995 (OSA 1996). Another source also reveals that the average duration of employment in companies and nonprofit organizations increased from 9.3 to 12.9 years between 1992 and 1996 (Fruytier 1998:22). According to the Arbeidsrekeningen (Labor Accounts) of Statistics Netherlands, in 1995, 91 percent of all jobs for employees were permanent, and in 1998, this figure totaled nearly 90 percent. The frequently heard comment about the end of the permanent job is therefore a myth and not consistent with the facts. There is, however, a relative drop in the number of permanent jobs and a significant increase in the number of flexible jobs, particularly at the beginning of a career and at the bottom of the labor market. Information about employees’ perception of job uncertainty complements the objective criterion used in Table 3.6. Uncertainty plays a major role in the relationship between employer and employee. A decrease in job duration and an increase in uncertainty reduce the incentive to invest in training and to profit from the advantages of long-term relationships. The relationship between job duration and uncertainty is not clear. It depends on the economic situation, and there is a disparity between segments of the labor market. Further more, employees can resign voluntarily. The job certainty perceived by employees declined during the period 1985–1995 in all EU countries. This applies in particular to employees in the Netherlands (see OECD 1997:129-135).

LOW-PAID WORK, DECLINING PRODUCTIVITY GROWTH When the policy of wage moderation is pursued for a long period of time, it can certainly discourage employees and employers from innovation and improving labor productivity. During the past years in the Netherlands, the growth of average annual labor productivity—the added value per employed person—has decreased. This was particularly the case in the 1990s. This trend has also been evident in other European countries and the United States. In the Netherlands, however, growth in labor productivity during the 1990s was significantly lower compared to that in other industrialized countries (see Table 3.7). This has been attributed to the increase in the share of less productive employees in total employment and a lack of investment growth. Evidence of this is the fact that prosperity—the gross domestic product per capita—developed favorably during the same period, due in part to the increase in employment participation (CPB 1997a; Hollanders and Ziesemer 1999). In other words, employment growth in the Netherlands was more labor intensive during the 1990s than in the 1980s as a result of the pursued policy of wage moderation. A decrease in the number of hours worked per employee is another possible explanation for why Dutch productivity has grown relatively poorly. Production per employee drops as a result thereof. However, when added value per worked hour is also used as a criterion for measuring labor productivity, it becomes evident that labor productivity growth has gradually declined during the past few

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Table 3.7. Average Annual Growth in Labor Productivity of Persons, 1970–1998 (Percentages)

aThe

figures for West Germany refer to 1990–1997 and 1983–1997. Source: Watson et al. 1999:9.

decades from 5 percent at the beginning of the 1970s and 2 percent in the first half of the 1980s to 0.5 to 1 percent since the mid-1980s (CPB 1997d:107; see also Hollanders and Ziesemer 1999). Further research conducted by the CPB Netherlands Bureau for Economic Policy Analysis (CPB 1998a) has revealed that in the 1980s and 1990s, the Netherlands was ranked among OECD countries with the smallest productivity growth. This was mainly due to a slowdown in productivity growth in the commercial services sector, particularly after 1990. In this respect, the Netherlands strongly resembles the United States: substantial employment growth in the services sector coupled with a minor increase in productivity. Unlike Germany, where the labor productivity per man-year was higher in the services sector than in industry from 1970 to 1994, in the Netherlands and the United States a reversal took place in the mid-1980s: the level of labor productivity in the services sector was lower than in industry. Hollanders and Ziesemer (1999) conclude that this was not due to a policy of wage moderation since this trend had already started before the Wassenaar Agreement. Chapter 2 also indicates that wage moderation had already been implemented as early as 1979. It is a fact that more and more low-productivity jobs have been created in the Netherlands and the United States as a result of wage moderation in the developing services sector. In the Netherlands, low-productivity, marginal jobs created in the services sector during the past few years have been induced in part by a supply effect under the influence of the pursued policy of wage moderation. Limited wage increases across the board and the implemented reduction of working hours can lead to a shortage of highly educated employees. This shortage also affects the development of productivity. The minimum-wage freeze may also explain the decline in labor productivity in the Netherlands after 1995 (CPB 1997a).

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The United States has the highest level of labor productivity measured per man-year. During the 1970s, the Netherlands boasted the highest level of productivity in the group of smaller European countries. From the late 1980s onwards, Belgium surpassed the Netherlands. The Netherlands also scores significantly better than other smaller countries (Hollanders and Ziesemer 1999). Productivity per hour can be regarded as a criterion for measuring efficiency. In this respect, the Netherlands surpassed the United States as a leader in productivity in 1983. Despite the relatively limited growth in productivity since the end of the 1980s, the level of labor productivity per hour in the Netherlands in 1994 was still 10 percent above the level in Germany and the United States (Schmid and Helmer 1998) and 19 percentage points above the EU average, compared to 23 percentage points in 1987 (OECD 1996b:77). The relatively high level of productivity in the Netherlands can be attributed, among other things, to the fact that people with a low level of productivity are inactive. The Netherlands has a positive ralationship between economic inactivity (volume of disability) and labor productivity at the macro level.3 Differences in the quality of the labor force can also be viewed as a partial explanation for disparity in productivity levels between countries (see SZW 1996). The substantial increase in the number of flexible jobs can be detrimental to relative prosperity. This is not the case in the Netherlands, however. How is this possible? GDP (gross domestic product) per capita is often used as a criterion for measuring prosperity. GDP per capita is determined by the product of labor productivity (GDP per worked hour), working hours per employed person, and the share of employment in total population. From 1983 to 1994, the 2 percent increase in GDP per capita in the Netherlands equaled that of the United States and was slightly higher than that of Germany (1.8 percent). In the Netherlands and Germany, this increase was achieved mainly by a rise in employment participation and a reduction of working hours. In the United States, however, working hours and employment participation have increased (Schmid and Helmer 1998). Table 3.8 shows that between 1987 and 1994, the increase in real GDP per capita in the Netherlands (1.83 percent) was higher than the average for Northwest Europe, the EU, and OECD member countries. This is remarkable since labor productivity increased less than elsewhere and the number of hours worked by an employed person dropped more sharply in the Netherlands. The considerable rise in prosperity in the Netherlands is mainly due to the share of employment in total population, which has increased substantially, both absolutely and relatively. These trends are directly related to the rapid increase in part-time and flexible employment, various forms of reduced working hours, and the shorter average working week. From a social point of view, efficiency only improves if GDP increases thanks to investment in more effective machines, a better-educated labor force, improved organization of production, or a rise in the employment of people who were previously excluded. A rise in labor productivity enables one to opt for a greater income. If this is the case, GDP also

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Table 3.8. Decomposition of Growth Rates of Real GDP per Capita from 1987 to 1994

NL = Netherlands. Source: OECD 1996b:78.

increases. Increased efficiency can also be “converted” into shorter working hours and therefore additional leisure time or less intensive labor. In the last two cases, GDP does not increase. A country with a low level of labor productivity may be economically richer than a country with a high level of labor productivity, particularly if the level of productivity per hour is high and environmental pressure is low.

INCOME INEQUALITY AND POLARIZATION Primary income distribution is the distribution of income originating from the production process: wages, profits, interest received, dividends, rents, and leases. Households that receive only benefits are included in the primary income distribution with an income of zero guilders. A high inactivity/activity ratio therefore finds expression in a skewed primary income distribution. Primary income distribution in the Netherlands is consequently more unequal than in Germany, the United Kingdom, and the United States. Sweden has the most skewed primary income distribution (Van Sinderen and Van Bergeijk 1995). In the case of secondary income distribution, the redistributional effect of income taxes, wealth taxes, and social security (benefits and contributions) is taken into account. Between 1983 and 1997, secondary income distribution in the Netherlands became more skewed: income inequality increased by roughly 10 percent (Hendrix 1997; SZW 1997:86). From 1986 to 1990, differences in income in the Netherlands increased considerably (the Gini coefficient rose by 11.7 percent).4 Approximately half of the increased inequality in income is caused by the pursued income policy (Gradus and Hendrix 1999). Important in this respect is the “delinkage” of wages and benefits in the 1980s and the revision of the fiscal system in 1990 (the Oort operation). Nearly a quarter of all changes are linked to altered education and par-

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ticipation levels (relatively fewer low-skilled people and more high-skilled individuals) and the composition of households (more two-earner and single households). People living on their own are over-represented among benefit recipients (Kersten 1995). As a result, differences in income increase. Comparative research also reveals that when one is searching for an explanation for the disparity in income inequality between countries, differences in institutions (differences in remuneration) and the government’s income policy (taxation and social security) are more important than demographic factors (aging of the population and dejuvenation) and differences in employment participation, composition of households, and the number of employed people in each household (SZW 1997:86). During the period 1990–1994, differences in income continued increasing, but not as much as in the second half of the 1980s. The Gini coefficient rose by 4.6 percent (Gradus and Hendrix 1999; SZW 1998:71-72). The pursued income policy was responsible for this increase. The increase in income inequality due to the delinking of wages and benefits is compensated for by raising the personal tax allowance and not correcting for inflation. Rent increases, on the other hand, reverse the equalization of incomes. A further decline in the number of sole wage earners contributes to smaller differences in income. Due to the pursued income policy—increases in the personal tax allowance, the tax credit for the elderly, and the rent subsidy—differences in income also continued increasing in the period 1995–1998, but less than in previous years, despite relatively significant increases in rent and falling mortgage interest rates. The composition of the population is continuing to change even further. The number of people receiving benefits is decreasing, along with the number of low incomes, which is a major change compared to previous years. Income inequality means that not everyone has the same income. However, this does not say a thing about the shape of the income distribution. In the case of extreme divisions, a concentration of people develops at the top and bottom of the division. Theoretically, it is possible that this goes hand in hand with smaller differences in income (a lower Gini coefficient). This division or polarization is therefore not the same as inequality, but involves the disappearance of the middle class and can be measured using the Wolfson polarization index.5 Calculations made by Hendrix (1997) show that polarization between the poor and the wealthy had already increased at the beginning of the 1980s. Furthermore, at 20 percent, it had increased more than inequality (10 percent). The income policy pursued in the Netherlands has two objectives: to stimulate employment participation and to achieve a balanced distribution of income. The division has widened to boost the flow of people from social security and in turn to avoid long-term division. In the period 1985–1993, half of the increase in differences in income and half of the increase in polarization could be attributed to the pursued policy. The delinking of wages and benefits is of particular importance in this respect. Due to this, the gap between the guaranteed social minimum income and the lowest wage scales in collective labor agreements has

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Table 3.9. Developments in Differences in Income, 1975–1995

a: between

7% and 2%; 0: between 2% and 2%; : between 2% and 7%; : between 7% and 15%; : increases by more than 15%. Source: Gradus and Hendrix 1999:485.

grown. The link was restored in 1996. As a result, inequality and polarization have not increased as much during the past few years (Hendrix 1997). Where does the Netherlands stand in an international context? Differences in income are the greatest in the United Kingdom, followed by the United States and the lowest in the Scandinavian countries (see Table 3.9). The Gini coefficient (times 100) is lower in the Netherlands (25) than in Belgium (27) and Germany (28). During the period 1975–1985, there were dissimilarities between these countries in the development of differences in income. They decreased in Germany and Sweden and rose sharply in the United Kingdom and the United States. Between 1985 and 1995, the Gini coefficient rose in all countries, but most notably in Sweden and the United Kingdom (see Table 3.9). Another source also reveals that between 1983 and 1997 income inequality in virtually all OECD countries grew, particularly in the United Kingdom and the United States. The increase in the Netherlands was similar to the increase in Sweden. This signifies that the Netherlands’ middle position has not changed (SZW 1997:86). In 1997, real disposable household income was on average 2 percent lower than in 1977. The income of working households was on average 2 percent higher, and that of households on benefits was 23 percent lower. The income of pensioners improved by 11 percent. Households became smaller during the period in question. If this is taken into account, then the standard income was on average 7 percent higher in 1997 than in 1977, 13 percent lower for households on benefits, and 12 percent higher for working families. The 12 percent increase for working families was due in part to an increase in the number of married women with a job (CBS 1999). The number of two-earner households increases

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where a benefit as an alternative source of income for the breadwinner’s partner is absent. At present in the Netherlands, less than 10 percent of those who earn a minimum wage are also breadwinners. This division increases income inequality between households (SZW 1997:92). Since income from wages forms an important part of total income, changes in the distribution of wages have major consequences for income inequality. Wage differences in the Netherlands are relatively restricted and increased only to a limited degree between 1985 and 1995. Compared to the first decile, the earnings ratio in the ninth decile rose only from 2.51 to 2.59, and the ratio in the fifth decile rose from 1.62 to 1.66. Experience acquired in the Netherlands clearly shows that large differences in remuneration are not necessary as such for high employment growth (see OECD 1996a; Roorda and Vogels 1997; Van de Meerendonk 1998: 111–112; Watson et al. 1999: 34–5). This minor increase in wage differences is surprising, given that the statutory minimum wage has been delinked from the average wage increase for a long time. An explanation for the limited increase in wage differences is the widened gulf between the statutory minimum wage and the actual minimum wage, which occurred because the lowest collective agreement wage scales kept pace with average salary developments, at least until 1994. On the other hand, this means that due to the linking of the statutory minimum wage and the minimum benefit, the difference between wages and benefits has increased (see following section on poverty). This encourages people drawing benefits to look for a job (also see Salverda 1998). Institutional factors such as the extent of corporatism in wage formation and the minimum wage play an important role in wage differences. Corporatist wage-formation institutions, such as those in the Netherlands, limit differences in wages (also see chapter 5). Research carried out by Agell (1999) reveals that if economies are more open, in other words, if they export and import more, the minimum wage is higher and wage differences and income quality are more limited. Trade therefore stimulates remuneration and income equality.The explanation for this is the fact that the labor unions’ wage policy and the government’s income policy act as “social insurance.” The social security system has an identical function (see chapter 6). There is a misconception that differences in wages between high- and lowskilled people have multiplied because of an increasing demand for the former and a falling demand for the latter. This alleged deterioration in the relative income of low-skilled people can be attributed to advances in technology, which are detrimental to unskilled people, and to increased competition with low-wage countries, which places pressure on the wages of low-skilled employees (see Van de Klundert 1997:11–12, for example). On the contrary, practical experience reveals that the opposite is true in a number of OECD countries, including the Netherlands. Wage differences between low- and high-skilled people have actually decreased since the beginning of the 1980s. Between 1982 and 1993, real wages of high-skilled employees remained relatively steady, while those of lowskilled employees continued to rise (Watson et al. 1999:35). This convergence can be attributed primarily to the supply side, that is, a significant increase in

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the supply of high-skilled people. On the underside, wages did not decrease, despite a reduction in the minimum wage and high unemployment. The efficientwage theory may explain why companies are prepared to pay wages that exceed the minimum wage, in spite of continuous unemployment. Higher wages boost the commitment of employees and labor productivity. The share of official minimum (juvenile) wages in employment also dropped from 8.9 percent in 1979 to 3 percent in 1994. The percentage of people below or at the adult minimum wage is higher. However, this also dropped from 12.4 percent in 1979 to 6.4 percent in 1994 (Salverda 1998:28). In the past few years, the percentage of people earning the statutory minimum wage has fluctuated between 3 percent and 5 percent of all employees (SZW 1999:113). A significant reason for this drop is that the lowest wage scales in collective agreements kept pace with general wage movements while the statutory minimum wage remained frozen for a long time. Following the revived minimum-wage freeze in 1992, there was no longer any collective agreement in which the lowest wage still coincided with the minimum wage. In that case, there is little point in reducing the minimum wage. In the memorandum entitled Een Nieuwe Koers (A New Course), the bipartite Foundation of Labor (Stichting van de Arbeid— STAR) asked the collective agreement negotiators to introduce new, lower wage scales. Consequently, 30 out of 103 collective labor agreements examined at the end of 1995 and 70 out of 109 examined at the end of 1997 contained standard wage scales up to a maximum of 5 percent above the minimum wage. At the same time, the gulf between the average lowest collective agreement wage scale and the legal minimum wage decreased from 14 percent in 1994 to 5 percent in 1998 (SZW 1999:113; Salverda 1998). In modern endogenous-growth theory, a link is made between primary income distribution (effective earning capacity) and the level of economic growth. Economic growth is assisted by as much employment participation as possible and the widest possible access to education and high, evenly spread investments in human capital. Causality can also be reversed: educational opportunities for broad groups make income distribution more even and contribute to economic growth (Van Bergeijk and Waasdorp 1993). Why is economic growth along with investments in physical capital nowadays determined by investments in knowledge and skills in particular? Due to globalization and technological development, comparative advantages are no longer that often determined by traditional factors such as location and the presence of raw materials but more and more by investments in human capital. A skewed primary income distribution will lead to endogenous levying that inhibits growth. Studies have revealed that unequal ownership and skewed primary income ratios are detrimental to economic growth, and more income inequality goes hand in hand with less economic growth (see Partridge 1997, for example). An unequal distribution of primary income is a sign that markets do not function adequately. Van Bergeijk and Waasdorp (1993) conclude that the government too must choose between growth or redistribution. The emphasis here, to a significant de-

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gree, is on the negative, disruptive effect that taxation has on the market. This is in line with Okun’s “leaky bucket.” In his opinion, economic science focuses on enlarging the economic pie, while politics concentrates on dividing it. According to Okun (1975:1), increasing inequality stimulates economic efficiency, and carving the national economic pie into equal slices shrinks the size of the pie. Redistribution is a “leaky bucket.” Consequently, countries are inevitably confronted with a trade-off between equality and efficiency. However, besides redistribution, the government also has a productive role to play, namely, investing in infrastructure, technological developments, and training (Van Sinderen and Van Bergeijk 1995). The implication of endogenous-growth theory for policies is that policy makers should occupy themselves with income distribution not only for political and social reasons, but also because of the long-term consequences of income distribution for economic growth. In addition, the government is far more effective than private agents in providing a sound “social infrastructure” (as referred to by Hall and Jones 1999): institutions and policy measures that provide protection against theft, expropriation, corruption, and the like and government policy on international trade (free trade versus trade barriers). This therefore involves institutions and government policy measures that determine the economic environment in which people develop skills and acquire knowledge and companies invest and produce. Consequently, the holdup problem with relationspecific investments is avoided. Moreover, people are more likely to reap the rewards of their activities. The use of taxes to finance this social infrastructure may have a disruptive effect. However, the social infrastructure has, on balance, a positive effect on the productivity of each employee and the amount of human and physical capital. The social security system can also reduce market uncertainty and thereby contribute to higher economic growth (see chapter 6).

POVERTY AND SOCIAL EXCLUSION The pursued government policy is partly responsible for the development of poverty in the Netherlands. Since the beginning of the 1980s, the net minimum benefit has lagged behind the net average wage. The net replacement rate, the relation of net minimum benefit to net average wage, gradually decreased from less than 70 percent to less than 60 percent in 1999 (see Figure 3.2). The legal minimum wage followed a similar pattern. Because of the freeze of the minimum wage from 1984 to 1990 and 1993 to 1996, the gross minimum wage in the period 1984–1998 was 21 percent lower than the average development in wages. Between 1979 and 1997, the real minimum wage (the purchasing power) dropped 22 percent (see Salverda 1998; Watson et al. 1999). Poverty has become a problem in the Netherlands as a consequence of this and other factors. It is important to consider not only the magnitude, but also the extent and duration of the poverty problem.

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Figure 3.2. Net Minimum Benefit Expressed as a Percentage of the Net Average Wage, 1979–2000 Sources: Net replacement rates are calculated from CPB 1997a:182–183 and CPB 2000:204–205.

In line with the practice of the European Commission and the Organisation for Economic Co-operation and Development (OECD), poverty is often defined in relative terms as an income that totals less than half of the average disposable income. As far as the magnitude of poverty is concerned, it appears that within the OECD area the highest percentages of poor households with an income below this OECD margin are located in Anglo-Saxon countries (24 percent in the United States (1994) and 27 percent in the United Kingdom (1995)). The lowest percentages can be found in Belgium (6 percent in 1992), Denmark (7 percent in 1992), and the Netherlands (8 percent in 1996) (Wildeboer Schut and Vrooman 1998). In 1993, 14 percent of Dutch households lived below the poverty line, compared to 13 percent in Belgium and Germany, 23 percent in the United Kingdom, and 17 percent on average in the EU (see Table 3.10). In the Netherlands, single-parent families and single women aged 65 and older are overrepresented in poor households, as is the case in other European countries. Compared to the end of the 1980s, the magnitude of the poverty problem in the Netherlands has doubled. Poverty Statistics in the Late 1980s by Eurostat (Luxembourg) shows that at the end of that decade, the percentage of poor households in the Netherlands, namely, 6.2 percent, was fairly low compared to other

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Table 3.10. Households with Income Less than 50 Percent of the Average Income in Several EU Member Countries in 1993 (Expressed as a Percentage in Each Type of Household)

Source: EC 1998:90.

EU member countries such as Belgium (6.6 percent), Germany (12 percent), and the United Kingdom (17 percent). There is no connection between the inactivity/activity ratio and the magnitude of poverty in a country. Despite its relatively high long-term unemployment and high inactivity/activity ratio, Belgium still ranks among countries with the highest level of prosperity per capita. The magnitude of the poverty problem is relatively small. Anglo-Saxon countries with relatively low inactivity/activity ratios and a high level of employment participation also have relatively high poverty figures. When the national policy standard for the guaranteed minimum income is used as a point of comparison, corporatist countries, the Netherlands included, fall under the middle group with a poverty magnitude of 4 percent. Denmark also scores relatively well again (1 percent), unlike the United States (12 percent). The United Kingdom’s score of 4 percent is similar to that of other European countries (see Wildeboer Schut and Vrooman 1998; EC 1998:90). The Armoedemonitor 1998 (Poverty monitor 1998), drawn up by the Cultural Planning Office of the Netherlands (Sociaal en Cultureel Planbureau—SCP) and Statistics Netherlands (CBS), concludes that 11 percent of Dutch households live on or around the guaranteed minimum income (Dfl 1,360 a month for single persons in 1996), and that 4 percent have an income less than the guaranteed minimum income.6 These figures correspond with figures in Belgium, Germany, and France. Denmark and Norway have fewer poor households (7–8 percent), but the United Kingdom has considerably more, 29 percent. In 1996, 650,000 out of

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the more than 6 million Dutch households had an income close to the subsistence level (for roughly 240,000 households, this was the case for at least four years in a row). It is expected that the number of households with a low income will decrease due to general measures aimed at boosting purchasing power and a specific policy aimed at combating poverty (Wildeboer Schut and Vrooman 1998). In the Belastingplan 21ste Eeuw (Fiscal Plan 21st Century), the expense deduction for employees will be restricted and replaced with an employed person’s tax credit. As a result, benefit recipients will be left behind. The VAT hike and the reduction in income tax will also reverse the equalization of incomes. Because of this, poverty may rise again. The magnitude of the poverty problem can be measured by determining the amount of income transfers required to increase the incomes of all households below the 50 percent level of a country’s average up to this 50 percent of the average level. It becomes apparent then that the Netherlands is located in the middle group within the EU. Like Germany, the Netherlands requires an 8.5 percent increase, compared to more than 10 percent in Portugal, Greece, Italy, and the United Kingdom and 7 percent or less in Denmark, Belgium, Luxembourg, and France (EC 1998:86). The social security system’s contribution to alleviating poverty is greater in the Netherlands than in Germany, the United Kingdom, and the United States. In the mid-1980s, poverty lasted far longer in the United States and Germany than in the Netherlands. It can be concluded that the Dutch social security system is relatively effective (Van de Meerendonk 1998:116–117). It is relatively easier to escape from the poverty trap. In the Netherlands, however, only a small group of people, 4 percent, can elude poverty by finding a job. This is because these jobs are often temporary or do not generate enough money (Wildeboer Schut and Vrooman 1998). This illustrates the existence of the unemployment trap. The causes of poverty are linked to household income and expenditure. With respect to income, these households have a lower earning capacity and not enough paid work. A low income from work can be related to the limited amount of human capital—knowledge and skills—that a person possesses and to the fact that the work is irregular or only short term, or a combination of both causes. Many employees with temporary jobs eventually find permanent positions. However, a large number remain in temporary jobs or become unemployed again. During the 1990s, approximately 32 percent of people with a flexible contract still had one after two years. The percentage of people with a flexible contract who were awarded a permanent contract after two years decreased from more than 60 percent between 1988 and 1990 to roughly 43 percent between 1994 and 1996 (Remery et al. 1999:53). In the OECD’s Employment Outlook for 1996, the fear that exclusion from the labor market can lead to poverty and dependence was deemed realistic. Nonstandard contracts usually contain unfavorable terms of employment. Dutch employers view their flexible employees as second-rate employees (see chapter 4). Also, the rise in small part-time jobs that has already been observed can result in poverty if there is no additional in-

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come at individual or household level. The General Social Assistance Act (Algemene Bijstandswet—ABW) will then have to be invoked. Chapter 2 revealed that there has been a sharp rise in the number of people living on their own in the Netherlands. Single people are overrepresented among benefit recipients partly because of child care and the high number of single people with temporary employment contracts (see Dagevos 1995; Kersten 1995; Hendrix 1997). If the people concerned do not have any paid work and the household has to rely on a benefit, a reduction in the benefit percentage and/or the delinking of wages and benefits may lead to poverty. However, poverty can also be the result of vital and unavoidable expenditure. Poverty is therefore more than an inadequate income (SZW 1998:72). It involves a combination of low income, debts, unemployment, social isolation, poor health, and other factors.

HIGH ENVIRONMENTAL PRESSURE AND LOW ENVIRONMENTAL QUALITY Environmental pressure in the Netherlands is extremely high, both relatively and absolutely (see Table 3.11). In empirical economics literature, energy, transport, industry, agriculture, and horticulture are the indicators used to determine the influence of economic activities on environmental pressure (see Verbruggen 1995; Van Veen-Groot and Van den Bergh 1997). The fact that environmental pressure in the Netherlands is high (relatively and absolutely) is largely due to several indicators related to surface area. The highest gross national product (GNP) per km2 reflects the high population density in the Netherlands. However, it is remarkable that environmental pressure stemming from agriculture, transport, energy consumption, and waste is high, compared to other countries. A major portion of all environmental problems can be attributed to agriculture and horticulture. The Dutch agriculture sector scores the lowest number of points as far as the use of fertilizers and pesticides and the number of pigs and cows per km2 are concerned (Van Veen-Groot and Van den Bergh 1997:4–6). Furthermore, no other OECD country has as many cars and trucks per km2 and as many roads (with the exception of Belgium). This densely populated country also has the highest number of cars and the greatest number of kilometers driven per km2 (Verbruggen 1995:106; Van Veen-Groot and Van den Bergh 1997:5). With respect to waste-production and energy-consumption levels, the Netherlands exceeds the OECD average, and these levels are particularly high compared to those of OECD countries in Europe. It can be concluded that the extremely high population density, the high income level, energy-intensive production, and large emissions are responsible for intense environmental pressure in the Netherlands. The problems are partly related to how “national accountants” define production and how prosperity is measured, and partly to the institutional framework that provides insufficient incentives in a particular direction. Gross do-

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Table 3.11. Environmental Pressure in the Netherlands, 1990–1992

Source: Verbruggen 1995:106.

mestic product (GDP) and thus prosperity increases if environmental damage is kept to a minimum, for example, by recycling waste or cleaning contaminated areas, but these activities do not contribute to real prosperity. In fact, they merely reflect rising transaction costs required to allow the economic system to function. On the other hand, GDP does not include the environmental pollution that destroys the environment. The price tag is therefore missing. The Dutch queen’s speech of Tuesday, September 21, 1999, contained the following statement in this respect: “Production processes and products must be ecologically efficient. Experience has shown that repairing environmental damage costs considerably more than the prevention thereof. It is often not only a matter of money, but also of careful and sound decision-making. The dedication we show now will determine the future of generations to come.”7 Policy makers apparently do not spend enough time finding out what an inherently environmentally friendly economic development looks like. A more intensive search for sustainability is also expedient. Dutch institutions do not function so that considerations made by individual manufacturers and consumers are consistent with the views held by citizens regarding sustainability. Market failure, property rights that have either not been defined or not properly defined, negative external effects, free-rider behavior, ethical inconsistencies in acting, and asymmetrical information all occur on a large scale. The discrepancies between actual and socially desired sustainability increase. This gulf in particular, but also market failures justify the implementation of a sustain-

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ability policy and government intervention from a welfare, theoretical point of view (Stolwijk 1997). Sustainability is a subjective concept. It involves standards and values that indicate how humans should treat the environment. Justice should be done to future generations. The pursuit of maximum prosperity and welfare for current and future generations can form the basis of the analysis. Consumption space is frequently used to determine the level of prosperity: the higher the level of consumption, the higher the level of prosperity and welfare. Long-term consumption can drop due to environmental damage. Applying this in practice is problematic since it is difficult or impossible to objectively determine the value of environmental goods and services, for which there is no market. This does not alter the fact that it is important from a democratic viewpoint, and given that decisions have to be made anyway, to make the grounds as explicit as possible and therefore also to include sustainability risks as best one can in the cost-benefit analysis. In addition to polluting the air, energy consumption depletes nonrenewable natural resources. Environmental quality involves the state of natural resources, soil, water, and air at a given moment. Stocks are therefore involved. On the basis of indicators such as percentage of forested areas, percentage of endangered mammals and plants, and noise, water, air, and soil pollution, it can be concluded that environmental quality in the Netherlands is poor (Van Veen-Groot and Van den Bergh 1997:9–10). The country does not have that many woodlands and nature reserves left. Moreover, they have been split up and are in a critical condition. Compared to 1970, the amount of agricultural land increased in 1993. By West European standards, the Netherlands has a sound, strict environmental policy. However, the extra efforts made to protect the environment count for little because environmental objectives are not being met. Recent figures released by NAMEA, the environmental accounts system belonging to the national accounts, indicate that increases in pollution have lagged behind economic growth. In the case of environmental issues such as acid pollution, fertilizers, and waste, there was even a significant decrease in the amount of pollution. The volume of waste that was eventually dumped or discharged dropped by 25 percent in the period 1987–1998. This decrease occurred after 1990. Overall CO2 emissions originating from manufacturers rose by 20 percent. A question that cannot be answered unequivocally is whether environmental damage increases during continuous economic growth (a pessimistic view) or whether it involves an “inverted U,” that is, the environmental damage decreases as incomes rise (an optimistic view). Long-term studies carried out by the CPB Netherlands Bureau for Economic Policy Analysis and the National Institute of Public Health and the Environment (Rijksinstituut voor Volksgezondheid en Milieu—RIVM) have revealed the following: Despite substantial reductions in most types of emissions—except for rising carbon dioxide (CO2) emissions and serious noise pollution generated by road traffic—the policy objectives for all emissions in 2010 except for sulfur dioxide (SO2) are not being met. Changes in the sector structure of the Dutch economy are responsible for

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these decreases (relatively less agriculture and industry, changing consumer preferences, and technological innovation) (see Stolwijk, Koopmans, and Albers 1998). Technological innovation is the most important key by far.

CONCLUSIONS In this chapter, several comments were made regarding strong employment growth and the pursued policy of wage moderation. First, the employment miracle involves, to a large extent, flexible jobs that are cyclically sensitive and small part-time jobs with low productivity levels in the services sector. Labor productivity growth lags behind that in the other countries referred to. In this respect, the Dutch labor market resembles the American labor market. A trade-off appears to exist—a negative relationship between growth in employment and productivity. Moderate productivity growth is responsible for the aforementioned redistributional nature of employment growth. The substantial growth in employment in the Netherlands is not a miracle at all. It would be a miracle if employment growth had occurred in highly productive jobs in the services sector. Another drawback to the polder model is the low utilization of the potential labor force compared to other countries. Furthermore, unemployment is very unequally divided. Major problems still exist, particularly at the bottom of the labor market. The rise in the number of flexible employment contracts results in labor-market segmentation and dependence. To a certain extent, the income policy adhered to pursues, conflicting objectives: increasing the incentive to work also increases differences in income and poverty. The pursued income policy places too much emphasis on the negative effects of taxation. On the expenditure side, the fact that the government also has a productive role to play, in addition to its redistributional duties, is overlooked. This can be detrimental to economic growth. The Netherlands also has a number of other structural problems. Paradoxically, a section of the Dutch labor force is ill due to overwork, while another section is ill due to a lack of work. Environmental pressure is high, and environmental quality is low.

NOTES 1. Newcomers to the labor market may be placed in a lower salary scale when they start working to ensure that they qualify for the subsidy (Salverda 1998:50–1). 2. Between 1992 and 1995, the average number of years of service of employees who worked 12 hours a week or more increased from 8.5 to 9 years. This increase was greater for women (from 6.1 to 6.9 years) compared to men (from 9.8 to 10.2 years). This rise is also evident in age groups (see CBS 1996). 3. Research carried out by Van Soest et al., quoted by Roorda and Vogels (1997:55). 4. The Gini coefficient measures the degree of inequality in income distribution and is derived from the Lorenz curve. If everyone earns the same income, the Lorenz curve

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is a straight line (the diagonal): the income percentage is equal to the percentage of income earners. As the inequality in distribution increases, the Lorenz curve bends even more, increasing the area between the curve and the diagonal (the “banana”). The Gini coefficient depicts the ratio of the area between the curve and the diagonal divided by the half square. The fraction varies from 0 (absolute equality—all people receive exactly the same income) to 1 (absolute inequality—one person receives all the income and the rest receive nothing). 5. Wolfson’s polarization index is derived from the Lorenz curve. The index is an indicator of the size of the middle group and measures the area between the Lorenz curve and the tangent on the Lorenz curve at the median group of wage earners, the 50th percentile (M.C. Wolfson 1994). 6. The national guaranteed minimum income is 100 percent of net minimum wage for couples, for single parents 70 percent, and for singles 50 percent of net minimum wage. 7. Annually, on the third Tuesday of September—day of the Queen’s speech (prinsjesdag)—the Dutch parliamentary year is opened by the Queen’s speech (troonrede) to the united meeting of the first and second chamber of the States General. In her speech the queen points out the state of affairs and the main governmental policy issues for the next year.

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Flexibility in Dutch Work Organizations

INTRODUCTION Flexibility can be defined as the degree to which an organization is capable of continually adapting the deployment of people and resources to the ever-changing demands of the environment and the difference in work processes. This definition covers technical-economical flexibility (production system), financial flexibility (for instance, profit sharing, piece-rate payment, and wage flexibility) (means), and social or staff flexibility (people). This chapter centers on the motivations for and the effects of the different types of flexibilization on work organizations. It examines whether the favorable effects of numerical, functional, and remuneration flexibility that are predicted on the basis of neoclassical theory can actually be observed. First, the theory of the flexible firm is discussed. Next, an outline is presented of the development of numerical, functional, and remuneration flexibility during the past 10 years, emphasizing the training participation of flexible employees. Next, the short and long-term financial-economic consequences of flexibilization are examined. The chapter ends with a number of conclusions.

THEORY OF THE FLEXIBLE FIRM Central to the theory of the flexible firm is the relation between flexibilization and segmentation. Within the flexible-enterprise model, four types of flexibility are discerned: numerical flexibility, functional flexibility, production externalization, and remuneration flexibility (see Delsen 1995, 1997; De Haan, Vos, and De Jong 1994; De Lange 1989). Labor-input flexibility has two dimensions.

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In the first dimension, an enterprise can vary the labor quantity. This is called numerical flexibility (see Figure 4.1). Numerical flexibility is a defensive strategy, employed to counter uncertainties. The most frequently employed method to adjust to production or service changes is the deployment of extra labor, for instance, through extra part-time staff, employees with fixed-term contracts, agency staff, or staff on call (external numerical flexibility). The reasoning in this case is that traditional labor costs form a fixed cost factor that considerably hampers the freedom of action available to adjust to changing circumstances. A flexible labor contract offers the opportunity to reduce fixed costs and thus to shift the risk from the employer to the employee. Variable remuneration also implies that employees carry the financial uncertainty of an enterprise. Such a risk transfer, however, is only possible in the absence of alternative job opportunities, since employees are just as much opposed to taking risks as employers. In other words, this transfer is possible only because of the existence of unemployment. The currently tightening Dutch labor market is increasingly limiting this transfer. In a tight labor market, employers will attempt to bind the employees. Another method is by changing the work schedules of current employees, for instance, by changing full-time jobs to part-time jobs or by introducing shorter working hours, variable shifts, overtime, yearly hour systems, and the like (internal numerical flexibility).

Figure 4.1.

Forms of Flexible Labor Input

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The second dimension is concerned with a shift in the quality or function of labor. This is called functional flexibility. The staff’s flexibility is increased mainly by task widening (new tasks of equal level), task enrichment (additional higherlevel tasks), and job rotation. Changes in the required skills are achieved mainly by retraining and extra training. This mainly concerns the employees’ multiple deployability and their capabilities to switch to other jobs and functions (internal functional flexibility). In this case, both the employer and the employee invest in the labor relation. A wider term closely related to this is employability. Employability refers to the lasting deployment of employees, or their capacity to obtain and keep jobs. This permanent employability holds both for the internal labor market within an organization (internal employability) and for the external labor market (external employability). “Employable” is a time- and location-restricted concept, depending on personal characteristics and the labormarket context. A person characterized as “difficult to place” at a certain place and time may well be very employable at another time or place, due to changes in personal characteristics or the number of available jobs or their requirements. Besides, there is external functional flexibility. This externalization consists of outsourcing, secondment and posting, freelance work, and subcontracting, among other measures. In this case, employment contracts between employer and employee are replaced by a commercial contract. For instance, employers can obtain certain goods or services from outside contractors instead of having their own staff provide these. In this way, part of the risk is shifted to the suppliers. A final form of flexibility is remuneration flexibility. This concerns the degree to which the wage and compensation system of an enterprise supports and strengthens the different forms of numerical and/or functional flexibility and stimulates employees to achieve by incorporating individual or collective performance elements. Variable remuneration also enables the downward adjustment of wage costs during difficult times and can serve as an alternative to forced dismissal. This relates to merit payment, compensation allowances, and profitsharing arrangements, among other measures. The theory of the “flexible firm” (Atkinson 1985) suggests that organizations employing one type of flexible labor will probably also employ the other types. The global picture of the flexible firm is supported only in a very limited way by research results. It is rather a matter of communicating vessels. More use of one type results in less use of another type, because different types of labor contracts can be deployed for the same purpose. Part-time labor and temporary labor, for instance, are substitutes to a certain degree. From the view of the employer, both fulfill the same requirements: flexibilizing the organization of work and cost reduction. Part-time labor enables varying the number of worked hours, and temporary labor enables varying the number of employees. The advantage of part-time labor is that fluctuations in demand can be accommodated without employing temporary personnel who are not familiar with the job and the company, and without having to expand valuable overtime.

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The burden of striving towards more flexibility is distributed unevenly. At the enterprise level, a subdivision of staff is observed. The flexible firm consists of a numerically stable core group of employees (the first segment) surrounded by peripheral categories of employees (the second segment), who may or may not be in permanent service. The numerically stable core group performs the organization’s key activities and the company-specific activities. For the core employees, the emphasis is on functional flexibility. In the outer layers of the organization, the number of employees who can be flexibly deployed and the numerical flexibility grow increasingly important. Theoretically these peripheral employees are regarded as a homogeneous group with the following characteristics: • They routinely perform mechanical activities. • They are frequently female. • They work part-time or temporarily. • They employ skills that are widely available on the external labor market.

Practically, however, there is no duality but a continuum, a consistent whole: together with full-time labor, permanent part-time labor belongs to the first segment of the labor market, whereas flexible part-time labor, work on call, and temporary labor belong to the second segment. Besides, a temporary contract can serve as a bridge to a permanent job. The theory of the flexible enterprise and other internal labor-market segmenting theories such as the efficient-wage theory, the implicit-contract theory, and the transaction cost theory are also demand dominant. They ignore supply influences in the development of staff structure. These supply influences are particularly important in part-time labor. The insider-outsider theory accounts better for such supply influences and is better suited to explain the segmentation of the internal and external labor market. These newer labor-market theories— efficient wage, implicit contract, transaction costs, and insider-ontsider theory— moreover assume that rational, conscious, and efficiency-based considerations apply to the flexibilization of labor deployment. In contrast to the basic assumptions of the theory of the flexible enterprise and other internal labor-market segmentation theories, employers frequently appear to employ ad hoc policies with regard to atypical, that is, nonstandard forms of work (see Delsen 1995; Hunter et al. 1993; Nollen and Axel 1996; Van Riemsdijk, De Leede, and Looise 1999). Both part-time work and temporary work have undergone tremendous growth internationally: part-time work especially on the initiative of the employees, temporary work especially because employers prefer it. Research into the determinants of part-time labor and temporary labor (Delsen 1995) through examinations of establishment data found in a large-scale European survey confirms that part-time labor is largely supply induced, whereas temporary labor is introduced mainly from the demand side of the labor market. The growth of the number of part-time jobs can be ascribed mainly to the demands of em-

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ployees, which are acted on by employers. On the other hand, employers are the main factor responsible for the growth of temporary labor. A shift in the deployment of temporary labor is visible. This investigation also shows that new reasons (uncertainties, labor legislation, and so on) especially constitute the main cause for the growth of temporary labor in Europe. These new reasons involve a shift of traditional employers’ risks towards the employees.

NUMERICAL, FUNCTIONAL, AND REMUNERATION FLEXIBILITY IN THE NETHERLANDS Numerical Flexibility In the Netherlands, in 1996 about half of all employees and self-employed persons doing paid work for at least 12 hours per week worked regular hours, that is, workdays between 6 A.M. and 7 P.M. More than 14 percent regularly worked nights. Nearly all of these people also regularly worked evenings. Around 7 percent worked shifts. Another 17 percent regularly worked evenings between 7 and 12 P.M., but not nights. A large group (17 percent) regularly worked during the day in weekends. These percentages have changed little since 1992 (Tijdens 1998). Eurostat data (see Table 4.1) show that between 1992 and 1997 mainly night work by employees has increased in the Netherlands. On average, in all European Union (EU) countries, employees working irregular hours is on the increase. Table 4.1 also shows that in the Netherlands, less work is performed on irregular hours than in the United Kingdom (which is considerably above average), but also less than

Table 4.1. Working Irregular Hours by Employees in 1992 and 1997

Source: Seifert 1999:52.

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the average for the EU and the surrounding countries. Employees in the Netherlands work weekends more frequently than in Germany. These differences are partly related to sector structure differences between the countries. The recent second European Foundation investigation into work conditions in EU member states shows a similar picture for 1996 (Paoli 1997). Flexibility in working hours on the Dutch labor market largely depends on external flexibility, that is, flexible contracts such as temporary contracts, agency staff, staff on call, and part-time labor. In the Netherlands, part-time labor and temporary labor are more prevalent than the average in the EU. The usage of internal numerical flexibility, for instance, overtime, variable working hours, and short-time work, is below the European average (see Delsen 1997; Den Broeder 1996; OSA 1997; Smulders and Klein Hesselink 1997). Recent research (De Jong and Van Bolhuis 1997) shows that fewer than half of all Dutch enterprises face noticeable production fluctuations. Of the enterprises that face production fluctuations, 43 percent choose both internal and external flexibilization and 30 percent only internal flexibilization. This practice indicates a clear deviation from the expressed preference for internal flexibilization (60 percent). The preference for external flexibilization (16 percent) is below the real value; 22 percent choose only external flexibilization. These differences between preferences and practice may be related to the enterprises’ negative experiences with external flexibilization (discussed later in this chapter). Although production fluctuations occur to more or less the same degree in all economic sectors, external flexibilization is applied more frequently than internal flexibilization in agriculture and the building industry; the opposite holds for trade, the catering industry, banking and business services. This fits in with the findings of De Grip, Van Loo, and Sanders (1999), who conclude that banking and insurance are very training intensive, whereas in catering and business services job changes can be explained by employment growth. Internal flexibilization is on the increase due to the 1996 Working Hours Act (Arbeidstijdenwet) and the 1996 Shop Opening Hours Act (Winkeltijdenwet). Partly, this forms a substitute for external flexibilization. The opportunities collective labor agreements offer for this form of flexibilization in relation to these two acts, however, are not nearly fully exploited (Delsen and Visser 1999). Only a few companies go into agreements on working-hours differentiation in the form of minimum or maximum number of working hours per day or week. This is because these are recent agreements, the implementation of which takes time. However, companies display only limited interest in differentiating workinghours patterns, even companies facing production fluctuations (De Jong and Van Bolhuis 1997). The companies’ reticence is also caused by the high implementation costs of this internal flexibilization. Increasingly, Dutch employers formally preclude the payment of wages if no work is available. This means that the normal business risk is placed increasingly on the employee. The law governing dismissal is circumvented and the costs are passed on to the social security system (see SZW 1995:25–26). In chapter 2 it has been shown that over the last 10 years, the number of flexible jobs

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Table 4.2. Types of Jobs of Employees, 1988–1998

Source: Calculated from data provided by Statistics Netherlands.

has doubled and the number of part-time jobs has increased by more than 60 percent. Flexible jobs now constitute 12 percent of the total number of jobs; in 1988 this was 8 percent (see Table 4.2). The percentage of part-time jobs gradually rose from nearly 24 percent in 1988 to nearly 30 percent in 1998. From 1988 to 1998, the share of full-time jobs among the total number of jobs decreased by more than 10 percentage points from 68 percent to 58 percent. The growth of the number of flexible contracts can indicate two things. First, it can indicate that employers use flexible contracts because they are not yet sure that the growth of the order file and thus the expansion of employment is a long-term and therefore structural phenomenon, and also to select personnel. If this is the case, the growth in flexible contracts gives an indication of the general economic situation. If the order flow is structural in nature, the need for flexible workers will decrease. Part of the flexible jobs will be converted to permanent jobs. This explains the recent leveling off of the growth in the number of flexible jobs. If the economic situation deteriorates, the growth in the number of flexible jobs will continue to decrease. Flexible workers are the first to be dismissed. As the economic situation continues to deteriorate, the number of permanent jobs will decrease as well. Second, the growth in the number of flexible contracts may indicate a structural shift towards more flexible labor relations, causing a change in the employment structure. The structural increase in flexible contracts may be caused by changes in regulations, for instance, with respect to the use of flexible labor contracts and shops’ opening hours, or a change in management style towards

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better short-term results. This final factor particularly forms an important explanation for the growing flexibilization of personnel deployment. At the moment, entrepreneurs are strongly cost conscious and averse to having too many staff. The time horizon is decreasing. Influenced by the shareholder approach, where profit purposes make financial management increasingly important, creative management becomes less important. This makes Dutch business life increasingly resemble that of America. Making profits and satisfying the shareholders are American managers’ first and foremost priority. American managers feel barely responsible for their enterprise and easily switch functions. They are primarily working on their personal career and are concerned only about what a group or company can mean for them. The result is a huge number of bankruptcies. A vulnerable business can never survive if it is being sucked dry by so many people (Hampden-Turner and Trompenaars 1995). A shift from Rhineland stakeholder capitalism to Anglo-Saxon shareholder capitalism is taking place (Van den Toren and Vos 1997:121–122). The stakeholder model, in which several parties are involved in the management of the company and which fits in with the Dutch tradition of negotiations, is losing ground. Strictly speaking, internal and external stakeholders are people with a direct interest in company policy and the company, such as employees, customers, financiers, and suppliers. In the Anglo-Saxon shareholder model, shareholders sell their shares if performances drop. A hostile takeover may even occur. For managers, this is a signal to improve results. When losses continue, the future of certain managers is at stake. For this reason, American and British companies frequently set up an internal market. Within a company, profit centers must compete for financial means. The rivals compete until they are down, even if the entire company is endangered (Hampden-Turner and Trompenaars 1995). Major international concerns such as Akzo Nobel, Unilever, Philips, and Reed Elsevier sell and buy companies to content the investors. This fate threatens not only unprofitable business parts, but all components that contribute insufficiently to the total concern’s shareholder value. Recent reorganizations in Philips and KPN-Telecom were performed only to increase shareholder value. They pose a threat to future consensus and damage the polder model. Within major Dutch companies, a shift is taking place from cooperation between management, shareholders, and employees to internally and externally competing departments. This aggravates internal labor relations and relations between employees (Balkenende 1997:15). The enterprise becomes more businesslike and tougher. This also means the end of the polder model, or at least a weakening of its foundations. The market requires quick decisions, which hardly leaves room for cooperation or negotiations with other stakeholders within the company. The Dutch consultative model is being forced out by the American conflict model in companies. If profits are lower than those of comparable businesses, massive sales, take-overs, and/or liquidations may occur. The purpose of these recent takeovers is no longer to enlarge the concern, but to split up the acquired company and to sell different components to raise share

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prices. Not only does this satisfy the shareholders, but high share prices form the best guarantee against hostile takeovers (Albert 1993:71). This also strongly influences personnel management. Labor is handled in a more businesslike manner. This forms the basis for flexibilization of labor. Tension, however, is also created when employees perceive the change as a downgrading of their labor to merchandise. Organizational and labor-legislation restrictions are removed to make the labor factor as cheap as possible, but employees themselves are insufficiently motivated to become more entrepreneurial (Balkenende and Kimman 1997:77–79). Because of the emphasis on the shareholders’ financial interests and profits, reorganizations aimed at cost reductions have recently been performed at Dutch companies like Shell, Unilever, Philips, KPN, ABN Amro, Ten Cate, and Delft Instruments. To achieve this, less profitable company components are sold or scrapped. The great emphasis on larger profits and stock-exchange prices enables management to limit company activities to profitable core activities. Reorganizations, subcontracting, and spin-offs are therefore everyday occurrences. A “rat race” appears to be taking place. Van Witteloostuijn (1999) calls this an “anorexia strategy”: businesses keep reorganizing and eventually grow so thin that they keel over, that is, are taken over by a competitor. The shareholders’ happiness generally does not last long. Short-term results usually hinder long-term results. Cost reductions to earn money now are at the expense of business investments and future earnings. The structurally saved money can be invested in the staying staff and will produce higher returns. Personnel, however, are the victims of this “rat race.” Good workers leave because they do not want to join the race; the stay-behinds have to work harder with fewer people because of the great emphasis on the shareholders’ financial interests. In the long run, this is counterproductive. Work pressure and uncertainty increase, and creativity and motivation are lost. Permanent staff are increasingly replaced with marginal jobs. The growing number of flexible jobs is also related to an employment shift from industry to services. In the Netherlands, the function of agency staff has changed in the last few years. For a long time, employers took on agency staff in order to compensate for temporary fluctuations. Today the development of agency work is a reflection of the tendency towards a more flexible labor market (Den Butter, Koeman, and Van Ours 1996). Supply factors also play a role, however. In contrast to other EU countries, where temporary labor was introduced mainly by employers, in the Netherlands the requirements of employees also play an important role (see Delsen 1995). More than in other EU countries, in the Netherlands the evolution of part-time labor can be explained from the preferences of the employees.

Functional Flexibility Data on the usage of functional flexibility in the Netherlands are limited.1 Research of the Dutch Institute for Labour Studies (Organisatie voor Strategisch

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Arbeidsmarktonderzoek—OSA) indicates that although production organizations require increasing deployment flexibility from their personnel, in the Netherlands fewer workers were flexibly deployed in 1996 than in 1986. An increase occurred after 1994, however. Besides, employees’ subjective estimates of flexible deployment are considerably higher (about 10 percentage points) than its real occurrence. This may indicate that they overrate their own capacities, or it can point to insufficient use of the available deployability (OSA 1996:47). In a large number of Dutch organizations and companies with more than 200 staff, personnel managers perceive the insufficient functional flexibility of the employees as a real problem (Vandenput 1995). More than 30 percent of the interviewed personnel managers regularly or frequently encountered insufficiently flexible employees, 11 percent rarely or never encountered this problem, and 57 percent occasionally encountered it. The percentage of personnel managers regularly or frequently encountering insufficiently flexible employees depended heavily on the employee category: higher echelons 20 percent, middle echelons 36 percent, and operational level 49 percent. This may relate to the fact that at the operational level functions are more strictly circumscribed and less broadly defined, causing more specialization. In the near future, this problem is expected to increase greatly. If the qualifications of employees remain unchanged, by 1999 only 11 percent of employees are predicted to function as expected, according to this investigation of 1995. The increasing interest in employability—the adaptability and deployability of employees—is connected with technological, organizational, economic, and demographic developments. The employability of employees is highest in catering, repair, and business services and in banking and insurance. The need for employability is greatest in energy, the chemical industry, the metal industry, electronic technology, catering, repair, and business services and lowest in the building industry and trade (De Grip, Van Loo, and Sanders 1999). This is partly related to the relatively large external flexibility in these sectors. In the current turbulent environment, individual employees are expected to take more responsibilities with regard to their own professional development. An active career management directed towards lifelong employability is increasingly considered a necessity. Employability is seen as a reply to the increasing uncertainty caused by the degradation of the social security system, internal flexibilization, and the increasingly businesslike relation between employer and employee. Both the Foundation of Labor (Stichting van de Arbeid—STAR) and the Social-Economic Council (Sociaal-Economische Raad— SER) assume that a good employability policy will be able to cushion the consequences of short-term labor relations and to offer opportunities for permanent labor relations (see Gaspersz and Ott 1996; STAR 1996; SER 1996a, 1996b). The only real security is on the side of the employee him- or herself. Employees must take their career planning into their own hands, to be less dependent on other people’s caprice (see, for instance, Bloch and Bates 1995; Ottenhof 1998).

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Some large Dutch industrial employers want to get rid of the traditional permanent labor contract and move towards more flexible contracts. Employees are primarily made responsible for their own employability. This can decrease monitoring costs. The aim is to make the organization more flexible and cheaper thanks to greater employability of employees and faster promotions to other functions. An employee who does not attend training courses and does not keep up runs the risk of his or her contract not being renewed. According to Philips Nederland social services manager A.W.A. de Haas (1997:59–60), the turbulent environment and the fact that companies no longer dare to accept certain risks may cause labor contracts to be set for only limited periods in the future. The uncertainty in hiring personnel is much greater than it used to be. Both the employer and the employee must realize this. Work is available for only a limited period. After some time, a meeting is convened to reconsider the situation. The main issues are what else the employee can do and what else the employee must learn, given the changing circumstances. In line with this, the employers’ organization VNO-NCW, the recently amalgamated Federation of Dutch Employers (Verbond van Nederlandse Werkgevers—VNO) and the Christian Employers’ Federation (Nederlands Christelijk Werkgeversverbond— NCW) has issued the Arbeidsvoorwaardenoverleg 2000 memorandum that serves as a guideline for the collective labor agreement negotiations and expresses the desire to make individual employees’ remuneration dependent on their productivity and/or their training activities. Philips and Akzo Nobel have taken over this guideline (de Volkskrant, December 11, 1999). Lifelong employability also implies that employers grant their employees the opportunity to take this responsibility for their own career. Employers too need to invest in training and to offer more variation and customized functions (see Vandenput 1995; Gaspersz and Ott 1996). Firm-specific training can be considered a fixed cost that makes trained workers more valuable than others to their present employer. It creates a deterrent to voluntary mobility. As long as workers share part of the returns to such training in the form of higher compensation than they could obtain elsewhere, their incentives to quit the firm are reduced. Hence employers who seek to reduce turnover costs have an incentive to force workers to pay for at least part of their specific training, providing a return by paying higher wages or benefits after training than they otherwise would. Where specific on-the-job training is more extensive, we will observe less voluntary mobility among firms. Job tenure–the amount of time spent with an employer—is a good proxy for a worker’s firm-specific training (Filer, Hamermesh, and Rees 1996:283). Participation in training becomes increasingly important, not only to improve career opportunities but also to bridge the gap between the required skills and the available training and to prevent obsolescence of knowledge and skills. Because employees’ knowledge and skills are kept up-to-date, they become more valuable on the external labor market. Because of its flexible and well-trained employees, the work organization can respond to and anticipate technological de-

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Table 4.3. Internal Job Mobility by Organization Size in the Netherlands (as a Percentage of the Number of Employees), 1988–1998

aConcerns

organisations with 100–499 employees. Sources. OSA 1994:21; OSA 1996:30; OSA 1998:24.

velopments and market changes. The recent social partners’ agreements at Akzo Nobel Nederland, DSM, Rabobank, and Heineken to improve their employees’ flexibility (internal employability) through refresher courses must be regarded in this light. Through expansion of training opportunities for employees, increasing their employability both inside their current company and elsewhere, internal and external job mobility are on the increase. The number of organizations where employees can participate in training courses and the attendance at these courses has increased in the first half of the 1990s (see OSA 1994, 1996). This has a favorable effect on internal mobility. Table 4.3 shows, however, that internal mobility decreased in the Netherlands. In 1988, nearly 5 percent of employees changed jobs within the same company. In 1994, this percentage had decreased to 3 percent. This pattern holds for all sectors of the Dutch economy. There are, however, major differences between small and large companies, both with regard to level and to development. Large organizations have more opportunities to provide internal promotions, due to the greater diversity in functions and departments. Large companies also pay more attention to internal staff promotions. Personnel management is an important factor behind the size of the internal labor market. This may explain the increase in internal mobility in large companies between 1988 and 1992. In many organizations, however, job changes are not the result of structural personnel management, but rather of ad hoc policy, for instance, due to the undesired quitting of an employee (see OSA 1994, 1996, 1998, 2001). This may explain the decrease in internal mobility in large companies between 1992 and 1994. Apart from the decrease in turnover, the decreasing trend in internal mobility may be related to the fact that training relates mainly to the current function. When the economic situation is favorable,

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more people voluntarily leave their jobs. Internal mobility may be used to replace the leaves. Internal mobility also may be used to enlarge the enterprise. The first dominates. This may explain the increase in internal mobility from 1994 to 1996 and the high level in 1998. Small businesses display more fluctuations, without a distinct trend. Because of financing problems that occur for training that is not business specific, the necessary training facilities will be less readily available for employees who do not work in internal labor markets. Internal mobility (as a percentage of the number of employees) is high in government, the service sector, health care, business services, industry, and agriculture and low in education, the building trade, transport and trade, catering, and repair services (OSA 1996:30; OSA 1998:24). Realizing employment at the downside of the labor market without causing segmentation implies that employers should improve internal transfers in their companies. Data on the size and development of external functional flexibility in the Netherlands are scarce as well. In 1996, 2.1 percent of employees were seconded, that is temporarily transfered or on loan: 1.8 percent of the permanent employees and 4.1 percent of temporary employees (OSA 1997). This mainly concerns hiring external specialists, who can be deployed temporarily or for a particular project. Particularly in automation and engineering, external labor forms a major component of companies’ numerical flexibility. Outsourcing labor and supplying have been greatly on the increase in the Netherlands in the second half of the 1990s (see Huiskamp 1999). Suppliers increasingly take over tasks from companies. Contrary to what the theory of the flexible firm states, this concerns not only supporting tasks, but also tasks crucial to the primary process of the enterprise. In industry, building, and business services, 35 percent to 40 percent of the turnover is produced by external suppliers. This concerns 500,000 employees. The great increase in outsourcing sharpens competition between suppliers and causes increasing pressure on labor conditions and contracts. Labor Inspectorate (Arbeidsinspectie) data show that in 1998 the number of work-related accidents in industry was 40 percent (1,206) higher than in 1996 (860) (de Volkskrant, January 15, 2000). This is caused partly by increased work pressures and use of agency staff.

Remuneration Flexibility Information on flexible remuneration in the Netherlands is also scarce. The importance of flexible remuneration in the Netherlands compared to other EU countries is limited. European Foundation research (Paoli 1997) shows that in 1995–1996, 6 percent of employees in the Netherlands received piecework payment or productivity-related payment. For the EU, the average was 13 percent (see also TERP 1994). Hay Management Consultants research (1996) shows similar figures and also indicates that the extent of variable remuneration is proportional to the function level, varying from 10 percent for senior management to 3 percent for lower-level staff (see Table 4.4). This research relates to the

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Table 4.4. Remuneration Flexibility in the Netherlands by Staff Category

Source: Hay Management Consultants 1996.

1991–1994 period. Not only the extent of the variable remuneration differs for different staff categories, but also the types of arrangements. For senior management, the variable remuneration is frequently linked to profit increases. For higher-level personnel (middle management/team members), bonus arrangements are frequently linked to individual and/or department targets, sometimes combined with profit-sharing arrangements. For lower-level staff (operational personnel), most arrangements concern bonuses for exceptional performance or collective profit-sharing arrangements. On average, the variable part of the earnings is 6.3 percent of the total wage amount. Promotion of employment and wage restraints are major arguments for variable remuneration. As an alternative to dismissals or staff reductions, wage flexibility at the enterprise level can be increased. Besides, an important motive is the fact that a company’s flexible wage and compensation system can support different types of numerical and/or functional flexibility; that is, individual incentive payments stimulate employees to perform better, increase staff loyalty and motivation, and express performance differences between personnel. The scarcity ratio is also expressed more clearly. As regards content, policy considerations for flexible payment differ for staff categories (see Table 4.4). For sen-

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ior management, the main policy considerations are motivation, increased performance, and ensuring competitive incomes for this category. For higher-level personnel, considerations largely parallel those for senior management. The main item is strengthening the individual’s orientation towards results within the company’s goals. Competitive powers on the labor market also play an important role. For lower personnel, too, motivation and identification with the company’s goals play an important role. Wage control and flexibility are also important considerations for deciding to implement variable remuneration. In the Netherlands, job maintenance is no reason for variable remuneration. This picture fits in with the large degree of external numerical flexibility, that is, the great number of flexible workers. The fact that in the Netherlands most agreements tie in with the encouragement of result orientation and motivation of employees is also of importance here. The total volume of variable remuneration arrangements is around 5.1 percent; this amounts to around 1–2 percent of total operational costs in the processing industry and 3–4 percent in the service industry. This share is so small that it has no effect on results or on conservation of employment in difficult times. Besides, the downward flexibility is limited because the variable award is not accompanied by a lowering of the fixed wages. It is doubtful, therefore, whether a further implementation of variable remuneration in the Netherlands is an efficient means of flexibilizing labor costs. It would seem more logical to use this instrument to combat early retirement of elderly employees and to promote the gradual reintroduction to the labor market of people who retired earlier, this because of the aging and dejuvenation of the labor pool (see chapter 7). This requires, after all, a larger degree of employment participation and more training. The labor-supply survey of the Dutch Institute for Labour Studies (OSA) shows that in 1996, bonuses of all types (5.1 percent) and profit sharing (3.0 percent) were of less advantage to flexible workers than to permanent employees (14.2 percent and 25.1 percent, respectively). The percentage of employees benefiting from bonuses rose from 19.4 percent in 1986 to 23.4 percent in 1996. During that period, the percentage of employees benefiting from profit sharing dropped from 17.8 percent to 13.3 percent (Remery et al. 1999:64). Despite these figures, the interest in forms of incentive payments, that is, performance-linked payments, is increasing, influenced by individualization, the labor-market power shift towards employers, and the need for new, flexible structures (De Galan and Van Miltenburg 1991:350). During the 2000 collective bargaining, Philips and Akzo Nobel not only wanted to abolish collective wage increases from the collective labor agreement but also wanted to make the individual employee’s wage increase depend on efforts, achievements, and functioning. The assessment depends on the supervisor. In this, both companies followed the Arbeidsvoorwaardenoverleg 2000 memorandum issued by the VNONCW employers’ organization, which emphasizes flexible awarding in the form of profit sharing, nonrecurrent allowances, and person-dependent variable remuneration (de Volkskrant, December 11, 1999). A major condition for the suc-

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cess of individual performance-related payment is the correct assessment of the employees’ contribution to the realization of these results. In such systems, wage differentiation depends on the negotiating employers and employees accepting objective criteria and characteristic numbers. In contrast to senior management, it is relatively difficult to determine goals and to assess the achievement of higher staff (Hay Management Consultants 1996). In the case of individual incentive payments, a principal-agent problem occurs. Because an employee (agent) possesses more information than his/her supervisor (principal), an information asymmetry occurs, causing inefficient salary mutations.

FINANCIAL-ECONOMIC CONSEQUENCES OF FLEXIBILIZATION According to Fruytier, the flexibility of the Dutch work organization provides an even better explanation for the success of the polder model than the importance both employers and employees and their organizations attach to wage control. Dutch companies are not only cost effective and productive, they are also very capable of responding flexibly to market requirements. However, this flexible response to environmental fluctuations cannot be allowed to degrade the organization’s internal cohesion (Fruytier 1998). In this section, the theory of flexibility encounters real life. Essential here is the question whether theoretical advantages of numerical and functional flexibility and flexible remuneration can be practically ascertained. Although this section focuses on the financialeconomic consequences of flexibilization, attention is also given to its influence on corporate culture and the consequences for the organization’s functioning. This first two parts of this section examine short- and long-term consequences of flexible work and the employability policy used. The last part of this section centers on the financial-economic consequences of flexible remuneration.

Short-Term Effects Newcomers to the Dutch labor market have particularly been confronted with flexibilization in the second half of the 1990s. This has especially caused welleducated young people to behave as self-employed persons. Permanent contracts are no longer offered to newcomers to the labor market. This indicates the presence of an “insider-outsider” problem, a characteristic that is typical of the American labor market (see also chapter 5). Recent case studies within the Dutch automobile industry confirm this (see Van Riemsdijk, De Leede, and Looise 1999). Flexible employees (the outsiders) serve as a buffer to protect the permanent staff. This is the most important reason for the works council to agree to an increase of flexible employees. This illustrates the power of the insiders (the incumbent personnel) at a decentralized level. The newcomers have therefore become accustomed to this temporary uncertainty. The current shortage of labor,

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however, hampers the “single-sided” employability strategy, in which employers require a great deal from young employees—creativity, social skills, immunity to stress, and so on, all for a job where they can be kicked out at very short notice. Loyalty to the company is at risk here. The single-sided flexibility desired by the employers backfires on them. Also, because of the current shortage of labor, companies are facing a lack of staff as well as a high staff turnover. Flexibilization operates, but the 20-year-olds dictate the conditions. A company must offer leased cars, flexible work, part-time work, four-day weeks, attractive wages, sabbaticals, and training courses to get new people, and then the company’s battle to keep the new human capital starts (de Volkskrant, August 18, 1999). At the moment, contracts for a limited time and agency work are concentrated at lower levels and the beginning of careers. Agency work and temporary work are frequently assumed to offer short-term cost advantages that exceed the longterm disadvantages. Several investigations, however, indicate that temporary employment and agency staff have both short- and long-term disadvantages (see De Haan, Vos, and De Jong 1994; De Lange 1989; Delsen 1995, 1996a; Nollen 1996; Nollen and Axel 1996). In other words, the advantages expected in the theory need not always materialize. For instance, agency staff are frequently more expensive than permanent or temporary staff. New agency staff must constantly be shown the ropes in the organization. The use of temporary staff and staff on call is also not cost effective: the unit labor costs are higher than those for permanent full-time or part-time staff. One of the main causes of this is the high turnover. This makes training a cost instead of an investment. The costs of introducing the employees are also important. The employer can obtain knowledge only to a very limited degree through temporary labor. According to the human capital theory, temporary contracts can be expected to occur more frequently in occupations requiring general skills and occupations needing little or no training than in professions requiring specific skills. General human capital involves skills that are of equal value in many different organizations, for instance, operating a widely used word-processing program. Specific human capital involves skills that are of value only to a single employer, either because the employer is a monopolist, that is, the only user of that type of worker, or because of special methods, routines, and equipment with which workers must become familiar (Becker 1964). This is confirmed by European empirical research (Delsen 1995): there is a negative correlation between the qualification level and the percentage of temporary work. Practice shows that personnel management measures relate to a shorter time period than the production-planning process, so that a disharmony and lack of integration between these occur. Little attention is paid to planning and future implications. Research in the United States and several European countries, the Netherlands, for instance (Delsen 1995; Hunter et al. 1993; Nollen and Axel 1996; Van Riemsdijk, De Leede, and Looise 1999) shows that ad hoc decisions with respect to flexibility lead to unexpected costs, for instance, because of absence, lack of involvement, and loyalty and quality loss. An increase in the num-

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ber of flexible employees (external numerical flexibility) can result in destabilization of business-economic indicators. The malfunctioning of a personnel department, for instance, especially with regard to staff planning and recruitment, can be veiled by taking on many agency staff. Temporary labor also has a negative influence on efficiency, internal stability, the quality of the end product, and costs. Two opposing effects can be distinguished regarding the productivity of temporary labor: the temporary employee works hard in order to become a permanent employee, or the employee achieves less because he will be dismissed anyway. The latter effect predominates. This also holds for agency staff (see De Haan, Vos, and De Jong 1994; De Lange 1989; Delsen 1995; Nollen 1996). If employees are averse to short-term contracts or risk averse, it may be necessary to compensate by raising wages for temporary contracts. This may cause production to increase as enterprises increasingly make more selective use of less flexible employees, who also are more committed to training. Flexibility has business-economic limits. It is no wonder, therefore, that in certain sectors of Dutch industry, flexible labor is no longer considered to be a cure-all (de Volkskrant, January 14, 1997). When flexibility is pushed too far, enterprises face negative cost consequences. Flexible workers are offered rewards and training to decrease turnover and to improve quality and are offered permanent jobs through a roundabout route. Recent case studies in the Dutch automobile industry (Van Riemsdijk, De Leede, and Looise 1999) show that unfavorable experiences with external numerical flexibility give rise to the development of alternatives such as internal numerical flexibility and functional flexibility.

Long-Term Effects In the case of temporary labor, employers trust blindly to numerical flexibility: the staff size rises and decreases with sales. However, this has a negative effect on long-term flexibility. For that, functional flexibility offers better perspectives. However, this functional flexibility, which can be achieved by part-time labor, requires extra investments in training and education. This causes a “prisoner’s dilemma” for the employers. In a decentralized situation and a deregulated and uncertain environment, the necessary training and education investment loses out on the short-term profits employers hope to achieve through numerical flexibility. The consequence of this is training underinvestment, causing unexpected labor-market demand and supply imbalances despite the original rational considerations. In other words, the market fails. This market failure can be prevented by consultative institutions (see chapter 5). Examples of undesired effects of flexibilization can be found in the United States, the European Union, and also the Netherlands. The standard neoclassical economic argument is that lower-productivity labor gets a smaller reward. This causality, however, can be reversed. Investigations show that low wages can induce low productivity (see Delsen 1995; Nollen and Axel 1996). In the EU,

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costs per unit of product are often higher in low-wage areas than in high-wage areas. In the United States, where cheap labor is freely available and where employment protection is limited, long-term productivity is lower because there is no incentive to do better. This is counterproductive also for managers: a surplus of cheap labor causes them to nod off and become less innovative. Wages, therefore, not only form a cost factor, as the neoclassical theory argues, but also provide employees and employers with positive stimuli to renew and improve productivity. Since the end of the 1980s, the Dutch labor market has found a new equilibrium: wages grow more or less parallel to the growth of labor productivity, but both grow slowly. In other words, the Dutch economy displays major similarities to the American economy. According to Watson et al. (1999:30), this shift from an equilibrium with high wage increases coupled with high productivity growth and poor employment effects to an economy where the equilibrium involves lower and labor-intensive growth and higher employment growth is based on a shift in the expectations with respect to future wage increases, influenced by the policy of wage moderation. However, this development can also partly be explained by the strong growth in external numerical flexibilization. American and European employers tend to underestimate the advantages of part-time labor and to overestimate the advantages of temporary labor. On the basis of experiences in Europe, Japan, and the United States, it can be concluded that permanent part-time labor is more advantageous to employers than flexible part-time labor or temporary labor. These latter two have both short- and long-term disadvantages. Table 4.5 lists the main relative costs and revenues of permanent part-time workers and temporary workers for the employer. Irregular contracts usually contain unfavorable labor conditions. Several recent investigations show that the Dutch labor market has a dual structure. This dual labor market is divided into a primary segment with well-paid permanent jobs and a secondary segment with badly paid temporary jobs (see Batenburg and De Witte 1995:99; Kleinknecht, Oostendorp, and Pradhan 1997:99). Supplementary training is prevalent on the primary labor market. Training participation in the secondary labor market lags greatly behind that in the primary labor market (see Dekker, De Grip, and Heijke 1996). Gaspersz and Ott (1996) label this a segmentation scenario that is unfolding now. Recent research by the Stichting Maatschappelijk Ondernemen (Foundation of social enterprising) of the MKB Nederland (Dutch small and medium-sized firms) employers’ organization shows that Dutch employers regard their flexible employees as second-rate workers. Employers discriminate between their own permanent employees and flexible workers: agency staff, seconded staff, staff on call, and employees with short-term contracts. Labor conditions differentiate between core employees and flexible workers. Permanent employees have the security of employment protection, wages, pensions, holiday allowances, and, increasingly, premium savings schemes, a thirteenth month pay, and profit-sharing arrangements. Besides, those at the summit may obtain options or shares. Employers in the Netherlands emphasize this division: flexible workers are not allowed to at-

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Table 4.5. Employer’s Costs and Revenues of Permanent Part-Time Workers and Temporary Workers Compared with Permanent Full-Time Workers

Source: Delsen 1995:85.

tend staff parties and are paid no attention during illness. Excluding these flexible workers, however, evinces a very narrow-minded mentality. After all, employers pay the employment agency very hefty margins without batting an eye. Apparently, haggling with the employment agency or self-activation is more effective when hiring flexible workers than some fewer Christmas hampers or partygoers.

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Exclusion, however, induces decay of moral standards and lack of interest. The investigation further shows that 78 percent of the flexible workers are hardly involved in the day-to-day running of the company. Flexible workers notice very well that employers feel less responsibility for them than for their colleagues with permanent jobs. Because of this, they feel no involvement in the company. About 80 percent of employers claim to make use of employees who do not work standard hours because this enables them to decrease costs. Apart from decreasing wage costs, increasing sales is also mentioned as a reason. One-third of employers claims that flexible workers are less committed to the business than permanent employees. The employers do hardly anything to change this (Het Financieele Dagblad, March 17, 1998). This leads to the conclusion that employers underestimate the disadvantages of temporary labor and overestimate its advantages, especially in the short term. This confirms the conclusion from the international economics literature (see Delsen 1995) for the Netherlands. Another conclusion is that short-term strategy prevails. This also illustrates the fact that the personnel management performed in the Netherlands is a major reason for the employees’ division on the internal market. Employers clearly accept this lack of commitment or, at least, do nothing to abate the situation. The recent experiences with Nedcar, the Dutch automobile manufacturer, illustrate almost embarrassingly both the short- and long-term disadvantages of pushing flexibilization too far. In 1998, one-third of the employees were flexible workers (2,500 out of 7,000 employees were agency staff or had short-term contracts), but uncertainty also held sway among the permanent workers after years of reorganizations and raised production standards (de Volkskrant, March 18, 1998). Turnover is high, commitment is small, and criminality is a problem. People with permanent jobs, who can further their careers and who get paid holidays, are looked at askance. This is not conductive to solidarity. Group norms no longer avail. Segmentation is the result. The organization’s internal cohesion is eroded. Training participation during one’s professional career is not equal for everyone. As is the case in other countries,—the Netherlands participation in training and education is limited for older employees, female employees, employees at smaller companies, and employees with flexible labor contracts (see Delsen 1998c). Table 4.6 shows that training participation by permanent employees is paid for considerably more frequently by employers (82 percent) than training participation by flexible workers (28 percent). Half of the flexible members receive no support. In the Netherlands, flexible employees need to invest a great deal in training and education to prevent obsolescence of knowledge and skills. Jonker, De Grip, and Van Smoorenburg (1997) conclude from their investigation that in the Netherlands flexible workers have twice as little chance to take part in business training as permanent employees. About 60 percent of these differences can be explained by differences in characteristics of the employees, and 40 percent of the training differences can be explained from the fact that employers are more willing to invest in permanent employees’ human capital than in that of temporary labor. Flexible employees who participate in training courses, how-

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Table 4.6. Sources of Payment for Training (Percentages)

Source: OSA 1997:54.

ever, do so for at least as long a time as permanent employees. Flexible contracts are aimed particularly at lower levels and are mainly filled by people with weak labor-market positions. This situation is exacerbated by lower investments in human capital. Other investigations also show that flexible employees are less frequently eligible for financial compensation for training courses (12.2 percent in 1996) than permanent employees (37.2 percent in 1996). In 1986, these figures were 3.3 percent and 19.4 percent, respectively (Remery et al. 1999:63). The relative position of flexible employees has clearly been improved. The expected investment horizon largely determines the training cost amounts. For the employer, the main item is the period the skilled employee will remain within the organization; for the employee, it is the period he/she will be active on the labor market. American experience shows that short-term contracts reduce the time horizon of both employers and employees. Like Dutch employers, American employers tend to invest less in the training of flexible workers. For the employee, it is less clear that flexibilization will lead to a shortening of the time horizon. Employees who can no longer count on lifetime employment may feel forced to keep their qualifications up-to-date so that after their contract runs out, they will be eligible for new jobs. U.S. practice, however, shows that employees with short-term contracts focus more on wage optimization than on training for yet unknown future functions (see De Vries 1995:74). In the case of external functional flexibility, the outsourcing company is supposed to take care of the permanent training of its specialists. In an uncertain labor market, however, this need not be the case.

Effects of Flexible Remuneration Empirical research into the influence of flexible remuneration in the Netherlands is very scarce. According to the neoclassical theory, adjusting wages to the

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employees’ productivity contributes to the organization’s efficiency (De Galan and Van Miltenburg 1991:353–355). This efficiency consideration is expressed in a more businesslike attitude of the employees, since they can be held responsible for their actions. On the other hand, lack of sufficiently reliable standards can cause arbitrariness (subjectivity) within businesses and organizations. Performance-linked payments can also lead to uncertain income positions. Incentive payments force employees apart in companies because they are appraised individually. Appraising individual or group achievements compromises the employees’ solidarity, a mainstay of the polder model. Thus performance-linked payment is not compatible with the general goal of improving the employees’ positions. Investigations show that in 1998 relative to 1997, managers received 8 percent more salary, excluding options (de Volkskrant, August 9, 1999). This is more than 2.5 times as much as the general wage increase of employees. This can damage the polder model: for the labor unions, it becomes increasingly difficult to explain to their members why wage moderation is desirable. This explains why at the end of 1999 the Netherlands Trade Union Confederation (Federatie Nederlandse Vakbeweging—FNV) raised its wage demands from 3 percent to 4 percent. Flexible payment can have a favorable effect on the public image of an organization. Flexibilization of labor conditions, if it can be fitted into the total organization culture and strategy, has favorable effects on turnover, absenteeism, productivity, and recruitment possibilities of the organization. This is why employers are generally in favor of performance-linked payments. In 1998, the four main industry labor unions (united in FNV Bondgenoten, which covers 500 of the 900 Dutch collective labor agreements) announced that they were in favor of the introduction of performance-linked payments. One of the aims is to reduce structural wage demands, in other words, to make wage costs more flexible and to decrease the number of dismissals in unfavorable economic situations. In the past, members’ priorities were with the 36-hour week; now, about a third of union members are in favor of performance-related payment, and in the banking sector, this figure is 50 percent. A greater number are in favor of multiple deployability as a criterion for additional rewards instead of performance payments. The most important industrial union, Industriebond FNV, is still skeptical. It accepts collective wage incentives, agreed on by Shell and DSM, for instance, but disagrees with wage incentives for individual employees. Dutch employers too are skeptical about wage incentives, since these are accompanied by high administration costs and it is difficult to measure performance, and also because of the downward rigidity. Besides, employees on incentive payments earn 10 percent more than employees on standard pay. This illustrates that generally speaking, incentive payments are favorable for employees and unfavorable for employers unless this is countered by a productivity gain of more than 10 percent (see also TERP 1994). Experience shows that in the Netherlands, variable remuneration is mainly regarded as an extra with respect to other employers/companies and does not replace structural wage in-

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creases. Measuring productivity at the individual level remains a major problem. Besides, the achieved effectiveness can be questioned. More money is paid than would have been intended because of the lack of objective criteria. These inefficient wage increases confirm the principal-agent problem. Notwithstanding all this, the Arbeidsvoorwaardenoverleg 2000 memorandum issued by the VNO-NCW employers’ organization pleads for abolishment of the standard annual wage increase and price compensation. Wages must be adjusted to individual productivity. Substandard performance can cause real wage decreases that can continue for years. It comes as no surprise, therefore, that the labor unions consider these proposals to be unacceptable. The performance-linked payments’ paradox is that people can only stand a critical assessment in a good working relationship. If the relationship is good, however, the employee will probably perform well. Extra money for higher performance will only cost the company extra money and will discourage those who do not get a bonus. Incentive payments can boomerang. If young persons’ achievements are openly acknowledged, they will not quickly commit themselves to the company. Instead, they will soon sell themselves to the highest bidder and do so again and again. This pushes up the price of scarce talents. Wages shoot up, and the customer ends up paying for it all. A recession, however, can change all this (Hampden-Turner and Trompenaars 1995). Incentive payment systems do not fit into the Dutch culture, which is characterized by solidarity and equality. Besides, implementation problems occur because of the difficulties encountered in establishing standards, measuring performance, and the negotiations that must be held with individual employees (see Langedijk 1998:25). This explains why (as yet) flexible remuneration systems are seldom applied in the Netherlands. Apart from the microeconomic consequences, macroeconomic consequences also occur. Performance-linked payments can cause income developments and thus purchasing power and consumptive expenditure to become more sensitive to business-cycle fluctuations. In fact, flexible labor costs, that is, the procyclical development of aggregate demand, exacerbate the cyclical swing. This undermines macroeconomic stability and also negatively influences consumers’ confidence. This is very important since a major part of the current economic and employment growth in the Netherlands can be attributed to consumptive spending (see chapter 2).

CONCLUSIONS Dutch businesses increasingly depend on the external labor market to accommodate production fluctuations. This is effected through temporary contracts, agency labor, staff on call, lending and borrowing personnel, secondment and posting, and outsourcing. The structural increase in external flexibility is caused not only by supply factors, but also by changes in regulation, the growth of the

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service industry, and changes in management style. Dutch business increasingly resembles American business. The main item is increasing shareholder value. The enterprise becomes more businesslike and tougher, and there is less room for consultation and cooperation within the business. The Dutch consultative model is being forced out by the American conflict model in companies. The positive correlation between labor flexibilization and cost per unit of product that is predicted by neoclassical economic theory, fails to materialize. This is especially true in the long term. In the long term, the unit labor costs are even higher. Flexibilization can boomerang. Even if a short-term advantage is achieved by flexible and cheap labor, this evaporates quickly and soon turns into losses. The expected flexibilization gains are so much hot air (see Delsen 1996a). We cannot conclude, of course, that flexible labor cannot and should not be used. The conclusion should be that the costs of ad hoc policy can be avoided to some degree by • improving staff volume planning and staff contract structure planning; • core employees’ numerical flexibility; • functional flexibility; and • substitution of categories of atypical labor.

Employers can offer permanent jobs more frequently than is done today by employing minimum-maximum contracts and flexible annual contracts, where the number of hours (within limits) is fixed but where working times are variable. More permanent labor relations, including well-organized flexible labor contracts, improve commitment to the company and improve opportunities to involve employees in training schemes. Active time management means time flexibilization, both in the employee’s number of working hours and in the employer’s production hours. This can contribute to optimizing the personnel mix within a company. For the employer, this means no more payment for overtime: extra hours now are recompensed by fewer hours later. For Dutch employers, the strong and increasing emphasis on flexibility means that they become more dependent on all types of flexible external labor for the production of goods and services. For employees, this means that lifetime employment is increasingly a thing of the past. In this context, employability is presented as the new security, both by the social partners and by the government: lifetime employability. On the basis of this analysis, it can be concluded that a trade-off exists between external flexibility and employability. The increasing use of external flexibility not only leads to segmentation of the internal and external labor market, but also results in shortsightedness and reduces employers’ and employees’ incentive to invest in general and firm-specific training. External flexibilization and internal functional flexibility (increasing employability) can therefore be regarded as mutually exclusive management strategies. External flexibilization and decentralization contradict the maintenance and attraction of necessary skills. A permanent shortage of skilled labor may

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threaten. This may pose a danger, especially today, when the emergence of information and communication technologies and the internationalization process enforce greater quality competition (see SER 1996a:152). Because of the internationalization of economies and the demographic and technological developments, a shift from external and numerical flexibilization towards internal and functional flexibilization, where both employers and employees invest in the labor relation, is imperative. Such a shift fits in with the increasing importance of the production factor of human capital and the consequent necessity to educate employees from time to time during their working life, aimed at lifelong employability.

NOTE 1. This section is based largely on Delsen (1998).

5

Costs and Benefits of the Consultative Economy

INTRODUCTION This chapter discusses the economic relevance of the consultative economy and of a number of important labor-market institutions in the Netherlands. Attention is also devoted to the socioeconomic implications of the changes seen in these institutions in the past two decades. First, the importance of consultation, agreements between employers, and institutions—such as the collective labor agreement—for the short-term and long-term efficiency of the economy in the Netherlands is studied. Next, the efficiency and flexibility of wage formation itself in the Netherlands are examined. The consequences that the shift of the formation of employment conditions to the level of the company has in terms of the content, the form, and the meaning of the collective labor agreement are analyzed. Last, the socioeconomic consequences of the unique Dutch preventive dismissal test for the employer, the employees, and society as a whole are discussed. The chapter ends with some summarizing conclusions.

ALLOCATIVE VERSUS DYNAMIC EFFICIENCY? What is the importance of the consultative institutions in terms of the manner in which the entire economic system in the Netherlands functions? In order to answer this question, a distinction must be made between static and dynamic efficiency and between individual and social efficiency.With static allocative efficiency, the question is whether the input of people and resources into the production process is such that the scope and composition of the package of goods and services produced are optimally attuned to the desires of consumers. If this is the case at

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any fixed point in time, then the allocation is said to be economically efficient: individual prosperity (perceived utility) and social prosperity (the sum of the individual perceived utilities) are at a maximum (Wolfson 1988). With dynamic efficiency, the question concerns the extent to which there is evidence of a trend towards a durable balance between supply and demand when all people and resources are fully utilized in the economy. There may be dynamic inefficiency, meaning a delay in the growth of prosperity, when insufficient innovations and/or investments occur in schooling, for example. Social efficiency pertains to minimizing costs and maximizing the results for society as a whole. Tension may arise between social efficiency and individual costs minimization and/or results maximization, for instance, in the case of collective goods or positive or negative external effects in the production or consumption of goods and services. Cooperation on the branch and sector levels and agreements on a level that is higher than the company level can prevent the “prisoner’s dilemma” and the “free-rider” problem from causing training and schooling to stagnate at a suboptimum level (see De Grip 1988; Dercksen and Van Lieshout 1993; Kuipers 1996). The prisoner’s dilemma and the free-rider problem pertain to general training and schooling and concern the relationship between employers (see Figure 5.1). Although individual employers are convinced of the importance of investments in human capital, the training and schooling do not materialize because they are caught in a prisoner’s dilemma. Because the training and

Figure 5.1.

Decentralized Bargaining and Investments in Human Capital

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schooling relate in part to non-company-specific know-how and skills, the advantages ensuing from investments made in schooling partially flow to other employers. These positive external effects create reticence among employers in training professionals themselves because they run the risk that an employee trained by the company will be poached after conclusion of the professional training by another company that does not devote as much attention to professional training. Thus even though it is in the collective interest of businesses to supply training, it is not in the interest of the individual businesses to do so because the return on the investment is uncertain. Positive external effects can also result in free-rider problems, because the competitor reaps the rewards of the investments in schooling while that competitor does not pay a fitting price. In other words, the investing employer is subsidizing the competition. Moreover, in the short term, an investment renders a cost disadvantage in comparison to competitors because businesses often treat the expenses for company training as “out-of-pocket expenses” (like the cost of heating), meaning that these costs are registered in full in the bookkeeping in the period in which they are incurred. This makes investments in human capital much more fragile and sensitive to economic cycles than investments in physical capital. The prisoner’s dilemma and the free-rider problem illustrate how the market fails: the individual rationality of certain employers is inefficient from the perspective of the business sector. When businesses that need the same type of skilled workers do not consult with one another, the ultimate result will be that there will be no schooling. Not only the collective labor agreement, but also the mandatory extension of collective labor agreements as well as collective financing of company training could be solutions to both the prisoner’s dilemma and the free-rider problem and could therefore prevent these sources of market failure. In theory, this could combat both overinvestment and underinvestment in company training. Collective labor agreements also represent a guarantee of the labor-market relevancy of the schooling and better address the issues of who is entitled to the training and what rights they have (duration, reimbursement, type of schooling). Collective labor agreements can move schooling from the category of “bonus” into the category of “rights.” This is particularly important for the weaker groups in the labor market, including the lower-skilled and older employees (Dercksen and Van Lieshout 1993:95–98). General training can be stimulated by collective labor agreements concerning schooling that is not directly related to the position held. The legal extension of provisions in collective agreements to all employers in the industry prevents unorganized employers from poaching trained employees because it does away with wage competition. The fact that training is obligatory for the entire business sector stimulates employers to invest in human capital. An industry training system also implies that diplomas are universally accepted, making it easier for employees to change employers. This promotes external job mobility. It stimulates employees to participate in company training. Collective financing

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prevents free-rider behavior and stimulates use of training opportunities by both employers and employees. Collective training funds decrease the marginal schooling costs for employers and make the number of available training slots less sensitive to the business cycle (see De Grip 1988; Waterreus 1998). Part of the financing for training of workers in the Netherlands comes from sector-related training and development funds (opleidings- en ontwikkelingfonds— O&O). The basis for these training and development funds is laid in the collective labor agreements. Because of the schooling agreements specified in the collective agreements, in particular during the 1980s, the number of existing funds has grown significantly. Collectively financed schooling funds can also compensate for the segmentation trends on the labor market. Specific collective labor agreements can also improve access to training for workers and to the training and development funds for smaller businesses, for example, and for lowskilled workers, flex workers, and women. In both chapter 3 and chapter 4, it was concluded that longer job duration and less uncertainty have a positive effect on investments in human capital by employers and employees. Recent comparative country research performed by Agell (1999) indicates that the more open the economy is, the greater the union density and the more centralized wage negotiations will be. Job-protection regulations are also more strict and unemployment benefits higher in countries with a relatively high level of export and import. These institutions contribute to reducing the uncertainty that is inherent in the market. Research performed by the Organisation for Economic Co-operation and Development (OECD 1997:130) shows that job uncertainty as perceived by employees is significantly lower in countries where the replacement rates of unemployment benefits are higher (safety net for employees), where the level of coverage of collective negotiations is higher, and where there are central negotiations about employment conditions. These last two factors in turn reflect the ability of unions to protect employees against uncertainty. Anglo-Saxon countries with more decentralized negotiations show a higher uncertainty figure. In a deregulated labor market—for instance, the United Kingdom and the United States—where the company is the dominant negotiation level, it is more cost effective for employers to poach skills from their competitors than to invest in training their own personnel (see Soskice et al. 1998). This can nevertheless only happen without detrimental effect if and when the individual employees sufficiently train themselves. However, in a decentralized, uncertain labor market, employees will not be willing to do so. Schooling and training fail to reach the socially optimum level as a result. The greater perceived job uncertainty, the higher personnel turnover, the limited possibilities for individual employers to force their employees to remain in their jobs, and the minimization of schooling costs explain the lower expenditures for general training by businesses as well as the limited attention to the quality of company training in the United Kingdom and the United States (see Acemoglu and Pischke 1998; Layard, Mayhew, and Owen 1994; Lynch 1994; Prais 1995; Vrancken and

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De Kemp 1996). Poaching trained personnel has brought a unique equilibrium with high levels of quitting and little training to the American economy. In Germany, this poaching is limited by the role played by works councils and is therefore in equilibrium, while the level of training is high. Moreover, the costs for dismissal of employees are high. Paradoxically, the economic equilibrium with a high level of employee turnover, achieving a better allocation of employees over jobs, can be less efficient because the training level is low. In general, it is impossible to indicate which of the two forces is dominant (see Acemoglu and Pischke 1998). This is determined to a significant degree by the structural characteristics of the economy and by its changing environment. Freeman (2000) also concludes that there is no single peak set of capitalist institutions, that is, there is no one superior economic system, and that performance varies for many reasons rather than that the lead economy—for example, the United States—in any period has found the ideal institutional arrangements. The link between institutions and outcomes is subject to a particular world economic environment. Research performed by Batenburg and De Witte (1999) indicates that allocative efficiency in the labor market in the Netherlands decreased in the period from 1977 to 1995; the gap between the average level of training of employees and the average required training level of jobs increased by 21 percent. Underemployment has therefore increased; in other words, to an increasing degree, employees have a higher level of training than that required for adequate position fulfillment. Diploma (credential) inflation and displacement are also contributing factors. This decrease in allocative efficiency also occurs in the United States. In terms of its level, underemployment in the Netherlands in 1995 (17–38 percent) was lower than in the United States and equal to the level in West Germany (Batenburg and De Witte 1999). An undesirable result of underemployment, credential inflation, and displacement is the fact that the socioeconomic return on investments in training decreases (Wolbers 1998). Consultative institutions are an important explaining factor for the scope, the participation, the content, and the quality of company training and therefore for the competitive strength and the growth of an economy. Table 5.1 indicates that in the Netherlands, the percentage of adults aged 30 or older with a job who are participating in a training course is higher than the average for the European Union. The score for the Netherlands is also higher than that for Belgium and Germany. This is particularly true for employed persons in the age bracket 30–49 years. The difference is smaller for persons aged 50 or older. Participation in schooling decreases with age. The highest participation in training is seen in Denmark, Finland, and Sweden. In the United Kingdom, participation in training is also above average (see also OECD 1999:143–149). Here, subsequent training compensates for insufficient initial training (Mancini and Visser 1995). Figures regarding the percentage of people participating in schooling shed no light on the duration, the quality, and the job relevancy of training for employees. Various sources indicate that compared to other OECD countries, the

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Table 5.1. Training of Employed Adults (Age 30 or Older) According to Age in 1996 (in Percentages)

-: Unreliable data. a1995. bTraining pertains solely to ongoing training at the time of the study. Source: Eurostat, 1996.

Netherlands holds an average position in terms of training for employees and scores well in terms of participation in schooling during the working life. The duration of the courses in the Netherlands is also significantly higher than the average seen in the EU and than in Belgium, Germany, and the United Kingdom (see Delsen 1998c; EZ 1995:32–33; Lynch 1994; Mancini and Visser 1995; OECD 1999). The combination of low expenditures, high participation, and long duration, as well as the relatively limited concentration of training on younger employees, indicates that the company training system in the Netherlands is efficient and that lifelong learning is relatively well developed in this country. However, hard conclusions cannot be drawn due to the limited comparability of the international data. The positive result achieved by the polder model is not an optimum situation. In the Netherlands, there is also underinvestment in training for employees (De Koning et al. 1991; Groot and Maassen van den Brink 1998). This means that sector-oriented collective agreements regarding schooling, the legal extension of collective labor agreements, and the training and development funds are necessary but as yet insufficient prerequisites for training on the business-sector level. Thus market failure can only partially be prevented by the consultative economy in the Netherlands. In particular, decisive for investment in training at any given time is the opinion of the employer regarding the desirability or necessity of the schooling (Aalders 1994). From actual practice in the Netherlands, it is also evident that consultation institutions and the training and development funds have been unable to close the training gap between small and large businesses. Unequal participation in company training also has not disappeared. Employees with a low educational level, older employees, women, part-time employees, and flex workers participate relatively less in schooling (OSA 1997; Groot and Maassen van den Brink 1998; Waterreus 1998; OECD 1999) (see also chapter 4).

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The trend towards tailor-made collective labor agreements and the decentralization of wage agreements from the level of the business sector to the business level, by which the company’s specific situation can be taken into account, can have a positive effect on the job market in the shorter term. However, this also means that innovative companies making profits are punished by higher wage demands, while noninnovative companies are rewarded with lower wage demands (Kleinknecht 1998). As a result, companies are not stimulated to take innovation risks. The increase in the number of wage negotiations on the business level, the growing number of flex contracts, and, coupled with this, the greater uncertainty lead to a higher level of underinvestment in human capital and to greater inefficiency. The failure of the market is therewith increasingly visible, and the advantages of the sector-based consultative structure in the Netherlands with reference to the accumulation of human capital are undermined. This means that the economy of the Netherlands is placing increasing emphasis on short-term allocative efficiency. Dynamic inefficiency is the price that is paid. However, allocative efficiency also decreases.

EFFICIENT WAGE FORMATION In assessing the efficiency of corporatist wage formation in the Netherlands, two criteria are relevant (Teulings 1996:14): (1) the extent to which wage differences between companies reflect market relationships, that is, are market clearing, and (2) the speed of adjustment of average wages to the market-clearing level. Labor relationships often have a lengthy nature. As a result of company-specific knowhow, the wage that an employee can earn elsewhere is lower than the costs that the employer must incur to replace the existing employee. This surplus above the market-clearing wage is the cause of lengthy relationships (Teulings 1995). At least one of the parties has an interest in not terminating the relationship. The market mechanism is replaced by negotiations. A second characteristic of labor relationships is that the wage level of the persons already employed is not determined by the market, but by predetermined agreements regarding periodic raises, by which fixed wage scales are applied. Company-specific investments not only make the employer vulnerable, but also weaken his/her future negotiation position with reference to the employee’s wages. Wage negotiations on the business level result in a holdup problem. This pertains to the relationship between the employer and the employee in the same company (see Figure 5.1). Due to uncertainty regarding the division of the surplus in the future, employer and employee suspend their specific investments because they expect that future wage negotiations about the surplus resulting from business-specific investments will rob them of part of the return, because contracts or agreements are incomplete. As a result, less is invested in specific training than is socially desirable. This partially explains the limited schooling effort from employers in the United Kingdom and the United States. A collec-

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tive holdup occurs because employees with company-specific expertise hold a strong negotiation position in comparison to management. The company-specific skills, which can only be acquired over time, promote lengthy relationships between businesses and their employees and make it difficult for the company to replace employees, while the strong technical expertise of the employees makes them very popular in the sector as a whole. However, in an uncertain labor market, neither employers nor employees are prepared to take the risk of investing in company-specific skills (Soskice et al. 1998:44). The market fails. Both parties have an interest in solving this holdup problem. The solution can be found in defining the wage level for the future at the beginning of the labor relationship. As a result, the need for future negotiations is removed. Fixed wage scales, however, have limitations. If the contract wage level is lower than elsewhere, the employee may leave, or when the costs are higher than the costs of replacement, termination looms. Modification of the contract is in the best interest of both parties, because otherwise the relationship may be unilaterally terminated. Renegotiations nevertheless result in the holdup problem. There is no optimum situation. The best wage contract is therefore a contract that minimizes the chance of renegotiations. This is a contract that specifies the wage level for the majority of the cases. If a contract of this type is to apply for a longer period, it must be possible to modify the wage level in response to changing macroeconomic conditions. If this is done through renegotiations, the holdup problem once again comes into play. This is where corporatist organizations can play a part. Negotiations about contract modifications are delegated to organizations on a higher aggregation level. Coordinated wage negotiations between employers and employees on a level higher than the company, for instance, sector wage negotiations as seen in the Netherlands, are a solution to this holdup problem (see Soskice et al. 1998; Teulings 1995, 1996; Teulings and Hartog 1998). As a result, an individual employer and his/her employee can bypass the holdup problem because they cannot influence the outcome of the negotiations by suspending their specific investments. The wage negotiations are uncoupled from the daily employment situation. The legal extension of collective labor agreements plays an explicit part: the holdup problem for new employees is prevented by determining the wage level prior to employment, by means of mandatory extension to all businesses in a sector. The negotiations on the macro level between the social partners relate to the annual percentage adjustment of the wage contracts (the initial wage increase) based on macroeconomic circumstances. The wage level for the individual employee is determined by scale determination at the time employment commences, based on negotiations between the employer and the employee on the micro level. That is also the level at which the fixed periodic wage increase (the incidental wage increase) is determined. On the basis of interviews, Teulings (1995) concludes that in general, businesses are leery of negotiating with the works council with reference to labor conditions. This happened in only one of

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the 10 interviewed companies at the end of 1994. In all other cases, negotiations were held with the labor union. Although the employer organizations the Federation of Dutch Employers (Verbond van Nederlandse Werkgevers—VNO) and the Christian Employers’ Federation (Nederlands Christelijk Werkgeversverbond—NCW)1 suggest that the works council should be assigned a greater role in the collective labor agreement negotiations, only one of the remaining nine companies supports that idea. A commonly heard objection was the “direct involvement” of the works council in the outcome of the negotiations. This made it difficult to make deals with the works council. This was especially true for painful decisions, for example, during reorganizations. The labor unions are a much more attractive negotiating partner under such conditions. The Works Councils Act (Wet op de Ondernemingsraden—WOR) of 1998, however, significantly strengthened the position held by the works council (see the section “Decentralization of and within Collective Labor Agreements” later in this chapter). Continued decentralization of wage negotiations may have a detrimental affect here, once again causing the holdup problem and resulting in dynamic inefficiency. In the theory of corporatism explained earlier, the negotiations on employment conditions are treated as one-time-only transaction costs that occur at the time of the first external recruitment of an employee (see Teulings 1995, 1996). If the employer and/or the employee prefer consecutive temporary contracts, however, instead of a contract for an undetermined period—a phenomenon seen to an increasing degree in the Netherlands, as explained in previous chapters— renegotiations can or must take place at the end of each contract. These renegotiations increase the transaction costs, even more so because both the employer and the employee experience uncertainty with reference to continuation of the contract. This last risk results in underinvestment by both the employer and the employee. Because the employer runs the risk that the temporary contract will not be continued and because the employee runs the risk of unemployment when the contract period has ended, there is less stimulation to invest in general training and especially in company-specific training (Rogowski and Schömann 1996:627–628). The decrease in the duration of the contract in itself also results—in accordance with the human capital theory—in a reduction in the investment in human capital by both the employer and the employee, because the available earn-back period decreases: job duration and training reinforce one another. A growing number of flexible labor contracts undermines the role played by corporatist organizations; the holdup problem occurs yet again, and the negative effect as explained earlier that continued decentralization has on dynamic efficiency is magnified. Employers in the Netherlands are in favor of the remuneration-accordingto-performance concept. In continuation of the collective labor agreement guideline issued by the employer organization VNO-NCW for the year 2000, the Dutch multinationals Akzo Nobel and Philips were willing to negotiate with the unions regarding increases in the wage scales, but whether or not an individual

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employee actually receives the agreed increase is dependent on his or her superior. According to the employers, the periodic wage increases should also be done away with (de Volkskrant, December 11, 1999). Not only does this create income uncertainty for the employee, but the subjectivity of the superior’s judgment also creates uncertainty for the employer. Renegotiations about wages between the employer and the employee result in the holdup problem.

NON-MARKET-CLEARING WAGE DIFFERENTIALS Decentralization of wage negotiations not only results in dynamic inefficiency, but also detrimentally affects allocative efficiency. Characteristic for decentralized countries are noncompetitive wage differentials. If the market mechanism worked, these differences would be eliminated through competition. The differences between countries in noncompetitive wage differentials can be explained by the differences in the effect of retail prices on wages. The more decentralized the economy, the greater this effect (Teulings 1996:37). Important in these non-market-clearing wage differences are not only the remuneration differences between sectors, but also those between businesses in the same sector, the effect of the size of the company on wage levels, the effect of the number of years of service, and the effect of the negotiation system. These non-market-clearing wage differentials amount to more than 20 percent in decentralized economies, including the United States and the United Kingdom, and to less than 5 percent in centralized economies, including Denmark and Sweden. Corporatist countries with wage negotiations on the sector level, including the Netherlands and Germany, hold a middle position (Teulings and Hartog 1998). Rent seeking is a greater problem in the Anglo-Saxon model than in the Rhineland model. Rent seeking is the behavior of actors oriented towards value maximization—consciously acquiring a surplus—that results in a loss of social prosperity. The dominant factor behind this is formed by the differences in negotiating power of employees cashing in on positions of power. The deviation from the average remuneration difference between companies in the United States, for example, is approximately 15 percent, but only 7 percent in the Netherlands (Teulings and Hartog 1998). A 10 percent increase in the size of the business, measured by the number of employees, in the United States results in an increase in the wage level of 0.36 percent, as compared to 0.6 percent in the Netherlands (SZW 1996:49–51). In the United States, the salary paid to people with eight years of service is about 20 percent higher than the salary paid to new personnel members; in the Netherlands, this difference is about 8 percent. In noncorporatist countries, the increase in wages between zero and eight years of service is three to four times higher than in corporatist countries. This illustrates that corporatism reduces wage differentials. The more corporatist the country is, the smaller the effect of the negotiating system will be (Teulings 1996:34–35; Teulings and Hartog 1998:41).

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This theory of corporatism can also explain why it is that when unemployment increases in the United States, new employees, that is, the “outsiders” in a company, in particular are confronted with lower wages. The wages of the “insiders,” that is, the incumbent personnel, are out of range. In the Netherlands, new employees and insiders share equally in the wage decrease, because the contracts in the Netherlands are modified through the mediation of the corporatist organizations. Wages in the United States are also more sensitive to the profitability of a company than in the Netherlands. Higher profits weaken the negotiating position of the employer in respect to its employees, and this results in higher wage demands and payment of higher wages. Employers buy “labor peace.” The objection to wage differences between companies with varying profitability is the fact that this interferes with the allocation of labor: profitable companies employ fewer personnel than would be socially efficient because the level of wages is higher than the social costs of labor. Pleas for wage moderation reduce the power of the insiders, limit the holdup problem, and prevent profitable companies from paying wage increases instead of hiring more people. The non-market-clearing wage differentials are limited (Teulings 1996:51). Empirical research has shown that collective labor agreements increase wages in the market sector in the Netherlands by 4 to 5 percent (Freeman, Hartog, and Teulings 1997; Lever and Marquering 1995; Van der Wiel 1999). By international standards, the effect of collective negotiations on the wage rate is limited (see Table 5.2). This limited effect on the wage rate in the Netherlands can be explained by the larger collective labor agreement coverage level and by the centralized and coordinated wage negotiations, enabling the labor unions in the Netherlands to take more into account both the effects on the job market in economically weaker companies and the interests of the unemployed. Because negotiations in the Netherlands are held on the sector level, the negotiating position of individual companies scarcely affects the outcome of the negotiations. This limits the power of the insiders. At the same time, the openness of the economy of the Netherlands plays a part. This limits the possibilities for wage increases. Moreover, the legal extension of collective labor agreements guarantees the influence of the unions at a relatively low union density level, so that the unions need not make extreme wage demands. Abolishing the mandatory exTable 5.2. Effect of Collective Negotiations on Wage Rate (in Percentages)

Source: Blanchflower and Freeman 1992:64.

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tension reduces the level of collective labor agreement coverage. The unions are then completely dependent on the relative level of membership of the labor force, the density rate, for financing union activities. The employers’ contribution to union activities, called the “labor-union tenner” (vakbondstientje) in the Netherlands, disappears as a source of funds when the legal extension is abolished. As a result, the level of collective labor agreement coverage no longer plays a part. This implies a fundamental change in the institutional environment. In practice, there are two possible directions in which this can develop: either the polder model will change in the direction of the American model of organized and unorganized businesses, or the polder model will change in the direction of the Swedish model with a high union density and high coverage of collective labor agreements (Freeman, Hartog, and Teulings 1997). Based on the trend towards decentralization and the increasing importance of a higher shareholder value as the objective of the Dutch business sector, the first of these two directions would appear the more plausible. The head of the Labor Department of the Netherlands Trade Union Confederation (Federatie Nederlandse Vakbeweging—FNV), C. Inja (1999), stated, for example, that the factual recognizability and profile of the unions as protectors of employee interests on the central level have decreased because the unions have become an integral part of the polder model, meaning that the unions share responsibility for socioeconomic policy. The collective labor agreement should return to focusing on the insiders, and in the collective labor agreements the unions should therefore no longer make agreements on behalf of outsiders or about other social and socioeconomic objectives, because this weakens their negotiating position. The socioeconomic policy is the responsibility of the government. The collective labor agreement plays a leading part in the area of labor relationships. Nevertheless, this requires two parties with sufficient power. In the Netherlands, employers are organized to a very high degree. An estimated 60–70 percent of all employees in the private sector work for companies that are members of an employer organization. These figures are comparable to those for Belgium, Germany, and the Scandinavian countries. Nearly all companies with 100 or more employees are members of an employer organization. The representativeness of the organized business sector on both the national level and the sector level is high in comparison to that in other Western countries. The level of union membership of employees in the Netherlands (25–30 percent) is relatively low in comparison to that in other small corporatist countries and Germany. However, the representativeness and the legitimacy are high (see CPB 1997b:307; Visser and Hemerijck 1997:82–90). Because a balance must continually be sought between multiple interests, the consultative model is syrupy. Coordination by the market, however, is slow and also damaging, for example, because high wages must first result in bankruptcies and unemployment before modifications are made. Coordination on the national level makes it possible to readily respond to price and wage developments

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and prevent unemployment (De Vries 1999). The consultative model renders more feasible decisions than a hierarchical model. Prerequisites, however, are that the various interest groups be sufficiently representative and that their representatives have sufficient support from the members to make the decisions binding. These prerequisites are satisfied in the Netherlands. As a result, decisions made based on consultation have a large level of support and therefore lower implementation or maintenance costs (transaction costs) than unilateral decisions. Internalization of the external effects of one’s own behavior is then possible. Measures can be easily implemented. Decision making based on consultation also supplies the participants with sufficient information about one another’s interests and position of power, thereby increasing the predictability of one another’s behavior. The lower level of uncertainty promotes orientation to the longer term. In addition to the decision-making structure, the norms and values in which the consultations are held play an important part. As long as there are conflicts and these conflicts are being decided, they serve to help participants get to know the opposition better. Different norms and values apply to the Anglo-Saxon model, and conflicts are fought out with the intent of beating the other party (Van den Toren and Vos 1997:105). The consultation economy produces not only contracts but also norms. If everyone is satisfied, it is not difficult to demand fulfillment of the agreements. This means that the maintenance costs are also low. After a period of time, the agreements are not satisfied based on the principle of “a contract is a contract,” but because it is the accepted behavior: the agreement as made has become a norm (see Teulings 1996). If norms are the binding behavior constraints, legislative reforms will have little effect. This can explain why certain labor-market reforms do not promote wage flexibility, and it represents an alternative explanation besides policy complementarity to the question of why European reforms have had so little effect (Agell 1999).2 As long as corporatist organizations are legitimized, the norms for wage modifications can be defined, and employees have little cause to react if and when this modification rule allocates a large share of the surplus (“rent”) to the employer. If institutions of this type do not exist, companies run a higher risk if they demand the entire surplus. This explains why rent sharing by employees is more important in decentralized economies. The maintenance costs of regulation in decentralized Anglo-Saxon countries can be expected to be higher than in the more centralized Rhineland countries. These higher transaction costs are expressed, for example, in a higher intensity of supervision, the ratio of supervising personnel to staff carrying out the work. In the United States (17.6 percent) and the United Kingdom (15.4 percent), this ratio is three to four times higher than in Belgium (5.5 percent), the Netherlands (4.5 percent), Germany (4.4 percent), and Sweden (4.0 percent) (see Gordon 1994). Corporatism is associated with cooperative labor relations and decentralization with antagonistic relations. Firms in countries with decentralized wage setting spend more resources on disciplining activities than do firms in

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Table 5.3. Differences in Wages between Sectors, 1970–1990 (Coefficients of Variation)

Source: Van der Wiel 1999:494.

more centralized economies. These higher transaction costs are also shown in the lawyer density (the number of lawyers per 100,000 inhabitants) and the expenditure on legal services (Van Waarden 2001). In the United States, the lawyer density (312) is nine times that of the Netherlands (35). By comparison, lawyer density ratios of some other European countries are as follows: West Germany 190, Britain 134, Italy 81, and France 49. Expenditure on legal services in the United States has been estimated at 2.4 percent of GDP. In Germany, Britain, France, and Italy, the lawyering costs amount to 0.5 to 0.6 percent of GDP, and in the Netherlands the figure is not even 0.1 percent. Between business sectors, wage differences are minimal in the Netherlands as compared to other countries (see Table 5.3). With a coefficient of variation of 0.13 in 1990, Finland has the smallest wage differences; the United Kingdom has the largest, at 0.40.3 Between 1970 and 1990, little changed in the order of this list, with the exception of Belgium and the United Kingdom. In Belgium, the differentiation was relatively large scale in 1990. Between 1970 and 1980 wage differentials decreased in Finland and Sweden, did not change in the Netherlands, and increased in Belgium, Germany, the United Kingdom, and the United States. In most countries—the United States was the exception—the differentiation increased after 1980. In the Netherlands, this increase was limited. The 1982 Wassenaar Agreement therefore had little if any effect on these differences. The decentralization of wage negotiations to the level of the business sector did not result in more differentiation in wage developments (Van der Wiel 1999). It is not possible to answer the question of whether remuneration has grown to be more or less in keeping with the market since the Wassenaar Agreement. Table 5.3 also indicates that the wage structure in nearly all countries scarcely changed between 1970 and 1990: business sectors that paid relatively much in 1970 still did so in 1990. This is particularly the case in Germany and in the Netherlands. Sweden is an exception to the rule. Teulings and Hartog (1998) also

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demonstrated that the wage differences between sectors are highly stable. This implies that the long-term differences in production technology, that is, the variation in capital intensity, are more important than short-term fluctuations on the product market. An alternative explanation is the fact that these differences reflect to an important degree the differences in rent sharing between the sectors, which are constant over time (Teulings and Hartog 1998:196). Non-market-clearing wage differentials are seen; in a properly functioning market, these differences would be leveled out. Wage coordination by the unions, that is, the attuning of the package of demands put forward by the individual unions, partially explains the limited wage differences between sectors in the Netherlands. Certain sectors, such as the banking and insurance sector, the wood and building-materials industry, and the paper and graphics industry, are “wage leaders” in the process of wage formation. Moreover, as the centralization of wage formation increases, the differences in hourly wages between sectors decrease (Teulings and Hartog 1998). According to neoclassical economic theory, wage differentiation can be seen as an indicator of how the labor market functions. Competitive wage differentials serve allocative efficiency. In practice, the wage differences are greater than necessary for allocative efficiency. Corporatist wage formation reduces these non-market-clearing wage differences and thereby contributes to the efficiency of the economy.

FLEXIBLE WAGES The corporatist negotiation model can also explain why the nominal wage rigidity in the United States is greater than in the Netherlands (see Table 5.4). If the actual inflation deviates from the inflation upon which wage contracts are based, no adjustment is made in the United States to macroeconomic circumstances due to the holdup problem. This is because there are no corporatist organizations

Table 5.4. Nominal and Real Wage Flexibility in Several Countries, 1965–1985

Source: Teulings and Hartog 1998:175.

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to modify these contracts (Teulings 1996:57). As a result, nominal shocks have extensive real consequences in the United States. Nominal wage flexibility is measured by looking at the effect that an unexpected change in inflation has on real wages. With perfect flexibility, the outcome is 0, and with complete inflexibility it is 1. Real wage flexibility in Table 5.4 measures the sensitivity of wages to the level of unemployment: the effect of 1 percent less unemployment on the percentage wage increase. The greater the number, the greater the effect. With reference to real wage flexibility, there is no clear relationship to corporatism. However, contrary to what is often believed, wages in the United States are not extremely flexible. Average wages even increase as unemployment increases. This may indicate that in the United States the insider-outsider problem is present. Inexpensive, temporary workers and newcomers—the outsiders—serve as a buffer and are the first to be dismissed when economic developments take a turn for the worse. As a result, companies are stuck with relatively expensive insiders, and average wages increase. The opposite occurs when economic developments are favorable. Other empirical studies also indicate that real wage flexibility in the Netherlands—how wages react to unemployment—is comparable to that in the United States, the United Kingdom, and Germany, and that nominal wage rigidity in the United States is relatively high (see SZW 1996:41–45; Van de Meerendonk 1998:108). The strength of the consultative economy in the Netherlands is that the social partners share views on what makes the world go round. As a matter of course, agreements made are taken into account. Nominal contracts are adjusted to general macroeconomic shocks. This nominal flexibility is not found in the United States. In this respect, labor relationships in the Netherlands are more flexible than in the United States (Teulings 1996; Teulings and Hartog 1998). In the Netherlands, wage flexibility is high, and wage differences not in keeping with the market are limited. In decentralized economies, wage relationships are less of a reflection of market relationships than in countries with corporatist wage formation. Modification in corporatist countries is not slower and is probably even faster than in decentralized economies. Decentralization of wage negotiations is asserted to be a method of ensuring a higher level of wage flexibility. However, this line of reasoning is not supported by empirical studies. On the decentralized level, the interests of the insiders—those already employed fulltime—are determinant. Wage moderation can be better achieved on a central level. The most important reason for this is the fact that on the decentralized level, certain groups of employees with a strong negotiating position can demand higher wages, and other groups want to follow suit, as a result of which the trend forces wages up. Centrally agreed wage developments that affect individual contracts through collective labor agreements prevent this from happening (ILO 1995). Teulings (1995) therefore concludes that in the Dutch consultative model, by which corporatist organizations negotiate initial wage increases and individual employees and employers negotiate incidental wage in-

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creases, is more efficient than the American system. Central collective agreements also make training and other skill-upgrading arrangements easier while offering unions the possibility of trading between wages and schooling or other matters, including working conditions and job opportunities for weaker groups in the labor market (“good causes”). The insider effect is reduced by corporatist structures. Unlike the Netherlands, countries with a decentralized system of wage formation are characterized by insider-outsider differences: company unions strive solely for maximum remuneration for their members at the expense of the wages or the jobs of outsiders.

DECENTRALIZATION OF AND WITHIN COLLECTIVE LABOR AGREEMENTS Employers and employees invest more in one another and therefore achieve a higher level of productivity if wage increases and wage scales are defined on the sector level. The collective labor agreement thereby limits transaction costs and is therefore one of the most important institutions on the labor market in the Netherlands. As a result, sector collective labor agreements also make it possible to quickly attune the initial wage increase to changing macroeconomic circumstances. The decentralization of and within the collective labor agreement as sought in recent years has important consequences not only for this efficiency but also for the part played by the collective labor agreement itself. Decentralization of the collective labor agreement means, for example, that the sector collective labor agreements are replaced by company collective labor agreements or that company collective labor agreements are entered into with the works council. With decentralization of the collective labor agreement, over the entire width of the collective labor agreement the room for and usually also the need for decision making is placed on the company level. Instead of decentralization as a result of the disappearance of collective regulations, in practice decentralization is primarily seen within the collective labor agreements, related to certain topics or sections delegation of negotiations concerning employment conditions at the individual companies (Van den Toren 1998: 57–59). As a result, the structure of the collective labor agreement remains, but the details of certain agreements are shifted to the company level for practical reasons. This can be achieved through a framework collective labor agreement (raamwerk CAO) or an umbrella collective labor agreement (mantel CAO). The framework or layered collective labor agreement (gelaagde CAO) regulates part of the collective employment conditions. Another part is defined per company in a company collective labor agreement. The framework collective labor agreement is seen in only a few sectors, including the collective labor agreement for tertiary vocational education, the collective labor agreement for waterworks, and the collective labor agreement for energy and utility companies. Employers object to negotiating twice or having

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the unions present on the company level. This is in part a result of the view of employers that the works councils are a weaker negotiating party than the professional union executives are. What is more, employers prefer not to have the union “inspecting their kitchen,” but do not mind the works council doing so. However, the unions are also opting for other types of delegation: the umbrella collective labor agreement and/or conditional delegation of negotiating authority to the company level. Examples include the collective labor agreements in the graphics sector, the banking sector, and the information technology sector, and the collective labor agreement for the police. Schilstra (1998) concludes in this respect that in companies that are not covered by a collective labor agreement, personnel policy is primarily agreed between the management and the works council. Negotiations concerning primary employment conditions are held with the works council. A disadvantage, however, is that in the event of a conflict the process quickly grinds to a halt because there is no independent third party. Negotiating with the unions takes longer. The advantage, however, is that agreements are more readily accepted and implementation is achieved faster based on the greater legitimacy. What is more, the negotiations are separated from the company’s internal politics, and standardization can be achieved, so control costs decrease. Standard employment conditions limit transaction costs. Establishing framework agreements with unions in which the details are determined together with the works council is a method that profits from the advantages of both systems, according to Schilstra. Customization results in higher transaction costs, which will be compensated for at some point. Van den Toren (1998) concludes that the importance of the collective labor agreement is increasing. The fact that the formation of employment conditions is increasingly shifting to the company level is not occurring at the expense of the collective labor agreement. On the contrary, the coverage of the collective labor agreement is increasing. Moreover, even though there has been more room in recent years for detailing on the company and individual levels, this takes place under the direction of and according to the conditions of the collective labor agreement. This organized decentralization that is characteristic of the polder model is nevertheless subject to wear and tear. Van Voorden (1998) asserts that the collective labor agreement is on the way out for a number of reasons. The first of these is the fact that employers have expressed a desire to place a certain category of personnel outside of the collective labor agreement. Banks, for example, and Akzo Nobel have attempted to arrive at position contracts. According to Tijdens (1998:36), the contrast between employees with an hour contract and those with a position contract served to break a lance for individual forms of reduction in the working hours. Employees with hour contracts are employed to perform a task for a certain amount of time and are paid for overtime. Middle and upper management personnel have a relatively large number of position contracts in which the task to be performed is described while the amount of time involved is not clearly defined: in the

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higher wage scales, overtime is not paid. As an alternative to the collective reduction in working hours, the collective labor agreement “à la carte” was developed for these employees. Synonyms for this type of collective labor agreement are the elective collective labor agreement and the cafeteria system. These lend shape to individualization, to tailor-made employment conditions. At the same time, the differences between categories of personnel are magnified by way of the collective labor agreement. This, too, is a reason why the collective labor agreement is losing its collective nature (Van Voorden 1998). The same holds true for the introduction of remuneration according to performance and option schemes that result in inequality between employees. What is more, the collective labor agreements are being formulated in more general terms. The collective labor agreement establishes a type of framework within which the details must be defined per company or organization, and by means of which the agreements are made less stringent. This also detracts from the collective nature of the collective labor agreement. The third reason is the change in the Works Councils Act (Wet op de Ondernemingsraden—WOR) that was effectuated as of January, 1, 1998. This change strengthened the position of the works council. The works council and the employer may agree in writing to supplementary authority. In these socalled company agreements (ondernemingsovereenkomsten), the works council and the employer may collectively agree to employment conditions without mediation of the unions. This agreement does not have the same status as the collective labor agreement because it is not binding for all personnel unless every personnel member agrees. It remains to be seen whether this change will prevent employers from preferring to deal with the works council as a contract partner in the future. Employers have demonstrated interest in this for some time. They view the current collective labor agreements as less suitable than contracts agreed within the company. In order to achieve this objective, even in the early 1980s it was suggested that the agreement to be negotiated with the unions should be limited to matters involving wages. Employers preferred homemade agreements with their works councils. To date, however, the unions have not been very willing to leave negotiating space for the works councils. The organization of labor was and is the domain of management. Unions have resisted the exertion of decentralized influence on operational matters and on the organization of labor. Their arguments include that this would erode the homogeneity of the working class as the pillar supporting collective employment relationships as well as threaten the identity of the labor movement (Fruytier 1998: 81–82). Another traditional argument used by the labor movement against negotiations on the company level instead of consultation has always been that tough negotiations with the employer require someone who is not employed by the employer. This attitude, however, has also contributed to the establishment of weak institutions within companies. In general, employers negotiate with the party that holds true power. This could result in situations in which these company unions only exist to achieve maxi-

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mum remuneration for their members (the insiders) at the expense of the wages, and in extreme cases even the jobs, of nonmembers (the outsiders). Because of its direct involvement, it is difficult for the works council to resist proposals that offer existing employees short-term advantages instead of more jobs (the insider-outsider effect). It is also difficult, however for the works council to resist an employer who indicates that certain working hours are accepted within a competitor’s company and that jobs are at risk as a result: competition in working hours. Due to the free-rider problem, individual negotiations between management and employees could result in a situation in which safety rules, light, and heating on the work floor are suboptimal. Collective negotiation institutions should exist in order to satisfy the preferences of employees (Agell 1999). Studies performed in the spring of 1998 by the Christian National Union (Christelijk Nationaal Vakverbond—CNV) indicate that 18 percent of the works councils are already involved in determination of primary employment conditions and 40 percent in determining the details of employment conditions within the company. The desire among the works councils for more involvement is large: 55 percent with reference to determining primary employment conditions and 70 percent in determining the details of employment conditions (Van den Toren 1998:68). As a result, the importance of the company agreements as the basis for regulating collective employment conditions will increase. Not only will this undermine the advantages of corporatist wage negotiations, but also it will detrimentally affect the polder model.

PREVENTIVE DISMISSAL TEST The preventive dismissal system applicable in the Netherlands is unique. This country is the only European Union member state in which the employer must have a permit from the minister of social affairs and employment in order to terminate an employment contract. The authority to issue dismissal permits has been delegated to the directors of the regional employment offices (regionaal directeuren voor de arbeidsvoorziening–RDAs). For many years now, employer organizations have argued that this preventive dismissal test should be done away with. They oppose the preventive termination assessment because it limits their freedom, because it is expensive, and because what it actually does is extend the notification period. In some 80 percent of the cases, the director of the regional employment office gives approval within six weeks, and nearly all applications for individual dismissal permits are processed within eight weeks. This period must be added to the notification period required by law (see Delsen and Jacobs 1999). Periodically, the minister of social affairs and employment considers replacing the preventive dismissal test by a system in which the court assesses the reasonability of the dismissal and issues fines where applicable after the fact (the repressive dismissal test), as is common practice in the other European Union

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member states. In accordance with neoclassical economic theory, this is expected to enhance how the labor market functions, to have a positive effect on the job market, and to promote mobility on the labor market (for example, see SZW 1992). Legal expert Paul Van der Heijden (de Volkskrant, November 27, 1995) also concludes that dismissal is a matter for the courts and not for the minister of social affairs. He motivates this by asserting that it has never been convincingly demonstrated that effectuation of dismissal policy via the Employment Office has ever exerted any influence of importance on the level of unemployment or the level of employment. He therefore believes that dismissal law is not an instrument for influencing unemployment or the job market. However, some comments are called for. The preventive dismissal test not only contributes to maintaining jobs because termination is prevented in the short term, but also contributes to longterm increases in the number of jobs. Dismissal protection has an anticyclical effect on the job market. However, the costs of termination have a greater effect on companies’ decisions to dismiss than on decisions to recruit. As a result, the number of jobs is above the long-term equilibrium level. A preventive dismissal test gives employees more employment certainty than a repressive dismissal test. The employer must explain the reasons for termination. Experience in the Netherlands in the 1990s shows that the termination request is approved in three-fourths of all cases. Approximately 8 percent of all applications for individual dismissal permits (1 to 19 employees) are rejected. Some 17 percent of the requests are later retracted (see Table 5.5). Thus in one-fourth of all cases, Table 5.5. Numbers of Applications for Individual Dismissal Permits, 1992–1997

Source: Data supplied by the Ministry of Social Affairs and Employment.

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the preventive dismissal test does indeed appear to have a calming effect on termination decisions made earlier. This illustrates the right of existence of the preventive termination assessment. The certainty of a cautious assessment procedure gives the employee legal certainty, peace of mind with reference to employment, and extra motivation in the event of an employment conflict. The preventive dismissal test prevents employment conflicts. This creates “flexibility rigidities.” Employment protection creates a situation in which employees are relatively more committed to their company, thereby increasing their productivity. Studies in the Swedish and German automobile industries indicate that there is a positive correlation between employment certainty and productivity (Nolan and Marginson 1990). Employees are more willing to adopt a flexible attitude in the tasks to be performed and to invest in training. In a time when change processes are daily fare and human input is an increasingly important factor in quality management, this is also important to the employer. In the United States, where employees can be freely terminated, companies that must cope with shrinking traditional markets can be easily enticed to solve problems in the short term by reducing costs in favor of profitability. Dismissal protection by law not only protects the employee from unreasonable termination (inequality compensation), but also prevents termination decisions from being made without proper consideration. The result is a more conscious, more cautious, and more future-oriented personnel policy (Büchtemann 1993). Such a personnel policy represents pure profit for both the employer and the employee while simultaneously serving the long-term competitive position and job market. Reducing dismissal protection could also result in an increase in transaction costs as well as increasing personnel turnover. The higher costs have a negative effect on the overall job market (Grubb and Wells 1993; Rogowski and Schömann 1996). The preventive termination assessment can compensate for this market failure: allocative efficiency improves. The preventive dismissal test also contributes to the dynamic efficiency of the highly open economy in the Netherlands. Thus the preventive termination assessment is an essential institution in the polder model. In addition, it offers the advantage that employees can look for a new job from a productive position instead of from a position of unemployment. This promotes proper functioning of the labor market in the Netherlands and helps to prevent long-term unemployment. This serves not only the individual but also social efficiency. Doing away with the preventive test would shorten the period in which an employee can look for a new job from a productive, nonunemployed position by six weeks. In most instances, the employee would therefore be forced to look for a new job from a position of unemployment. This places a heavier toll on unemployment funds. Moreover, civil court proceedings are expensive. A fundamental objection to the repressive termination test is presented by the fact that the case can only be submitted to the court after the fact, once the employment relationship has been terminated. Realistically, nullifica-

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Figure 5.2. Number of Applications to RDAs for a Dismissal Permit and Requests for Dissolution Dismissal by the District Judge, 1980–1998 (in Thousands) Source: Data supplied by the Ministry of Social Affairs and Employment.

tion of the termination will often no longer be an option. The most that can be achieved is financial compensation. It can be concluded that the effectiveness of reducing the level of dismissal protection is questionable. Figure 5.2 indicates an increase in the number of employers opposed to the preventive dismissal test. The number of applications for collective and individual dismissal permits submitted to the directors of regional employment offices (RDAs) has shown a decreasing trend since 1983, while the number of requests for dissolution dismissal by the district judge submitted to the cantonal courts has increased, in particular during the early 1990s. These trends demonstrate a scissors movement. For the first time in 1998, the number of termination applications submitted to the cantonal courts (40,106) was higher than the number of termination requests submitted to the employment offices (39,614). In the Flexibility and Security Act (Wet Flexibiliteit en Zekerheid), effectuated as of January 1, 1999, it was decided that the preventive dismissal test would be maintained. However, the procedure was shortened because the notification period and the termination request period now commence simultaneously. The number of termination requests submitted to the regional employment office directors increased again as a result of this “flexicurity” act.

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The average “observable” costs of dismissal based on cantonal court proceedings (approximately Dfl 48,000) in 1994 were three to four times higher than the costs of dismissal through the director of the regional employment office (nearly Dfl 13,000). This result appears to go against the grain of the economic principle in that employers in the Netherlands do not opt for the termination channel with the lowest costs. An explanation for the increase in the number of termination proceedings via the cantonal courts is found in the “nonobservable” costs. Hassink, Reitsma, and Roorda (1998) indicate that these include termination for business-economic reasons, rapid conclusion of the entire procedure (time savings), and the costs of rejection of the termination request. The chance that the regional employment office will reject the request is considerably greater. Older employees in particular can be more quickly dismissed through the cantonal court. The length of the notification period is one of the important differences between the cantonal court procedure and the employment office procedure. The trend of an increase in the number of cantonal court procedures can therefore be partially explained by aging personnel. To an increasing degree, employers attempt to buy out the employment contracts of nonfunctional or redundant personnel through the cantonal court. However, not only are “golden handshakes” being given due to employee failure, they are also seen as a solution to disrupted employment relationships due to failures by top management. Employees with above-average qualifications receive the highest buyout sums. According to Van Dalen (1998), the golden handshake is a product of the polder model: businesses with sufficient liquidity buy off the shortcomings of the consultative economy with a handshake that can be easily given in prosperous years, but is also a handshake that either disappears or intensifies labor-market problems in meager years. Mulder (1998), however, correctly asserts that the Rhineland model shows a more institutional view of the enterprise: a cooperative relationship between various stakeholders, including employees, company management, capital investors, suppliers, and buyers. Employees who have contributed to the growth of the market value of the enterprise and are faced with involuntary dismissal are awarded compensation for what they have earned but have not received based on the number of years in service. The courts view this as a moral obligation to the employees. This therefore does not pertain to a shortcoming in the consultative economy but is a logical result that is applied on a limited scope. High buyout sums, however, are primarily characteristic of the American “hire-and-fire” system in order to avoid the holdup problem (Moerland 1998). The shareholders’ value cannot be viewed as absolute because of the relationship-specific investments made by other interested parties. The development of the value of these specific investments is dependent on the behavior of the other stakeholders involved. Incomplete contracts leave space for opportunistic behavior. This can result in a holdup problem. All of the parties involved have an interest in controlling this holdup problem. In the event of reorganizations, restructuring projects, mergers, and takeovers, in particular, tension exists between

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the shareholder interest and the employee interest. In the Anglo-Saxon model, in particular, in which companies are seen as an extension of the shareholders, processes of these types are often implemented without due caution for the sake of the market effect and the shareholders’ interest. However, this is accompanied by a culture rich in damage claims and buyout sums. These “golden parachutes” can be seen as high and expensive compensation for lost return on relationship-specific investments at the time of termination. The strong increase in the number of terminations of employment contracts via the cantonal courts in the Netherlands demonstrates the increasingly businesslike nature of the relationship between the employer and the employee. It is therefore not a product of the polder model, but a reflection of the fact that the Anglo-Saxon model, characterized by short-term thinking, is gradually replacing the polder model, characterized by long-term thinking. Reorganizations and personnel reductions that are accompanied by high profitability detract from the necessity for involuntary dismissal. This could cause difficulties for the termination request through the director of the regional employment office, giving employers reason to bypass this termination route. The business-economic interest cannot compete with the higher exchange quotation interest. This explains why the preventive termination assessment is losing its validity and why the number of cantonal court procedures is increasing significantly. The more stringent definition of the concept of “voluntary” unemployment via the Social Security Penalties, Measures, and Claims Act (Wet Boeten, Maatregelen, en Terug- en invordering sociale zekerheid–Wet BMT) of 1996 has resulted in more cantonal court procedures (see chapter 6). For the employee, this brings a significant increase in uncertainty. If employers give employees less certainty and the social safety net offers less security, the employee may choose to reduce the risk of termination and unemployment by taking two paid jobs. Having more than one job—moonlighting—is common practice in Anglo-Saxon countries. Statistics Netherlands’ (Centraal Bureau voor de Statistiek—CBS) Arbeidsrekeningen indicates that the number of persons in the Netherlands with at least one additional job increased between 1994 and 1999 from 339,000 to 373,000. More than half of this increase was seen in the financial and service sectors.

CONCLUSIONS Sector consultative institutions create a certain order and stability in markets and reduce the risks and uncertainties related to specific investments for both employers and employees. They provide the necessary collective resources, including a trained labor force. This stimulates a long-term orientation. Not only the collective labor agreement, but also the legal extension of collective labor agreements and collective financing of company training could be solutions to the prisoner’s dilemma, the free-rider problem, and the holdup problem and

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could therefore prevent these sources of market failure. They also reduce the power of insiders. Corporatist organizations promote nominal wage flexibility and reduce noncompetitive wage differentials. Suboptimum utilization of the employed labor force is also limited. The consultation institutions thereby contribute to both allocative and dynamic efficiency of the economy in the Netherlands. However, the polder model also makes the optimum situation impossible to achieve. Decentralization of wage negotiations towards the company level and the growing number of flexible employment contracts undermine the part played in the economy by the corporatist organizations. The collective labor agreement is heading towards an uncertain future. The increasing number of dismissal procedures submitted to the cantonal courts due to the shift in the polder model towards the Anglo-Saxon model detrimentally affects the protective function of social law.

NOTES 1. In March 1995 these two employers’ organizations amalgamated into VNO-NCW. 2. Complementarity of policies implies that reforms have a larger effect when the policy measures are combined instead of being taken in isolation. Rigidities are mutually reinforcing, explaining why a gradual piece-by-piece reform of the labor market fails. A “big-bang” approach to labor-market reform is needed. This approach, however, puts too much emphasis on the costs side of labor-market regulation (Agell 1999). 3. The coefficient of variation is a measure of spread. It is calculated by dividing the standard deviation by the mean of all observations.

6

The Dutch Welfare State

INTRODUCTION The welfare state is often considered as a kind of social policy that is part of the government’s intervention in the market because the government is unhappy about what is happening in the market. This chapter will deal explicitly with not only the social but also the economic functions of the Dutch welfare state. We will also examine the socioeconomic effects of the recent reforms in the Dutch welfare state. First, the efficiency and effectiveness of the private and public organization of social security will be analyzed. This will be followed by a description of the objective, the institutions, and the extent of the Dutch welfare state and of the social security system in particular. We will then look into the effectiveness and efficiency of recently introduced premium differentiation and market forces concerning the Sickness Act (Ziektewet—ZW), the Disability Insurance Act (Wet op de Arbeidsongeschiktheidsverzekering—WAO), and the Unemployment Act (Werkloosheidswet—WW). Finally, we will examine the economic role the social security system plays in the small and open Dutch economy. The chapter ends with a few conclusions.

PUBLIC AND PRIVATE SOCIAL SECURITY Public and private social security are, to a degree, each other’s substitutes. When the government offers public insurance, the need for private insurance disappears. For example, collective coverage against inability to work leads to the disappearance of private life insurance. This is of no consequence to the collective tax burden. The market creates similar private insurance (SZW 1996:160; Teu-

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lings 1997). This illustrates an important difference between taxes and social security premiums. The answer to the question of whether publicly or privately created social security is preferable, therefore, depends on the relative efficiency of the organizational form of social security: privately, through the market, offering a large range of choice, or publicly, through the government, and collectively. According to neoclassical theory, insurance through the market leads to efficient allocation, that is, a Pareto optimal situation.1 The reason is that individual decisions are controlled by prices that contain information about the costs of a particular service. Competition ensures that the service is offered at the lowest possible cost (cost efficiency). Moreover, competition continuously stimulates companies to look for new products or production processes (dynamic efficiency) (see also the section “Increasing Market Forces” in chapter 2). The price mechanism leads to an efficient allocation only when enough information is available or when, at least, there are sufficient ways to cover the risks that result from a lack of information. Using perfect information, as presupposed by the economic equilibrium theory, every desired Pareto optimum should be attainable, regardless of the ownership and decision structures of companies. However, it does not make sense to assume that every agent in the economy is fully informed about every aspect of the economic system (Van Damme 1994). Imperfect information leads to a so-called principal-agent problem: the owner/supervisor (principal) cannot perfectly observe to which degree a department manager contributes to reaching the goals of the principal. Asymmetric information implies that parties in the market do not have the same information at their disposal. This leads to transactions that do not fully represent the preferences of the parties in the market and are therefore less efficient. In the case of asymmetric information, ownership and decision structures are relevant, as they determine how much information the parties directly involved (the stakeholders) have about the company. More information is available about private companies because of the workings of the capital market (banks and shareholders), the takeover market, the labor market, and the product market. For a public company, only the latter two are relevant, and often even they are not very relevant (natural monopolies). Supervision by civil servants and politicians on behalf of taxpayers is often far from perfect. It is to be expected that this causes private companies to have a better internal organization, but also a bigger urge for market power. Modern economic organization theory emphasizes this trade-off between higher internal efficiency and lower allocational efficiency as a result of privatization. The policy conclusion is that privatization is preferable in any area where effective external competition makes the buildup of market power impossible (see Van Damme 1994). Privatization can be defined as the transfer of government activities to the market sector by rejecting, outsourcing, or privatizing these activities (see Boorsma 1994). Economics literature provides several arguments for government intervention (see, for instance, CPB 1997b; Koopmans et al. 1997; NYFER 1998; Schram, Ver-

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bon, and Van Winden 1997). This justification of government intervention is based on efficiency and fairness. Efficiency considerations relate to solving market imperfections as a result of external effects, public goods, limited competition because of barriers to entry, increasing returns to scale, and uninsurable risks. Allocative efficiency is stimulated by this government policy. External effects occur when a good price is not expressed in terms of all costs and profits. For example, the contribution burden for social security increases the costs of labor and has an influence on the supply of labor by individuals. It is typical for collective goods that they are nonrivalrous (use of one is not at the expense of the other) and nonexclusive (they are available to everyone). For these goods, no market is established because no price can be charged for them. In the case of increasing returns to scale, there is a risk of the creation of monopolies. Considerations of fairness are based on paternalistic grounds and redistribution motives. Paternalistic grounds concern merit and demerit goods. Being uninsured or underinsured can be caused by shortsightedness and “free-rider” behavior by calculating citizens. Shortsightedness refers to the undervaluation of future income and the underestimation of future risks, as a result of which insufficient arrangements are made and insurance is either too low or altogether lacking. The free-rider problem refers to people who do not contribute in payments, but who do receive the benefits of a provision or insurance. The treasury is directly involved in this. Compulsory contributions prevent free-rider behavior and increase the credibility of a system of insurance. The redistribution motive is based on the fact that people lack the private funds to put enough money aside for risks that are, in principle, insurable. In economics literature, it is often assumed that the objective of allocation and the objective of distribution are conflicted. The government, therefore, has to choose between redistribution and economic growth (see also the section “Income Inequality and Polarization” in chapter 3). Every private or public system of social security faces an identification problem that leads to a moral hazard. The fact that the insurance or the provision is available makes the group of recipients bigger, and the higher the allowance, the bigger the group of recipients of the allowance. Moral hazard refers to situations in which individuals can influence the risk by their own behavior without the knowledge of the insurer. This makes private insurance for the risk of loss of wages as a result of unemployment, illness, and work inability (disability) more difficult. This moral hazard cannot be completely ruled out since illness, work inability, and unemployment in reality are relative concepts. Therefore, the risks of unemployment, disability, and illness are partly endogenous. If employees have unemployment insurance, they will not, for instance, try as hard to keep a job, or they might act in such a way that their employer has no choice but to fire them. The employer and the employee can work together to have the employee officially declared ill or unable to work. This improper use of social security makes contributions go up. Financial stimuli can be used to reduce the moral hazard resulting from asymmetric information and to apply more objective and strict criteria when grant-

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ing allowances, for instance, allowance reduction in case of early retirement, premium differentiation based on the historical risk (“experience rating”) within the company or the industry, deductibles, and personal contributions. If the insured party then insures this deductible amount with a second insurer, this will lead to unexpected losses for the first insurer, because the likelihood of claims will have increased significantly. This external effect is not included in the costs for the insured individual (Van der Ploeg and Teulings 1992:165). In the “minisystem,” the government as primary insurer guarantees an allowance at a minimum level, and individuals who wish to insure themselves at a higher level are free to do so in the market. Here moral hazard ends in overinsurance: more additional contracts are taken out than is socially efficient. Especially for employees whose wages are slightly higher than the basic allowance, this will lead to additional insurance, since for this group an increased chance of work inability hardly leads to higher costs. We also see this happen in the context of unemployment allowances, where additional regulations apply (Teulings 1997). Private insurance is based on the principles of causality and equivalence. The principle of causality relates to the strict relationship between risk and premiums: the bigger/smaller the risk is, the higher/lower the premium is. When there are differences in, for instance, the risk of unemployment, illness, disability, or death, premium differentiation is a possibility. The principle of equivalence relates to the strict relationship between premium and benefit level: the higher/lower the premium paid is, the higher/lower the allowance is (see Douben 1986). An insurance is called actuarially fair when the premiums and the allowances only depend on the risks and the amounts of the damage. When the risk and the possible amount of damage are lower, preparedness to pay a certain premium will be reduced.2 The private insurance market has a few shortcomings. Only the government can repair these market imperfections. If the risks are not independent of each other—in other words, if they are interdependent—the market will not be able to offer an insurance, and the risks will be uninsurable. Risks are interdependent when the insured event affects many insured individuals at the same time. In that case, the insurance company cannot use the law of large numbers to spread the risk over the insured population. This includes various macroeconomic risks, such as inflation and unemployment. These risks cannot be insured through commercial insurance companies. The risk of unemployment is largely dependent on the economic situation and on how the economic situation affects certain industries and companies. Insuring against this risk of unemployment is only possible through compulsory social insurance. Asymmetric information prevents the market from achieving an efficient result. As a result of asymmetric information between the insurer and potential clients—a well-known problem in insurance markets—self-selection occurs. Only the “bad-risk” cases will seek insurance with an average, uniform premium because it is not worthwhile for the “good risks” to seek insurance. The “goodrisk” cases do better to put money aside themselves. In a free market, this ad-

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verse selection leads to underinsurance by good risks, in other words, to a less than socially optimal insurance. Adverse selection starts when an insurance system at the individual level is not actuarially fair because it contains solidarity elements. Adverse selection can also have the effect that some people will not be able to get insurance at an affordable premium, for example, health insurance or insurance for loss of wages because of disability or unemployment. The following are solutions for this adverse selection: risk selection, self-selection, and compulsory solidarity (Teulings 1997). Risk selection (screening) means that insurance companies collect additional information about the risks the insurer takes. Consequently, the premium will be differentiated accordingly. This premium differentiation between good and bad risks is efficient. Consider, for example, the differences between disability insurance premiums in banking and construction. However, there is no solidarity, except within the industry. This leads to high information costs because of admission and examination procedures, in other words, to high transaction costs. This explains why private insurers incur higher costs when they are closing new insurance contracts than collective insurers. This approach is beneficial to good risks: they pay a lower premium. It is possible, however, that the quality of the insurance policy suffers. In a non-government-regulated insurance market, the consequence for the bad risks might be that they are unable to pay the premiums the insurers charge. A second reaction by the insurer might be to introduce a deductible amount so that individuals exclude themselves, that is, self-selection. The insured person pays a fixed amount of any claim (deductibles) or a fixed percentage of any claim (coinsurance). As a result of deductibles and coinsurance, the insurance premium can go down, first because the insured party pays for part of his/her own damage and therefore receives less, but also because the deductible amount will lead to less damage because it will encourage the insured party to be more careful. A deductible amount is especially relevant when the damage is strongly related to the behavior of the insured party. Good risks will opt for a high deductible amount that gives the insurer information about the risk. For the good risks, this means, in terms of risk selection, that they cannot insure themselves to the same degree, but that they do not have to pay for the bad risks. There is a reduction in solidarity. However, from the perspective of distribution, a deductible amount can lead to an unbalanced burden between low- and high-risk groups. A third option to break through asymmetric information is compulsory solidarity. As a result of this, transaction costs can go down, because there is no need for expensive selection procedures and good risks can insure themselves well. Compulsory insurance, however, causes the good risks to be obliged to cofinance the bad risks. For bad risks, this approach is very attractive. Insuring and redistributing go hand in hand: together with the insurance, a redistribution takes place from good risks to bad risks. A collective system is the answer to risk selection. The problem with adverse selection is that the insurer cannot differentiate premiums, because it cannot distinguish the good risks from the bad.

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Compulsory insurance solves the problem of adverse selection. This is not a matter of solidarity or fairness, but of efficiency. However, there is no incentive left to avoid risky behavior. This moral hazard can be reduced by a combination of collective insurance and market forces. Compulsory acceptance is also relevant from the perspective of fairness (NYFER 1998:42). Compulsory insurance and compulsory acceptance are the way to reach the Pareto optimum. The disadvantage of collective, uniform social insurances is that many insured individuals have to pay more because they cannot obtain tailor-made insurance. The costs of redistribution are based on labor. This has a negative effect on the way the labor market works. Moreover, there is also a political risk. Insurances are complex products, however. Uniformity helps keep transaction costs low. Uniformity not only reduces the need for information, but also leads to economies of scope and economies of scale. One advantage of freedom of choice is that people are free to decide to which degree they want to insure themselves. This increases efficiency. Also, competition between insurers leads to lower costs, while collective regulations lead to monopolies, at the expense of efficiency. Public social insurance organizations cannot go broke (NYFER 1998). Nevertheless, in reality, competition between insurers expresses itself through risk selection in response to adverse selection, in order to be able to insure good risks (Teulings 1997). This happens at the expense of both social efficiency and justice.

DESCRIPTION OF THE DUTCH WELFARE STATE A welfare state is a country with a democratic constitution in which production is largely governed by the price mechanism and in which the government tries to guarantee its citizens an acceptable standard of living through a combination of consultation, regulation, and activation of the budget mechanism. The system of social care and security constitutes the backbone of the welfare state (Koopmans et al. 1997:107; Schram, Verbon, and Van Winden 1997:127). Each welfare state is the product of a very specific national history and culture. The Dutch welfare state is founded on three basic principles (Albeda 1992): solidarity (in a rich society nobody should have to be poor); fairness (income distribution should not be based merely on efficiency considerations); and the economy (stopping depression from progressing by ensuring a minimum income for the unemployed). One of the main functions of the welfare state is to provide insurance to protect people from certain risks.3 A state that provides sufficient means of existence for its citizens will be mainly supplying allowances to citizens who are entitled to them for reasons described by the law. This social insurance only leads to the government paying an allowance when a certain event occurs and when the citizens have paid premiums. This is the insurance function. There is also the minimum-need function. These welfare allowances—or social provisions, as they are called in the context of the Dutch General Social Assistance Act (Al-

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gemene Bijstandswet—ABW)—are awarded regardless of whether the recipient has paid the premium in the past. The creation of the postwar system of social security in the Netherlands is based on two central principles (Van der Veen et al. 1996). First, the state is responsible for social security and for protecting all its citizens from any hardship, provided these citizens themselves do everything within reason to provide themselves with this social security and this protection against hardship. Second, organizations of employers and employees play a central role. The implementation of employees’ insurances was placed under the care of bipartite industrial insurance boards (bedrijfsverenigingen), and supervision was left to the tripartite Social Security Council (Sociale Verzekeringsraad—SVr). The Dutch tend to avoid risk. The Dutch love and value security, and this is expressed by the fact that the Netherlands, like Sweden, is a very mature and complete welfare state. The system of social security is one of the most developed in the world. Its allowances are relatively high in comparison to those in Belgium, Germany, and the Anglo-Saxon countries (see SZW 1996, 1997; Van de Meerendonk 1998). This is true not only for the welfare allowance, but also for the unemployment allowance, the work-inability allowance, and sickness benefits. This also illustrates the Dutch dislike of risk and the importance Dutch culture attributes to solidarity and equality. For the Netherlands, it is typical for the social partners to be involved in the preparation, formulation, and implementation of the required policy. If a welfare state wants to function well, it needs a minimum of consensus. During the 1950s and 1960s, this consensus existed in the Netherlands (Albeda 1992): complete welfare would lead to full employment, and full employment would keep complete welfare affordable. The Dutch system of social security is a combination of the continental European system, to which the name of Chancellor Otto von Bismarck (1881) is linked, and the Anglo-Saxon system, with which the name of Lord William Beveridge (1944) is associated (Asscher-Vonk et al. 2000; Delsen, Van Gestel, and Pennings 2000; Douben 1986). The continental European system consists of employee insurances for which both the premium and the wage-replacing benefit are linked to the employees’ earned wages. This system can be considered a reaction to massive industrialization and protection against serious professional risks. The principle of insurance came first, and the employer paid the premium. Social insurances can, therefore, be considered as working expenses for companies and do not serve the purpose of redistribution of income. The idea of insurance is expressed in the principles of causality and equivalence. Since allowances are tied to an absolute maximum, there is an income limit for the premium. No premium is paid on the income that exceeds this limit. The Anglo-Saxon system is a national insurance against loss of income for all citizens. The principle of causality is completely absent, and there is no equivalence. Instead of causality, there is solidarity. Allowances do not vary with the income or the premium, but are minimal allowances. They are a basic provision, consisting of a fixed amount (flat rate). Here again the purpose was not to achieve

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redistribution of income, which is why uniform premium payments were used. Apart from this, there has to be room for additional private insurance and personal savings. The Dutch system of social security provides not only for redistribution, but also for insurance. The primary purpose of the collectively organized and financed system of social security in the Netherlands is to guarantee a certain level of continuity in the consumptive spending capacity of individuals when their income for some reason disappears or becomes insufficient. The government intentionally cuts the strict relationship between premium and performance that applies to many private insurances. As a result of this built-in solidarity and redistribution, there is no actuarial fairness: certain groups are net contributors and certain groups are net recipients. This not only leads to redistribution from the rich to the poor and from the active to the inactive, but also from good risks to bad risks, or to a redistribution between generations (Koopmans et al. 1997:109). This is compulsory solidarity, because it would not survive if it were not legally enforced. This forced solidarity, however, limits the freedom of choice citizens have. The Dutch system of social security consists of employees’ insurances for employees in the market sector4 (werknemersverzekeringen) and national insurances (volksverzekeringen). Depending on the nature of the insured risk, a distinction can be made between insurance against loss of income and health insurance. The premiums are levied upon employers, employees, and benefit recipients. Employers do not pay premiums for national insurances. These social insurances are financed on a pay-as-you-go basis. Each year the expenses are equal to the revenues; the active labor force pays for the inactive. The premiums are determined annually based on the expected benefit expenses. Financing through full funding means that a provision is created to finance the allowances by means of periodic payments. Until recently, no funds were formed (see chapter 7). The pay-as-you-go system does not suffer from inflation. As a result of this and because the system of full funding requires a long period of saving before allowances can be paid, the pay-as-you-go system has been chosen for the social insurances (Douben 1986). Pay-as-you-go financing can also be empirically explained by the theory of endogenous growth: social security increases as the inequality of the primary income distribution is greater and the number of people over the age of 65 in the total population is higher (Van Praag and Van Dalen 1992). Private insurances are based on the principle of equivalence. Social insurances, however, are more or less based on the principles of financial strength, solidarity, and need. This is clearly the case with national insurances, which have a fixed allowance, differentiated according to circumstances, and a premium that is income dependent. The Disability Insurance Act for the Self-Employed (Wet Arbeidsongeschiktheidsverzekering Zelfstandigen—WAZ) and the Disability Benefit Act for the Young Handicapped (Wet Arbeidsongeschiktheidsvoorziening Jonggehandicapten—WAJONG), the General Old Age Act (Algemene Ouder-

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domswet—AOW), and the General Surviving Relatives Act (Algemene Nabestaandenwet—ANW) provide benefits that are based on the accepted social minimum allowance level. Since 1998, the WAZ and the WAJONG have replaced the General Disability Act (Algemene Arbeidsongeschiktheidswet— AAW). The AAW was a national insurance. The WAZ is a compulsory insurance for self-employed persons, and the WAJONG is a social provision (LISV 1999). The principle of equivalence applies mostly to the employees’ insurances against the risk of loss of wages, such as the Unemployment Act (Werkloosheidswet—WW) and the Disability Insurance Act (Wet op de Arbeidsongeschiktheidsverzekering—WAO), where there is a relationship between a wage-based allowance and a wage-based premium amount. The Act on the Extension of the Mandatory Continuation of Payment of Wages by the Employer (Wet Uitbreiding Loondoorbetaling Bij Ziekte—WULBZ), which replaced the older Sickness Act (Ziektewet) in 1996, is no longer a collective insurance, since employers now only have to continue paying wages when an employee is ill (Schram, Verbon, and Van Winden 1997:149). Employees who make less than the income threshold (approximately 60,000 guilders a year) have compulsory insurance for medical costs as required by the national Health Insurance Act (Ziekenfondswet— ZFW). If there is a long-term illness, the General Exceptional Medical Expenses Act (Algemene Wet Bijzondere Ziektekosten—AWBZ) goes into effect. The AWBZ is a national insurance. Another feature of the Dutch social security system is the social provisions, which are formulated by the General Social Assistance Act (Algemene Bijstandswet—ABW) and the General Child Allowance Act (Algemene Kinderbijslagwet—AKW). These are financed from general funds (taxes). The fact that the ABW functions as a safety net is expressed by the fact that the amount of the allowance is determined by an income test and a capital test. In 1998, social security expenditure in the Netherlands amounted to approximately 112 billion guilders. Expressed as a percentage of GDP, that is 15 percent (see Figure 6.1). In 1980, the social security share amounted to almost 19 percent, and in the early 1980s it surpassed 20 percent. As a result of cost-cutting policies by the Lubbers government, the share gradually decreased to approximately 18 percent in 1994 (see chapter 2). However, the biggest decrease of the social security share in a short period of time occurred during the first term of the Kok government, from 18 percent to 15 percent of the gross domestic product, also as a result of the favorable economic situation. There is a misconception about the social security system in the Netherlands that its total expenditure is higher than in other member states of the European Union (EU). In this context, we need to distinguish between gross expenditure and net expenditure (see Table 6.1). The net social expenditure share in the Netherlands is lower than in Sweden, Germany, Denmark, and the United Kingdom. In part, this is due to the relatively high taxes for the Dutch social allowances. These taxes flow back into the treasury. In 1993, the total public and private expenditure, including that on health care, as a percentage of GDP (24.9

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Figure 6.1. Social Security Share (Excluding Health Care Sector) as a Percentage of GDP, 1980–1998 Source: SZW 1998:13.

Table 6.1. Gross and Net Public Expenditure on Social Security (Excluding Health Care), 1993 (in Percentages of Gross Domestic Product)

Source: OECD 1998b:81.

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percent) in the Netherlands was roughly equal to that of the United States (25.0 percent) and the United Kingdom (24.7 percent) and lower than that of Germany (28.2 percent) and Sweden (32.8 percent) (Van de Meerendonk 1998:94). The fact that national expenditures on social security is more or less equal shows that preferences in regard to social security are quite homogeneous. This means that privatization of social security does not lead to a lower total expenditure, but to substitution effects. This definitely applies to the Dutch social security system. The recession in the 1970s (the oil crises of 1973 and 1979) showed that a welfare state alone was not enough to ensure full employment (Albeda 1992). Massive unemployment is a threat to the welfare state. A financial crisis will ensue. The policy implemented by the government caused a conflict between politics and the unions; the consensus that was the foundation of the welfare state no longer existed. Even after economic recovery, the financial crisis of the welfare state continued to exist, especially because of ongoing long-term unemployment (see chapter 3), sick leave, and the number of people unable to work, which was considerably higher than in other EU member states (see Table 6.2). The welfare state was partially seen as a cause of the recession and slow recovery. The Dutch welfare state was structured in such a way that the market economy could no longer sustain the welfare state (Albeda 1992). As the social security system grew, a cultural change took place. More emphasis was given to providing allowances and less to encouraging entry into employment (NYFER 1998). The flip side of a high inactivity/activity ratio is the high cost of labor. A “social security trap”—a vicious circle—was created: in a pay-as-you-go system, unemployment leads to increasing labor costs. This again is an economic motive for employers to fire more people. This trend is strength-

Table 6.2. Standardized Sick Leave and Disability, 1990 and 1995 (in Percentages of the Labor Force)

Source: SZW 1998:103.

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ened by the presence of moral hazard in the social insurances against illness, disability, or unemployment. There is a moral hazard in both the pay-as-you-go system and the system of full funding, but the pay-as-you-go system is more capable of “budgetary flexibility.” With full funding, the moral hazard will be smaller because of the financial discipline—since the premiums, unlike those in pay-as-you-go financing, cannot be easily adapted each year—and there is no social security trap (Van Praag and Van Dalen 1992). In 1992, the parliamentary inquiry committee chaired by member of parliament Flip Buurmeijer did not just blame the failure of the social security system on the social partners, but also came to the conclusion that all parties involved (employers, employees, government, parliament, and the industrial insurance boards bedrijfsverenigingen) had been holding each other in a paralyzing grip that prevented fundamental changes in the system and its implementation. Another conclusion was that too much emphasis had been given to providing the allowances instead of to volume control and that supervision by the social partners had failed (Van der Veen et al. 1996). In the second half of the 1990s, much has changed in the organizational structure of social security (see LISV 1999). As of March 1, 1997, the National Institute for Social Insurances (Landelijk Instituut Sociale Verzekeringen—LISV) became responsible for the implementation of the employees’ insurances, the Disability Insurance Act for the Self-Employed (WAZ), and the Disability Benefit Act for the Young Handicapped (WAJONG). LISV has taken the implementation of the employees’ insurances away from the industrial insurance boards and transferred it to five competing executive institutions (uitvoeringsinstellingen, UVIs): Cadans covers the care sector, retail trade, cleaning, and department stores; Gemeenschappelijk Administratiekantoor Nederland (GAK Nederland), the largest, covers various sectors of industry; Gezamenlijk Uitvoeringsorgaan (GUO) covers the agricultural, tobacco, and meat sectors; Sociaal Fonds Bouwnijverheid (SFB) covers the building sector; and Uitvoeringsinstelling Social Zekerheid en Onderwijs (USZO) covers the government and education sectors. Bipartite sector councils advise LISV about giving instructions to these UVIs. The bipartite Social Security Council (SVr) was dissolved in 1995. A new, independent Committee for the Supervision of Social Insurances (Commissie Toezicht Sociale Verzekeringen—CTSV) supervises the implementation of social security. Currently, the social security system has three main objectives. The primary objective is to reach an adequate income provision for those who can no longer work or those who have retired. A second, derived objective is to achieve control over the system, so that citizens can be guaranteed adequate risk protection in the long term. The third objective of social security is to stimulate employment participation. There are three options available to control the costs of social security (NYFER 1998:27): stopping the inflow through stricter selection upon entry and through prevention, lowering the allowances, and stimulating transition into the labor market. In recent years, many new policies have been formed to reduce the high

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costs. Because of this, among other things, the social security share of GDP has gone down, especially since 1993 (see Figure 6.1). Since the mid-1980s, reform in the Dutch social security system has been aimed at reducing the moral hazard. In the 1980s, reductions in collective spending, including spending on social security, were mainly aimed at reducing the level of the allowances (price measures). In 1983, the allowance percentage, that is, the replacement rate, was reduced, and the gross allowances were detached from the average increase of collective labor agreement wages (see chapter 2). In the 1990s, volume measures were especially taken to reduce spending on social security. Here more emphasis was given to the principle of equivalence: a stricter relationship was established between the premium paid and the level of the benefit. Financial incentives were introduced into social security by partial privatization of it. Sick leave and disability numbers went down between 1990 and 1995 (see Table 6.2). The question is whether there is a causal connection.

PRIVATIZATION AND MARKET FORCES IN SOCIAL SECURITY This section will focus on the experience with privatization and market forces in social security. The first part of the section deals with privatization and market forces in combination with the Sickness Act (Ziektewet—ZW). The second part focuses on privatization and market forces in combination with the Disability Insurance Act (Wet op de Arbeidsongeschiktheidsverzekering—WAO). The third part examines the effectiveness of premium differentiation in the Unemployment Act (Werkloosheidswet—WW).

Privatization and Market Forces in the Sickness Act As of early 1994, under the Act on Reduction of Sick Leave (Wet Terugdringing Ziekteverzuim—Wet TZ), employers could no longer calculate the 70 percent of wages they pay to their sick employees to the industrial insurance boards (bedrijfsverenigingen) that implement the Sickness Act (Ziektewet— ZW). The industrial insurance boards not only collected the sickness insurance contributions but also paid the sickness benefits and supervised those on sick leave. Since then, the first six weeks are paid for by the employer. This financial liability gives the employer an incentive to reduce the amount of sick leave taken and to improve labor conditions. The employer can obtain insurance against this risk, for which the premium is linked to sick leave in the past. A lower (higher) sick leave will afterwards lead to lower (higher) premiums (‘experience rating’). The result of this partial privatization of the Sickness Act was a drop in sick leave from 5.5 percent in 1994 to 5.1 percent in 1996. The biggest reduction took place in 1994 (see Table 6.3). The legislation was effective, as use of the Sickness Act went down because of the employer’s financial liability of six weeks. Approxi-

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Table 6.3. Volume Development of Sick Leave and Disability, 1993–2000 (in Percentages of the Labor Force)

Sources: LISY 1999:66 and 98; LISY 2001:66 and 98.

mately 80 percent of sick employees went back to work within two weeks, and 90 percent went back within six weeks. The reduction of sick leave, therefore, partially reflects a shift of collective expenses to private expenses. However, the actual amount of sick leave has also decreased because of the Act on Reduction of Sick Leave. An undesired effect of this TZ act was that risk selection in the form of inflow selection through job-application medical examinations has increased (NYFER 1998:60–65). Other types of risk selection have also increased: selection of personnel based on absentee or health risks during inflow (trial period and temporary assignment) and outflow of personnel (dismissal). At the beginning of 1996, the Sickness Act was almost completely privatized. With a few exceptions, such as temporary workers and those who work from home, the public Sickness Act system has been abolished. With the introduction of the Act on the Extension of the Mandatory Continuation of Payment of Wages by the Employer (Wet Uitbreiding Loondoorbetaling Bij Ziekte— WULBZ) on March 1, 1996, employers have to pay their sick employees 70 percent of their regular wages for an entire year. After one year, the employees on sick leave will be transferred to the disability insurance program. The employer can insure this risk with a private insurer. The premium will then be based upon past sick-leave statistics in the individual company. It was expected that this would reduce long-term sick leave by approximately 10 percent. By mid-1997, some 80 percent of companies had taken out private insurance, and around 20 percent remained uninsured (NYFER 1998:58). Recent sick-leave figures show that there has been no positive effect from these increased market forces: sick leave has increased one percentage point between 1996 and 2000 (see Table 6.3). Premiums will go up, as a result of which the policy of wage moderation will be under pressure. Privatization also has some consequences that cannot be expressed in figures. The employer can pressure the employee into going back to work. This can cause a shift from short-term sick leave to long-term sick leave. Another side effect of this change of legislation is that age and medical history start to play a role as selection criteria for companies that are hiring personnel. Employers have become more inclined not to hire employees who have been ill for a long time. As a result of the privatization of the Sickness Act, risk selection has become much

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more prevalent, especially in the selection stage (NYFER 1998:65). This has created extra obstacles to the integration of disabled people, has further weakened older employees’ position in the labor market, and has made the “insider-outsider” problem bigger. The position of incumbent employees, the “insiders,” improves. The chances of becoming unemployed become smaller. However, the position of the “outsiders” deteriorates: the chances of remaining unemployed increase. The Act on the Extension of the Mandatory Continuation of Payment of Wages by the Employer also gives employers an incentive to prolong the trial period, so that they can assess personnel longer before offering them a permanent position. Also, the use of temporary contracts in order to monitor employees increases. There is also an incentive to avoid risk by hiring temporary workers (see the next part of this section). These are also forms of risk selection. Moreover, WULBZ causes a deterioration in the work environment. Work pressure increases, absenteeism rules are tightened, and the relationship between the employer and employee becomes more businesslike, which can even lead to more sick leave. This also applies when workers continue to work during illness, which increases the risk of spreading the illness (NYFER 1998:75–76). Finally, a logical consequence of the change in legislation is that access to health care between workers and nonworkers has become different. Employers demand that priority be given to their employees in order to reduce health costs. This could be the beginning of a division in health care. Dutch hospitals see this as an extra source of income.

Privatization and Market Forces in Disability Insurances On March 1, 1992, the Act on Reducing the Disability Volume (Wet Terugdringing Arbeidsongeschiktheidsvolume—Wet TAV) went into effect: a “bonusmalus” system was introduced into the work-inability insurances (SZW 1992:43–49). In accordance with the TAV act, employers had to pay a penalty— the so-called malus—for every employee who ended up receiving disability insurance. The penalty per employee who became unable to work amounted to a maximum of half the fixed yearly salary. The total penalty has a maximum of 3 percent of the total wage bill. Employers were hardly interested in the bonus, fearing that if they hired a disabled person, in the end they would be paying a malus. For example, in 1993, 1,244 bonusses were awarded, less than 5 percent of the estimated amount was spent, and 14,000 penalties were issued. Employers were also penalized for disability that had its cause outside of the workplace. The slight decrease in the volume of disability after the introduction of the Act on Reducing the Disability Volume cannot be attributed to this act (NYFER 1998:93). Due to the lack of public support, the unpopular bonus-malus system was abolished again in 1996. As of August 1, 1993, the Act on Reducing Claims on the Disability Regulations (Wet Terugdringing Beroep op de Arbeidsongeschiktheidsregelingen—

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Wet TBA) went into effect. This act focuses only on incentives for employees. Disability has been more strictly defined, and the legal definition of “suitable work” a worker is still able to do has been broadened. The allowance is limited to a maximum of five years, and periodic reassessments have been introduced. Also, all allowance recipients younger than 50 years of age have been reassessed. The disability insurance allowance became age dependent: the duration of the allowance became dependent on the recipient’s age upon commencement of allowance payments. Its level also became age dependent and was also determined by the difference between the original wages and the minimum wage. As a result of this reassessment, 32 percent of disability-benefit recipients lost their allowance; 11 percent received a reduced allowance. The regulation has not been very successful in reintegrating disability-benefit recipients who lost all or part of their allowance after being reassessed. A substantial number of them now receive a different allowance. A small number of them begin working more hours within a year after their reassessment (NYFER 1998:96). The Act on Reducing Claims on the Disability Regulations has, however, been successful in reducing the number of General Disability Act (AAW) and Disability Insurance Act (WAO) recipients. In 1994 and 1995, the volume of disability as a percentage of the labor force decreased by 0.5 percentage point (see Table 6.3). In 1990, 40 percent of terminations of disability benefits occurred because of recovery, and 50 percent were a result of the recipient reaching the age of 65. In 1995, these percentages were 60 percent and 30 percent, respectively. This means that it has become less common to stay on a disability benefit until pension age (NYFER 1998:95). The Disability Insurance Act serves less than before as an outlet for older employees (see also the section “Fourth Pension Pillar” in chapter 7). The result of this policy is that partial allowances are more often awarded than full allowances. Younger employees, especially, experienced a WAO gap (WAO-gat). The latter concerns the difference between the previous benefit level of 70 percent and the age-related benefit. After the introduction of the TBA act, the coverage of professional risk in the Netherlands is now worse even than in the United States (Aarts, Dercksen, and De Jong 1993). According to the coalition agreement of the first Kok cabinet, on January 1, 1998, the Act on Premium Differentiation and Competition in the Disability Insurance Scheme (Wet Premiedifferentiatie en Marktwerking Bij Arbeidsongeschiktheidsverzekeringen—PEMBA) was introduced in order to reduce the number of work disabled. Premium differentiation reduces the moral hazard, since employers can no longer divert the consequences of their behavior onto a collective fund. It therefore has a cost-reducing effect. As a result of premium differentiation at the company level, the employer directly feels the consequences of an employee’s work inability. This gives the employer a financial incentive to prevent outflow through the Disability Insurance Act (WAO) by investing in safety and prevention, contesting claims, and promoting the repositioning of partially work-disabled workers. The position of the insiders improves. The premium that has to be paid, based on the PEMBA act, now consists

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of a basic premium (6.95 percent in 1999) that is the same for every employer and a differentiated and maximized premium that varies according to the disability risk of the company, in other words, the outflow into WAO during the previous years. The variable premium amounts to 0.3 percent on average. This does not create a strong incentive. Employers who choose to pay any allowances to their employees during the first five years only pay the basic premium. Employers can also opt to carry the financial risk of the first five years with a private insurer (“opting out”). Since the disability risk can be insured, as opposed to the unemployment risk, premium differentiation in the Disability Insurance Act leads to competition between the five executive institutions (UVIs). According to the neoclassical theory, this offers the advantage of increased efficiency. Of the 600,000 companies in the Netherlands, by December 1997, 600 companies had applied to leave the public system. Only 25 companies, among which were the banks ING and ABN Amro, had been granted permission to do so. Seventy-eight companies had applied to leave the public system by mid-1998 (NYFER 1998:103). In 1998, the number of work disabled had not gone down, but increased (see Table 6.3). In 1999, the number of new disability benefit recipients was more than 13 percent (34,000 employees) higher than in 1998 (30,000 employees). Representative numbers from the Industrial Insurance Administration office (Gemeenschappelijk Administratiekantoor—GAK), the largest UVI, show that the increase of the number of disability-benefit recipients in 1999 came mainly from large companies: 750 companies, less than 1.5 percent of the total, including Philips, Nederlandse Spoorwegen (Dutch Railways), a number of banks, including Rabobank, ABN Amro, and ING, are responsible for 45 percent of the new WAO allowances. The share of these companies in total employment is much less than 45 percent. These 750 companies will be paying the maximum WAO premium in years to come. Since they already do this, the small companies where the outflow into the WAO is relatively low are subsidizing these free riders through the general premium (de Volkskrant, January 15, 2000). Table 6.3 shows that in 2000 the disability rate was back at its 1995 level. In contradiction to neoclassical theory, research among the implementing bodies in the field of social security in the United States shows that private insurers are more expensive than a competing government fund (NYFER 1998:104). Research by Aarts and De Jong (1997) shows that in the United States, 87 percent of employees are insured against the risks of temporary or permanent work inability as a result of work accidents and worker’s injuries, rehabilitation, and the medical costs tied to work-related injuries and occupational illness through a compulsory “workers’ compensation” insurance offered by the employers. Here again government funds are cheaper than most private insurances because they do not make a profit and do not have any acquisition costs. As a result, the so-called cost ratio—the share of the implementation costs of claim assessment, claim processing, and acquisition of clients in the total premium amount—is much lower than for private insurances. In order to charge companies as accu-

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rately as possible, premium differentiation is applied, in which a distinction is made among more than 500 risk categories for company types and professional groups. This strict differentiation in order to achieve risk selection implies high transaction costs. Another difference is that private insurers base their calculations of the insurance premium on actuarial risk. The risk of future work inability is calculated, for example, based on the average age in the company. Public insurers look at past risk, for example, the number of work disabled during the past five years. In the first case, preventive policies do not affect the premium. In addition, market forces lead to increasing costs, since economies of scale are lost and transaction costs go up because of the introduction of choices. The higher implementation costs of private insurers in 1985–1988 (24.5 percent of the gross premium amount) as compared to the government funds (11.6 percent) mainly resulted from the higher administrative costs. Inasmuch as the acquisition costs are related to risk selection and lead to adverse selection, this is socially undesirable. On the other hand, public implementation can, because of the lack of competition, lead to higher volumes and costs in social security. Therefore, the higher implementation costs of private insurers have to be weighed against lower premiums as a result of lower numbers of allowance recipients and more freedom of choice (SZW 1996:160–161).5 Furthermore, an important disadvantage of the Act on Premium Differentiation and Competition in the Disability Insurance Scheme (Wet PEMBA) is the incentive to select employees upon entry, when new personnel are being hired. Risk selection occurs when employers are able to spot health problems in potential employees. Considering the experience with the privatization of the Sickness Act, this is not an unlikely scenario. This will lead to “branded” people missing out. The position of disabled people in the labor market, which is already weak, will suffer even further, and leaving disability insurance (WAO) will become harder. The insider-outsider problem will become worse, and the labor market will become more segmented. In order to prevent risk selection, at the same time as the PEMBA act, in 1998, the Act on Medical Examinations (Wet op de Medische Keuringen—WMK) was introduced. This act prohibits prehiring checks. The effectiveness of this act is doubtful. In this context, it is remarkable that no research has been done in the United States into the relationship between premium differentiation and risk selection. It is possible that companies fear legal prosecution (NYFER 1998:102). Furthermore, the Act on Premium Differentiation and Competition in the Disability Insurance Scheme penalizes employers even when the work inability is caused by a social risk that they cannot influence through prevention. This is important because more than 60 percent of all cases of work inability are not work related. The creation of premium differentiation introduces extra costs and risks in company decision making and limits the effectiveness of PEMBA. This is a burden on labor: companies hire fewer people. NYFER (1998:101) concludes that this will especially be the case in small companies, as they are least inclined to take extra risks. In addition, the PEMBA act leads to increased use of agency

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workers and fixed-term contracts. This is important because many of the new work disabled are unable to work because they suffer from psychological problems (see chapter 3). To prevent the adverse effect of the PEMBA policy, on July 1, 1998, the Reintegration Act for Disabled People (Wet op de Reintegratie Arbeidsgehandicapten—Wet REA) was introduced. This REA act is designed to make it easier for employers to hire or keep disabled workers. Employers are now responsible for the reintegration of their own personnel and can receive a standard amount or customized compensation when they hire a disabled person or reposition a disabled person within the company. The Reintegration Act for Disabled People also guarantees that an employer who hires a disabled person is not taking the risk of higher illness and disability expenses. The fear of higher health costs is increased by the PEMBA act. This partially explains why the increasing shortage in the Dutch labor market and the growing number of hard-to-fill vacancies barely influence outflow from the WAO. Experiences in the Netherlands and elsewhere in Europe show that integration of disabled employees is mainly related to repositioning within their company. Reintegration, external hiring, is negligible (see Delsen 1996b). Gründemann and Nijboer (1998) conclude in their research into the WAO inflow and outflow that the REA act does not offer any new ways to improve the internal labormarket position of employees with unfavorable labor-market opportunities. No extra opportunities have been created for extra training or retraining, even though they are important in order to return to the original employer. There are no extra means to cover the costs of returning a worker into his/her original job, only for repositioning him/her in another job with the same employer. The Reintegration Act for Disabled People hardly, if at all, addresses the insideroutsider problem. This is confirmed by the Augustusrapportage of the Committee for the Supervision of Social Insurances (CTSV): the legislative tools are rarely used, and the laws to reduce sick leave and the number of disabled have had hardly any effect (de Volkskrant, August 27, 1999). On the other hand, the strict disability insurance policy since 1994 has led to considerable cost cutting. Between 1994 and 1998, 736 million guilders were saved on WAO allowances. As a result of this, the income of the work disabled has gone down by 25 percent on average, but the number of employed disabled people has decreased. Furthermore, work-disabled people who do find work get offered a permanent position less frequently.

Premium Differentiation in Unemployment Insurance The policy of the first Kok cabinet with regard to the Unemployment Act (Werkloosheidswet—WW) mainly focused on employees. In order to limit the inflow into the WW, in 1995 the eligibility criteria for the unemployment benefit were tightened and the right to an unemployment benefit was greatly reduced. As of March 1, 1995, there are three types of unemployment allowances:

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a short-term allowance, a wage-dependent allowance, and a follow-up allowance. The eligibility criteria that determine the level and the duration of the allowance have been tightened. Also, in 1996 the penalty system was expanded through the Social Security Penalties, Measures, and Claims Act (Wet Boeten, Maatregelen, en Terug- en invordering sociale zekerheid—Wet BMT), and the legal definition of “reproachable unemployment” has been broadened. An unintended consequence is that employees choose to have their labor contract dissolved by a judge in order to prove sufficient resistance to the dismissal (see NYFER 1998). This leads to higher transaction costs. After the incentives for the employee had been increased, it was the employer’s turn: this was followed by a plea by the government for premium differentiation and the employer’s deductible amount at the company level in the Unemployment Act (SZW 1997). The risk of unemployment is uninsurable (see “Public and Private Social Security” earlier in this chapter). That is why leaving unemployment insurance to market forces is not a realistic option. Premium differentiation in the Unemployment Act can only be imposed. The extra premium can then be determined by examining past risks: the number of employees dismissed by the employer in the recent past (experience rating). On the sectoral level, this premium differentiation already existed in the form of the so-called half-pay period of 13 weeks. The unemployment allowance during this half-pay period is paid from a fund to which separate premiums are contributed per sector. After these 13 weeks, the unemployment allowance is financed from the General Unemployment Fund (Algemene Werkloosheidsfonds), which consists of national, uniform premiums. In order to reduce the inflow into the WW (to reduce short-term unemployment), on January 1, 1998, the half-pay period was prolonged to 26 weeks. This prevents cross-sectoral subsidization. Calculations by Doodeman, Genet, and Hoogewoning (1999) show that this is not an effective method of confronting companies with unemployment costs they have incurred. There is a shift occurring in the premium burden from the national level to the sectoral level, but the premium differentiation does not increase. They believe that in order to make companies that draw heavily from the half-pay regulation actually feel the costs, the premium should be specified per risk group. Also, a further classification of groups of companies that use many short-term engagements can lead to more differentiation through a sector-specific risk markup on top of the basic premium. Next, a distinction can be made per risk class. The flip side of this is that the economies of scale disappear and transaction costs increase. These costs will then be compensated by raising contributions or lowering the level of the allowance. In order to prevent the Unemployment Act (WW) from being increasingly used as an outlet for older employees, now that access to the Disability Insurance Act (WAO) and the voluntary early-retirement scheme (Vrijwillige Vervroegde Uittreding—VUT) has been limited, and to reduce long-term unemployment, the first Kok cabinet proposed differentiating the unemployment insurance premium based on dismissal frequency and age. As with reproachable

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unemployment, which is the employee’s responsibility, the employer can only be held responsible for unemployment that can be influenced: unemployment as a result of factor substitution, seasonal unemployment, and unemployment at the end of a boom period (Doodeman, Genet, and Hoogewoning 1999). This can result in high transaction costs in the form of frequent and long work-dismissal court cases. Premium differentiation makes it more advantageous to invest in older, current employees rather than replacing them by new ones. Internal flexibility is improved. Employers are encouraged to retrain employees about to be dismissed or to support them in finding another job. This improves the position of the insiders and increases their power. Employment protection for flexible labor contracts also improves. This reduces the external numerical flexibility; in other words, experience rating reduces the chance that unemployment insurance will be misused in a flexible market, since at the end of temporary contracts it is no longer possible to assess whether the unemployment is reproachable (Bovenberg and De Mooij 1996). Premium differentiation can then be considered as a market-conforming type of employment protection and a way to internalize the social costs of dismissal: it becomes more expensive to fire people, which will in turn reduce the number of dismissals and the need for unemployment allowances. Seasonal unemployment will also be reduced. However, premium differentiation in unemployment insurance also has its flip side (Bovenberg and De Mooij 1996). Unemployment insurance premium differentiation can increase insecurity and costs for companies, especially for companies that have to deal with unpredictable demand. A company that is trying to avoid bankruptcy and is dismissing employees will be confronted with higher premium costs and will, therefore, have to file for bankruptcy sooner. A larger risk can lead to a decrease in investments and a lower employment level. Employers become more careful when they are hiring new personnel because of the threat of having to pay higher premiums if these employees have to be dismissed again. The result could be an increase in agency staff and temporary employment contracts in order to avoid eligibility for wage-loss allowances. Premium differentiation can be a hindrance to firm start-ups. As with the Disability Insurance Act, premium differentiation in the Unemployment Act (WW) will lead to a selective hiring policy. This is bad for the longterm unemployed, who are branded with a high risk of unemployment. With the current WW regulation, the unemployment insurance premium is independent from the risk of unemployment. This creates solidarity between people with a strong position in the labor market and a low risk of unemployment, on the one hand, and people with a weak position in the labor market and a high risk of unemployment. Premium differentiation reduces solidarity and increases inequality between employed and unemployed. The employer will try to apply risk selection. This also increases the insider-outsider problem and leads to longterm unemployment and permanent exclusion of “branded” people. The increased power of the insiders and the discouragement of the outsiders cause an increase in wages. The extra costs will be diverted to the employees with flexi-

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ble contracts and to people with lesser ties to the company. Premium differentiation, therefore, does more harm than good to older unemployed. Older employees will not be fired as quickly, but older unemployed will also be hired less easily. Since 70 percent of older people in the age group 55 to 64 in the Netherlands do not participate in the labor process, the positive effect of premium differentiation in the Unemployment Act is doubtful (see also the section “Fourth Pension Pillar” in chapter 7). On top of this, as with disability insurance, the problems mainly involve the outflow, not the inflow. Premium differentiation does not contribute to the reintegration of long-term unemployed persons. The problem consists of the large employment inequality and the low outflow (see chapter 3). Premium differentiation makes this problem worse; a shift occurs from short-term to long-term unemployment. The problems at the lower end of the labor market also increase. In the United States, experience rating has been applied for a long time to prevent employers from firing people in the low season and rehiring them in the high season. As a result of lenient dismissal law, legal employment protection is limited or absent, and this premium differentiation functions as an alternative to legal dismissal protection and employee participation. Without premium differentiation, the American employer can fire employees rather easily. This discourages employees from acquiring company-specific skills. Premium differentiation prevents the holdup problem. Without premium differentiation, temporary unemployment would be 25 percent higher. As a result of institutional differences, the influence of premium differentiation on hiring policies will be greater in the Netherlands (Bovenberg and De Mooij 1996). In addition, even without premium differentiation in the Unemployment Act, strict Dutch dismissal protection, higher administrative taxes, and greater employee participation discourage companies from letting people go through unemployment insurance and make it more advantageous for employees to invest in companyspecific human capital. Another alternative to reduce the moral hazard in unemployment insurance consists of the unemployment allowance through an individual savings plan: a funded unemployment insurance (spaar-WW) (Bovenberg and De Mooij 1996). This way the financial incentive is placed with the employee. The employees are not insured against unemployment, but accumulate savings in an individual account for the duration of employment for use when they are unemployed. During unemployment, they can take a monthly amount from this savings account. When the account is exhausted, the government will guarantee an allowance at the minimum level. The effects of funded unemployment insurance are to a large degree identical to those of premium differentiation. Again, costs of dismissal are internalized, but this way they are related to the behavior of the employee. This gives the employer a better negotiating position. If the account remains unused upon retirement, the amount will be added to the pension. This creates an incentive to reduce the periods of unemployment as much as possible. If the amount saved

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is seen as an investment rather than a tax, the moral hazard will be greatly reduced. Furthermore, the marginal labor tax is reduced, as a result of which the supply of labor increases, which is not the case with premium differentiation. Abuse of unemployment insurance is discouraged, solidarity between workers with a high and a low risk of unemployment is decreased, and the position of long-term unemployed deteriorates. Funded unemployment insurance can also stimulate internal flexibility and decrease external numerical flexibility. Under funded unemployment insurance, there is no selection upon entry; there is also no insider-outsider problem. The system is not procyclical, meaning that companies go broke more quickly. On the other hand, funded unemployment insurance creates a moral hazard in that it encourages people to use up their savings, after which they will benefit from a minimum income guarantee anyway. When the savings fund is empty, this can stimulate early retirement and can discourage people from looking for work. The supply of labor will decrease. For young people, it will be hard to save enough money. In the current Unemployment Act system, this problem does not exist, as a result of built-in solidarity. Like premium differentiation, funded unemployment insurance (spaar-WW) is not a solution for the problems in the Dutch labor market. It also does not alleviate the problem of flexible contracts: the costs of temporary unemployment are no longer funded by society, but by the individual employee (NYFER 1998:148). Premium differentiation is at odds with mobility stimulation in the labor market.

WELFARE STATE: COST FACTOR OR INVESTMENT? In public finance textbooks, the relationship between the government and the economy is systematically referred to as government intervention in the economy. Government intervention is not only about striving for macroeconomic stability, but also primarily about reaching efficient and fair allocation, which disables the market mechanism. This intervention, through income and expenditure policy and through regulations and information, can essentially be traced back to dissatisfaction with the effects of the price mechanism (see, for instance, Koopmans et al. 1997; Schram, Verbon, and Van Winden 1997). The market is seen as the preferred mechanism for producing goods and services and is considered the most likely mechanism to increase prosperity. According to this line of reasoning, it is obvious that the market is good and the government is bad, both by definition. Therefore, economists often see tension between social policy and economic performance. Pursuing all kinds of social objectives would be a strain on the economy and, therefore, a hindrance to economic and employment growth (see also the section “Income Inequality and Polarization” in chapter 3). In discussion about the efficiency of the welfare state, it is generally assumed that income transfers lead to discouragement. However, empirically, this cannot be conclusively proven. Government, the welfare state, and the market are com-

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plementary; the government sector is indispensable in making markets function efficiently. Social policy contributes to economic growth. A system of social security that provides coverage for loss of income can increase people’s preparedness to take economic risks, which creates a positive relationship between equality and efficiency. A social safety net stimulates independent entrepreneurship. Boosting employability requires that employees also take a certain risk. A breakdown of the social security safety net can be detrimental to this. However, income-redistribution programs have to be designed well to prevent the optimal level of risk taking being exceeded and a moral hazard being created (Van de Meerendonk 1998:117-118). Unemployment insurance will encourage workers to reduce their search effort (moral hazard) and stay in unemployment longer, lowering employment and output. Moreover, the importance of uninsured risks for workers is limited by the self-insurance of saving. However, a moderate level of unemployment insurance encourages workers to take on more risk, that is, to look for more productive jobs that are harder to get, and encourages firms to create those higher productivity jobs, increasing welfare and the level of output. Acemoglu and Shimer (2000) show that the latter effect outweighs the two opposing forces. On balance, a reduction in the generosity of unemployment insurance would not only decrease welfare but also reduce the level of output. It has been empirically established that in countries with inferior social security allowances, necessary cutbacks in companies do not occur due to the serious social consequences in case of dismissal (poverty) (see Englander and Gurney 1994). The absence of legal social security does not imply that the total costs of social security are lower in the long run (see Table 6.1). At the same time, a good system of social security has a stabilizing effect on the economic climate. Furthermore, social security protects individuals against certain risks than cannot be insured through the market. In the section “Poverty and Social Exclusion” in chapter 3 the conclusion was drawn that the Dutch system of social security is relatively effective in pushing back poverty. The market causes and increases inequalities between employed and unemployed, between strong and weak groups in the labor market, between regions, and between countries. Unskilled workers, women, older workers, and minorities are especially vulnerable. Nonintervention leads to slower adaptation, higher social costs, and problems at the lower end of the labor market. Fair income distribution is efficient, since a strong dichotomy—a large group of poor people— has negative effects on society as a whole (Van der Ploeg and Teulings 1992:156). First, there are the costs of social revolt. Good social provisions and reasonable income distribution contribute to social cohesion and mobility. Good does not necessarily mean higher. Second, in a segmented society there is a risk that people with little or no income give up and do not add anything productive anymore, while their children’s chances of social mobility greatly decrease. Third, there is a negative effect because of lower investments and economic growth in accordance with the theory of endogenous growth (see also the section “Income Inequality and Polarization” in chapter 3). In a democracy, this leads to income transfers through taxation. This is an important reason to plead for a more equal distri-

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bution of wealth and incomes. This is followed by the fact that less poverty leads to lower inflation, since politics finance redistribution of incomes through inflation tax. A country with a relatively high number of poor people has a higher rate of inflation than a country with a more equal distribution of wealth and income. A small, open economy is confronted with big economic uncertainty. This explains why Dutch policy makers attribute great importance to free trade and place strong emphasis on a fair system of social security (Katzenstein 1985). It is, however, a misunderstanding to think that social security serves only a social function, which is to protect against and to compensate for the social risks of market forces (see, for instance, Hemerijck and Visser 1999). Apart from a social function, the Dutch welfare state, like any other welfare state, also has an explicit economic function. The welfare state has developed as an answer to the problems that came with industrialization. Industrial production implies that illness, disability, and old age, as well as involuntary unemployment, become a cause of misery. Occupational risks increasingly became part of the production process and decreasingly risks that could be influenced by the individual. However, the vulnerability of the industrial production process itself also increases with the division of labor. As a result, the need for conflict prevention increases together with the need to influence the quality of the labor supply (NYFER 1998:19; Vos 1992:18). This increases the stability of labor relations. In this context, relevant research has been conducted by Rodrik (1997) in an attempt to answer the question of why small, open economies have a larger government sector. Among OECD member states, there is a strong positive correlation between government spending as a percentage of GDP and the degree to which the country is exposed to trade. These differences can be traced back, to a large degree, to differences in social security expenditure. Therefore, there is complementarity between governments and markets: the provision of social insurance by governments protects against the effects of external economic risks, which include exchange-rate instability and product concentrations in exports. In developing countries that do not have a system of social security, this role is performed by government consumption, so the government can actually act to absorb economic shocks and to reduce insecurity. The government makes growth of the markets possible. This is at odds with the traditional ideas behind neoclassical economic theory, in which governments are detrimental to markets and their growth. Agell (1999) concludes, based on his research into the relationship between the openness of Western countries and labor-market institutions, that globalization of economic activity will lead to an increasing demand for different forms of labor-market rigidities.

CONCLUSIONS Social security cannot be left entirely to the market. A typical example of an uninsurable risk is the risk of unemployment. Social protection and economic

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dynamics do not exclude each other. On the contrary, the welfare state and the market are complementary. This is definitely true for the small, open Dutch economy. In other words, there is interaction between economic and social development. Eager as they are to reduce the government sector, neoclassical economists and policy makers forget that maintaining a good system of social security is not a burden, but an essential part of a market economy: it enables the expansion of markets. Social insurance programs have a beneficial effect not only on welfare but also on output and productivity. The welfare state is an investment and not a cost factor. Therefore, the discussion about reducing the government sector should not be about its size so much as about its function. Another conclusion is that premium differentiation and market forces are not effective nor efficient ways to control the costs of social security. First, public and private social security are each other’s substitutes. Furthermore, as a result of privatization, transaction costs—implementation costs, acquisition costs, and costs of legal procedures—increase and increasing returns to scale cease to exist. These higher costs are compensated for in the premium and/or in the policy conditions. Moreover, risk selection takes place in companies. Market forces and premium differentiation are also not effective nor efficient tools to reduce the volume of social security. Rather, increasing sickness absenteeism and a growing number of people on disability and unemployment allowances are the result. The different amendments of laws have a cumulative effect on certain groups in the labor market. The position of the insiders improves, but the position of the outsiders deteriorates. This jacks up wages. The price to pay for freedom of choice in social security is high. The solution to the problem of inactivity, which in the Netherlands is concentrated in older people and the long-term unemployed, is an active reintegration policy.

NOTES 1. A Pareto optimum means that there is no other allocation that can improve at least one individual’s prosperity without decreasing another’s. 2. In reality, there is no such thing as actuarial fairness, since insurance companies face implementation costs and make a profit (Schram, Verbon, and Van Winden 1997:131). 3. From an operational point of view, one can speak of a welfare state when the expenditures on education, social security, health care, and housing total a certain percentage of the gross domestic product. 4. There are different regulations for civil servants. 5. In the United States, the administrative costs of private insurers amount to 40 percent of the total expenditure. In the Netherlands, Germany, and the United Kingdom, they are only 10 percent of the total expenditure (Van de Meerendonk 1998:119).

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INTRODUCTION This chapter analyzes the effectiveness and the efficiency of the Dutch pension system. The focal points of this chapter are the implications of the aging population, dejuvenation, and individualization for the Dutch pension scheme and the structural solutions with regard to these developments. In the first part of the chapter, demographic developments will be addressed. This will be followed by an explanation of the Dutch pension system. Advantages and disadvantages of the three pillars in the pension system will be examined against the background of demographic and social developments. This will be followed by an analysis of the legal framework of the Dutch pension system in an attempt to answer the question of whether more market forces and more freedom of choice can improve the performance of the system. The fourth pillar of the pension system will also be examined: paid labor. The chapter closes with a number of conclusions.

DOUBLE AGING AND DEJUVENATION Most of the risks the Dutch social security system is trying to cover depend on demographic factors. Naturally, this applies to child-allowance and old-age provisions, which cover demographic risks. However, disability, illness, medical expenses, and unemployment are also age related, meaning that these risks increase with age. The current demographic developments include, among other things, double aging. Not only is the number of older people (above the age of 65) increasing, but the average life expectancy is also going up; older people are

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Figure 7.1.

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Old-Age Dependency Ratio, 1990–2050

Source: Besseling and Zeenw 1993.

living longer. Furthermore, a process of dejuvenation is occurring. The birth rate, the number of children per woman, is dropping. Demographic projections show that between now and 2040, the old-age dependency ratio will almost double from 20 percent to about 40 percent, although the increase differs between countries. After 2040, the old-age dependency ratio will go down again (see Figure 7.1). The old-age dependency ratio consists of people aged 65 or over as a percentage of the total labor force, meaning people between 15 and 65. The latter group has to look after the first group by means of paid labor and the income it generates. The Netherlands has experienced and will experience a sharp increase in aging between 1990 and 2040. Currently, the Netherlands still has a relatively young population and labor force, but in 2040 the old-age dependency ratio will have gone up to approximately 50 percent. In the United Kingdom, the opposite is happening. In 1990, the old-age dependency ratio in the United Kingdom was already high, but aging and dejuvenation will not be as great as they are in other countries. The development of the old-age dependency ratio in Germany, the United States, and the European Union will be somewhere between these two extremes. Demographic projections for the Netherlands also show that the old-age dependency ratio will be structurally high: after 2040, the old-age dependency ratio will stabilize at 40 percent (De Beer and Beetsma 1999). This structural problem requires structural solutions. One has to keep in mind that demographic

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forecasts are uncertain. In order to make demographic forecasts, presuppositions are needed about the fertility of women, life expectancy, and the rates of emigration and immigration. In regard to immigration, for instance, De Beer and Beetsma believe that the increasing pressure caused by migration from the third world and the increasing restrictiveness of the admissions policy in the Netherlands and elsewhere in Europe will even out. Due to the large, unused potential supply of labor and a relatively young population and labor force (see chapter 3), the Netherlands is off to a good start in handling the consequences of aging. The demographic developments just mentioned allow for a relatively large amount of time in which to seek structural solutions and implement the necessary changes.

THE CAPPUCCINO MODEL First Pension Pillar The Dutch pension system consists of three pillars or tiers. In this context, the term “cappuccino model” is often used.1 In Europe, the first pension pillar, the basic pension, provides 90 percent of all pensions. The supplementary pensions—the second pension pillar—provide 7 percent, and the third pension pillar, individual provisions, provides 3 percent. In the Netherlands, these percentages are 45 percent, 30 percent, and 25 percent, respectively. Intergenerational solidarity is an important starting point of the Dutch pension system: solidarity among the young, working generation and the older, retired generation. This solidarity is found in the first and the second pillars. The first pension pillar refers to the statutory basic pension established by the General Old Age Act (Algemene Ouderdomswet—AOW). The basic pension is based mainly on the idea of care. The purpose of the General Old Age Act, when it was introduced in 1957, was to provide a basic pension to “protect anyone from deprivation during old age” and to prevent that the elderly “in needy circumstances, would have to be provided for by churches, private people or the government” (see NYFER 1996:52–53). The basic pension allowance is a fixed amount that is the same for everybody (flat rate). From the point of view of poverty reduction, this standard allowance is to be preferred to a wage-related allowance, which most other EU countries use. A wage- or earnings-related pension can lead to a savings trap, because calculating citizens will adapt their savings as an additional provision for old age to the reductions in the allowance and possibly even reduce them to zero, in order to be entitled to a pension allowance. A uniform allowance circumvents the savings trap and broadens the social basis for the basic pension. For that same reason, public financing is more appropriate than individual insurance. The General Old Age Act provides two partners from the age of 65 on with an income-independent allowance that is approxi-

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mately equal to the legal minimum wage. Single pensioners receive a basic pension allowance that equals 70 percent of the net minimum wage. This is a compulsory old-age pension for residents from the age of 15 to 65. During these 50 years, a complete basic old-age pension is built up at the rate of 2 percent per insured year. However, this means that people who spend some years abroad and do not pay a premium during that time do not build up a full general old-age pension. The basic pension allowance equals approximately 45 percent of the average wage. This percentage is lower than in, for example, Germany, France, and the southern European countries. The general old-age pension decreases the differences in incomes. The statutory basic pension is financed by a pay-as-you-go system. Each year the expenses are equal to the revenues. The pay-as-you-go system does not suffer from inflation. In a system of full funding, the accumulated pension reserves equal the present value of all pension liabilities owed to current members. Inflation eats at the value of the built-up pension rights and at the purchasing power of existing pensions. Another disadvantage of full funding is that it is very hard to guarantee the purchasing power of the allowances during times of continuous or substantial increases of prices and wages. In this case, continuous adjustments are required to replenish the shortage of premium revenues and the pension capital, in other words, back service. Also, implementation costs are relatively high. A pay-as-you-go system provides a high yield when the population and national production experience rapid growth. In that situation, the financial base of the pay-as-you-go premium grows every year. In the 1950s and 1960s, this real yield amounted to 5 to 6 percent per year, while pensions with full funding had a real yield of little more than 1 percent per year. Pay-as-yougo financing, therefore, was a good choice. In the 1980s and 1990s, the population experienced slower growth. However, the real yields of the pension funds greatly improved (4 to 6 percent per year) (Koopmans et al. 1997:123–124). Therefore, a fully funded system is nowadays more profitable. In an actuarially fair pension insurance system without compulsory participation, four groups have to pay relatively high premiums: people who are expected to receive a high pension benefit, people who will receive a pension allowance for a long time, people with a coinsured partner, and people who pay premiums during a limited time (Eichholtz and Koedijk 1996:19). For reasons of social justice, the government has broken the relationship between the premium and the risk of old age. This means government intervention for reasons of redistribution. Since poverty is a relative concept, the basic pension benefit is wage indexed. As a result, income transfers take place between generations. The longevity risk and the risk of inflation are shared between young and old. This solidarity cannot be achieved via the market. Without the compulsory aspect, this required risk solidarity cannot be organized (Jeurissen 1996). Furthermore, there is solidarity between higher and lower incomes. Compulsory participation, therefore, is absolutely necessary to prevent “free-rider” problems and adverse selection. The result of adverse selection is that only the bad risks—people who

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are expected to contribute less than they will receive—remain in the system (see the section “Public and Private Social Security” in chapter 6). Another argument for the public system is that it can help keep administrative costs low. As a result of the large group of insured people, there can be increasing returns to scale in both the collection of premiums and in the supply of allowances. The standard allowance also keeps operational costs (direct costs) low (economies of scope). These transaction costs are approximately 1 to 2 percent of the total pension amount paid (Eichholtz and Koedijk 1996:11). The basic AOW pension is completely transferable in the case of a change of employer. However, since there is no strict relationship between old-age pension premiums paid and old-age pension benefits received, the premium is part of the “wedge” between gross and net income. This “wedge” disturbs the labor market. These indirect costs are relatively high. Pay-as-you-go financing also implies that the costs of the basic pension scheme are very much influenced by demographic developments and developments in the labor market (unemployment). Therefore, aging and dejuvenation give rise to the question of whether the AOW benefit can continue to be the foundation of the pension system. The inactive/active ratio becomes increasingly unfavorable. Benefits that are financed by a pay-as-you-go system place a burden on the working generations of the future. This creates an unpaid bill. Currently, the AOW premium amounts to approximately 16 percent and is levied in the first income-tax bracket, up to an amount of approximately 52,000 guilders. The doubling of the old-age dependency ratio in the years to come will, other things being equal, also imply a doubling of the current AOW premium. Since people over the age of 65 currently do not pay AOW premiums, aging is simultaneously eating away at the financial base of the premium contribution and increasing the total amount of benefits paid. In principle, the old-age pension benefit follows the index figure of the average collective labor agreement wages. However, since part of the increase in wages, the incidental wages—the difference between the increase of the actual wages and the collective labor agreement wages—is not part of this index, this adaptation mechanism plays an important role in limiting the future burden of the general old-age pension. The incidental wage rate (wage drift) varies between 0.5 percent and 2 percent per year and averages 1 percent. Moreover, as mentioned in chapter 2, for a long time wages and allowances were disconnected and the minimum wage was frozen. This caused the basic AOW pension allowance to remain 25 percent behind the gross wages between 1980 and 1998. Poverty among pensioners can be the result if they have not provided for a supplementary pension or have insufficiently done so. Many pension funds use a franchise that is derived from the level of the AOW or the minimum wage.2 Employees on minimum wage, therefore, will not accrue a supplementary pension. This explains the overrepresentation of older women in poor households (see chapter 3). It also illustrates the importance of the policy of linking the mechanism of wages and benefits in regard to keeping the statutory old-age pension afford-

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able in the future. Since the majority of the pension liabilities in the second pillar are based on the last actual final pay, including the franchise, a decrease in the AOW benefit means that the supplementary pension has to be increased. Since the statutory old-age pension benefit is the franchise for the supplementary pensions, privatization is creeping in. In regard to the distribution of the burden between generations as well as economic efficiency, it is not preferable to transfer the costs of aging with a wageindexed basic old-age pension to the labor force of the future. The current lower burden and the current economic profits are more than negated by the higher burden and the economic losses in the future. In the case of financing through a fully funded system, this demographic risk is largely absent. All those insured in the past have contributed premiums themselves by consuming less. Replacing the pay-as-you-go system with a fully funded system can avoid placing too high a burden on the active labor force in the future, since those in the current, working generation make savings towards their own pension. When funds are built up, the burden therefore actually lies in the past. This capital is invested so that it can be used, with the investment yields, to finance the allowances in the future. However, a complete or partial transition towards a fully funded system will not be Pareto optimal for a relatively long time, because during the transition period the current active population has had to pay a double premium. Full funding and pay-as-you-go financing are complementary. When there is a temporary increase of expenses, the optimum solution is to create a fund that can soften the financial consequences of these increased expenses. In 1997, the first Kok government began partial funding of the basic pension by creating an AOW savings fund. This temporary fund represents the happy medium that charges the costs to both the current and the future generations. The increasing burden as a result of aging is spread out over time (tax smoothing). As a result of this AOW savings fund, the premium burden can remain at an almost constant rate if the incidental wage increase is not reflected in the AOW allowance. In accordance with the optimal fiscal policy, the constant rate reduces the disturbing effect (Van Praag and Van Dalen 1992; Verbon, Van Dalen, and Dietvorst 1998). In 1999, 5 billion guilders had already been transferred. At the end of 2002, the AOW savings fund will contain 28 billion guilders.

Second Pension Pillar The second pension pillar involves the supplementary occupational pension system and is strongly linked to the idea of deferred wages. Control and responsibility lie with the social partners and not, as in the case of the first pension pillar, with the government. The second pillar in most European pension systems is based on the pay-as-you-go system. In France, participation in the second pillar, which is based on pay-as-you-go financing, is compulsory. As a result, participation by employees is relatively high and the accrued pension capital, expressed as a percentage of GDP, is relatively low (see Table 7.1). In Ger-

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Table 7.1. Participation Rates, Number of Pension Recipients, and Accrued Pension Capital in the Second Pension Pillar in Several Countries

-: Not available. Source: Organisation for Economic Co-operation and Development and World Bank.

many, companies are now using book reserves to finance the pensions. These reserves are fiscally facilitated. Both the number of participants and the number of pension recipients are the highest in the Netherlands. In the Anglo-Saxon countries, the participation and number of pension recipients are also high. The supplementary pensions in the Netherlands, the United Kingdom, and the United States are financed by a fully funded system. As a result, the Netherlands has the biggest pension market in Europe after the United Kingdom. Dutch pension-fund capital currently amounts to more than 500 billion guilders, 87 percent of GDP. Approximately 99 percent of pensions in the Netherlands are defined-benefit provisions, meaning that a certain benefit obligation is predefined (see Table 7.2). Forms of pension provisions with defined allowances include the final-pay plan, the average-pay plan, and the fixed-amounts plan. Defined-benefit pension systems with a defined allowance serve two purposes: to keep direct costs low and to create allowances with a purchasing power that is as fixed as possible, meaning that the allowances are adjusted according to inflation. This is only possible by means of intergenerational income transfers. Compulsory participation is required to prevent insured people from leaving the pension fund in a period of increasing back service, that is, in periods when price and wage inflation are relatively high compared to the capital-market interest rate. Such pension plans protect the pension allowances of insured people against the risk of inflation, since prices and nominal wages will change at approximately the same

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Table 7.2. Pension Funds Divided by Type of Pension System, 1993 (in Percentages)

aincluding

the active, the retired, and the sleepers. doubly counted: people who are registered as active participants for one fund, but as sleepers for another fund. Source: Supervisory Authority for Insurance Companies (Verzekeringskamer), quoted in Eichholtz and Koedijk 1996:16. bincludes

rate. This also applies to the longevity risk. Employees themselves carry the risk of losing the pension when they change jobs, as well as the political risk of tax changes. Defined-benefit pension systems are not fully transferable to a new employer. This loss of accrued pension rights limits labor mobility. Since 1994, there has been legislation in the Netherlands entitling employees to a value transfer, which prevents the pension loss from occurring. Also, as of 1992, the pensions of early leavers (“sleepers”) have to be indexed at the same rate as the pensions of retirees. However, damage sustained in the past will not be repaired. Table 7.2 shows that in the Netherlands, more than 70 percent of those insured participate in a final-pay plan, a moderate final-pay plan, or a life years plan. In a final-pay plan, the risk of disappointing yields lies completely with the pension funds, not with the individual participant. The level of the pension is related to the final pay. This is consistent with the idea of welfare and the breadwinner principle. The resulting pension claims are unknown and can be high. This creates uncertainty for the pension funds in regard to their required capi-

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tal. The final-pay plan is not only an open-ended system, but also leads to a subsidy, through the back-service obligations, for the career maker (“perverted solidarity”). With a final-pay plan, the employer and the employee can, during the final year before retirement, agree on higher pay, the so-called pension promotion. This is a form of moral hazard. The premium arrears as a result of this noncalculated wage increase are shared by all the participants. This introduces a payas-you-go element in the supplementary pensions and makes the pension premium susceptible to demographic developments (NYFER 1996; Verbon, Van Dalen, and Dietvorst 1998). For this reason, pure final-pay plans are rare and are limited to company pension funds. In a moderate final-pay plan, salary increases during the final years before retirement are (partially) eliminated or the pension is based upon an average wage during a certain number of past years. This system is mostly used by company pension funds or sectoral pension funds. The pension system where the pension is based upon life years instead of the number of years of participation is the most expensive form. It is a variation on the final-pay plan, in which a salary increase not only leads to higher pension claims for the years of work with that employer, but for the total number of life years after the age of 25 (NYFER 1996:100). In other words, the time before participation in the pension scheme is included in determining the pension benefit. This compensates for pension claims that have been frozen with the previous employer and are losing value as a result of inflation. The average-pay plan is used for more than 26 percent of the participants (see Table 7.2). With a standard average-pay plan, a fixed percentage of these yearly wages is accumulated per year. The total pension then consists of the total of these yearly accrued pension rights. In an average-pay plan with indexation, the accrued pension claims are increased annually by the inflation percentage for that year. This provides better protection against the risk of inflation. A third variant is that in the standard average-pay plan an increase takes place towards the level of a final-pay plan, provided the means to do this are available. The investment risk lies completely with the pension funds. In the average-pay plan, there is substantially less back service than in the final-pay plan. The averagepay plan decreases the pay-as-you-go element in the supplementary pensions. The fixed-amounts system applies to 2 percent of people insured in the Netherlands (see Table 7.2). In this system, the pension is preset to a certain amount, regardless of the pay earned. This system, therefore, is quite similar to ordinary life insurance. The fixed-amounts system is prevalent in sectors where short-term contracts are common, such as the hotel and catering industry. Savings systems refer to employees who save for an old-age provision. The effect of aging on the supplementary pensions is stronger during positive economic development (NYFER 1996:108–109). First, a trade revival leads to higher wages, which in turn increases the costs of back service. Second, the statutory old-age pension benefit falls further behind when it is compared to wages, because incidental wage increases (wage drift) are hardly reflected in it.

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Also, the accumulation of human capital and therefore the increase of productivity add to the financial problems of a pay-as-you-go system that is wage indexed. These developments are passed on to the supplementary pensions. Furthermore, the investment yield of Dutch pension funds remains stagnant because, compared to the Anglo-Saxon countries, they invest relatively more in fixed-yield assets (bonds) and less in shares. This illustrates the Dutch aversion to risk. Investors can achieve a higher yield by undertaking higher-risk investments, that is, investing more in shares and in unlisted companies. More market forces, individualization, and increased freedom of choice will lead to pension funds utilizing lower- instead of higher-risk investments—meaning more investments in fixed-yield capital—since pension funds have to take into account individual investment preferences and have to place more focus on liquidity. The supplementary pensions largely undo solidarity between the older and younger generations and between higher and lower incomes. The decreasing statutory basic old-age pension (AOW) benefit implies that perverted solidarity between lower and higher incomes increases as a result of the final-pay plans and the back-service obligations. Complete solidarity within the pension scheme is reduced as a result, according to Eichholtz and Koedijk (1996:18). They conclude that the transition to a defined-contribution system or a moderate average-pay plan will lead to an increase of solidarity in the pension scheme as a whole. Defined-contribution systems are quite rare (0.2 percent) in the Netherlands (see Table 7.2). In comparison, approximately 25 percent of employees in the United States are covered by a defined-contribution system, and 75 percent participate in a final-pay plan. Moreover, the number of defined-contribution plans is increasing rapidly (Naschold and De Vroom 1994). Also in the United Kingdom, where participation of employers in a pension fund has not been compulsory since 1988, the number of individual pensions based on the defined-contribution system has increased (Eichholtz and Koedijk 1996). In the defined-contribution plan, for every year of insurance an amount of pension premium is made available, with which a pension is purchased. The amount can depend on the salary or on the profit. This is a strictly individual system in which the resulting pension is completely dependent on the premium paid and on the investment yield. This provision is in accordance with the idea of deferred wages. The implementation costs, that is, transaction costs, are relatively high. The defined-contribution plan, often used in the United States and the United Kingdom, is closely related to the individual pension provisions (the third pension pillar). The difference is the compulsory participation, the purpose of which is to reduce the indirect costs because of increasing returns to scale. Elements of choice can be easily introduced. Individual pension provisions and defined-contribution plans are fully funded by definition. Since there is no relationship between the pension and the preretirement pay, there is also no back-service burden. The accrued pension rights can be easily transferred when there is a change of employment. As a result, this

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system has little disruptive effect on the labor market. It is also less sensitive to demographic developments. A defined-contribution system also does not cause any moral hazard. Intergenerational and intragenerational transfers of income are completely absent. On the other hand, defined-contribution plans are detrimental to people who are forced to leave the labor market prematurely and introduce uncertainty about future pension income. Although the yearly contribution is predetermined, the allowance depends on how the investments are managed and how long the employee contributes and receives. In other words, insured employees carry the full investment risk, work-inability risk, longevity risk, and risk of inflation. Therefore, there is no solidarity at all. The effect of the creeping privatization mentioned in the section on the first pension pillar is identical to that of a wage increase: a back-service obligation is created. Since supplementary occupational pension premiums are untaxed and general old-age pension premiums are taxed, this privatization also entails a loss of income. The creeping privatization has also made a number of pension funds disconnect the franchise from the AOW benefit. As a result, the fact that the statutory old-age pension benefit falls behind the development of wages is no longer compensated by a higher accumulation of the supplementary pension. The total pension benefit result of the basic old-age pension plus the collective supplementary pension will turn out lower because of this development. People will be forced to acquire an extra pension through the third pension pillar.

Third Pension Pillar The third pension pillar consists of voluntary savings plans and provisions made individually, such as life insurance, house ownership, stocks, or savings accounts. The main function of the third pension pillar is to complement any pension deficits in the first or second pension pillar as a result of residing outside of the Netherlands, pension losses, and so-called white spots: employers and employees without a pension plan. Individual pension provisions are actuarially fair. The level of the allowance depends on the yields achieved from the investments and is, therefore, uncertain by definition. Intergenerational and intragenerational transfers of income are completely absent. Individual pension provisions are customized according to individual requirements and preferences. The pension rights can be easily and fully transferred when one changes employer. However, the operational costs are high. Paid premiums of the third pension pillar are not part of the “wedge” and have a neutral effect on the labor market. Aging and dejuvenation make fiscal treatment of pension savings increasingly important. The current fiscal benefits for pension savings are the result of progressive taxes and not of the so-called reversal rule that is part of the Wage Tax Act (Wet op de loonbelasting). According to the reversal rule, pension premiums are tax deductible, but income tax is levied on the pension allowances. As a result of progressive income tax, supplementary pension plans are unde-

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servedly subsidized: premiums can be deducted at a high rate, and taxes are paid on pension income at a low rate. This is also a case of perverted redistribution from low to high pension incomes. This can lead to too high pension savings and is economically undesirable. Furthermore, the treasury loses considerable tax revenues as a result. The fiscal tool to encourage people to provide for a good pension is expensive. Taxing these premium contributions can cancel the subsidization of higher incomes. In the Belastingplan 21ste Eeuw (Fiscal plan 21st century), this solution has not been chosen because of undesired redistribution effects (Verbon, Van Dalen, and Dietvorst 1998). A minimal pension obligation for supplementary pensions is a better and cheaper tool to encourage people to provide for a good pension. It would be a bad scenario if the government abolished the reversal rule for budgetary reasons (see Bovenberg 1992). Without the reversal rule, taxes and premiums are mainly paid during the active period, while during retirement many community services are being enjoyed. The reversal rule brings enjoyment and payment closer together. This improves political support for community services for older people. In addition, the current fiscal benefiting does not hold any guarantee for the future. Government involvement in the third pension pillar is limited to differences in fiscal treatment. Currently, only life annuities benefit fiscally from the reversal rule. Other forms of individual old-age provisions, such as employee savings plans, voluntary savings, and shares, do not benefit from this fiscal treatment and therefore have a competitive disadvantage. In this context the Belastingplan 21ste Eeuw brings up the introduction of the pension umbrella. Not only does this provide for more choices, but the competition between the providers of individual old-age provisions would also lead to lower implementation costs. A pension umbrella establishes an explicit relationship between the first two pension pillars and the third. A necessary condition is that people have a complete picture of already-purchased financial products for old age.

REVISION OF PENSION LEGAL FRAMEWORK The Pension and Savings Funds Act (Pensioen- en Spaarfondsenwet—PSW) constitutes the legal framework in which the social partners reach pension agreements. The purpose of the Pension and Savings Funds Act is to secure pension amounts and to disconnect them from the prosperity of the company. Companies do not live forever. Under PSW, it is compulsory to separate pension amounts from company capital and to place the pension obligation outside of the company, as opposed to Germany, for instance. For employees, this means more security, since the pension capital cannot be used by the company to compensate for financial losses. The employer can choose to place the pension plan for employees with a company pension fund or a sector pension fund, or to get insurance directly from an insurance company. The pension funds are under the supervision of the Supervisory Authority for Insurance Companies (Verzeker-

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ingskamer). The Pension and Savings Funds Act also prescribes financing through full funding. This means that during the period before retirement, a provision is build up by periodic payments. Assuming certain expectations about interest, probability of death, and costs, this provision should be sufficient to pay the assigned pension allowances from the pension date onward with the revenues from investments and pension premiums. In accordance with recommendations made by the Witteveen Commission in 1995 (MF 1995), various options have recently been introduced into the pension scheme. The Pension and Savings Funds Act was amended in 1997: the condition stating that a pension commitment required 50 percent participation by the employer towards the costs of the pension provision was dropped. That way, pension funds can also implement pension plans the premium for which is entirely contributed by the employee, and, therefore, venture into an area that used to be the domain of life-insurance companies: the third pension pillar. The purpose of the new Act on the Fiscal Treatment of Pensions (Wet Fiscale Behandeling van Pensioenen) of June 1, 1999, is to grant employees individual options in the pension scheme, that is, flexible retirement and additional insurance through a bridging pension, for instance, in the case of early retirement, to fill the general old-age pension (AOW) gap until the age of 65. Demotion—accepting a lower function with a lower salary or changing to part-time work at the end of a career—from the age of 55 onward has no impact on pension accrual. The pension benefit can amount to 100 percent (formerly 70 percent) of the last earned pay, including a thirteenth month and holiday pay. The surplus will be considered as wages from current employment and will be taxed progressively as usual. A prepension—starting at the age of 60 and totaling up to 85 percent of the last earned pay—can be accrued in a maximum of 10 years. This is a fiscal incentive to replace the expensive voluntary early-retirement (Vrijwillige Vervroegde Uittreding—VUT) regulations that are pay-as-you-go financed by fully funded prepension schemes. Voluntary early-retirement regulations will still be fiscally facilitated through the reversal rule. The Netherlands has a pseudocompulsory pension (Kraamwinkel 1995:711). The Compulsory Participation in a Company Pension Fund Act (Wet Betreffende Verplichte Deelneming in een Bedrijfspensioenfonds—Wet BPF) obliges the employer to allow an employee into the company’s pension plan if the employee belongs to a group to which a pension plan applies. This act also gives the minister of social affairs and employment the option to make participation in a pension plan compulsory for all employees or a group of employees in the entire sector at the request of the representative social partners in the sector concerned. According to the BPF act, exemption from this obligation can be granted in a number of situations. This act has been much used. There are 65 compulsory company pension funds that represent 81 percent of the insured and 14 noncompulsory company pension funds that represent only 3 percent of the insured. Like the legal extension of provisions in collective labor agreements, compulsory participation in a pension plan prevents competition between employ-

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ers and employees in a sector, thereby contributing to the stability of Dutch labor relations and industrial peace. Another advantage of this pseudocompulsory pension is the high percentage of employees who are insured for a supplementary occupational pension (see Table 7.1). Less than 15 percent of the Dutch labor force relies on the first and possibly the third pension pillar for its old-age income. A disadvantage, compared to a general compulsory pension, is the existence of so-called white spots. In new sectors, such as “other services,” pension plans are rare. Until the end of the 1980s, many part-time workers were excluded from participating. This could and can be achieved by narrowing the definition of the participants in the pension plan. As of 1994, part-time workers could no longer be excluded from participating in a pension plan and became entitled to proportional pension claims. In spite of this change in legislation, many parttime workers are still being excluded from pension plans because they have flexible labor contracts. Flexible workers, meaning home workers, people with zerohours contracts, on-call workers, and those with temporary contracts often still cannot participate in supplementary pension plans (Kraamwinkel 1995). Many pension funds have a waiting time of a year. As a result of the growing number of flexible workers and increasing labor mobility, a general compulsory pension would be the logical next step. Recently, however, there has been a plea for more market forces, that is, the abolishment of the compulsory pension. “More market forces” refers to increasing freedom of choice in the pension plan. This affects the employees first because it increases their possibilities to decide individually where to get which pension insurance. Second, it affects the employers by giving them freedom of choice for a specific type of pension fund: a company pension fund or a private insurance company (see, for instance, NYFER 1996; Eichholtz and Koedijk 1996). The idea behind this is that more market forces, in accordance with neoclassical economic theory, will lead to more competition between the different pension providers. This will ultimately be beneficial to both the price and the quality of the pension product as a result of more efficiency, more product innovations, better investment yields, and more freedom of choice and tailor-made pension products. Consequently, allocational efficiency, cost efficiency, and dynamic efficiency (see the section “Public and Private Social Security.” in chapter 6) will also be improved. The main cause of “white spots” in the Dutch pension system now is the socalled white employers. These white spots cannot be removed with fewer rules or more market forces. On the contrary, more market forces will lead to an increasing number of white spots in the Dutch pension system, since the number of employers who do not provide for a pension plan for their employees will increase. Reality shows that if pensions are not compulsory, certain employees probably will not be covered by any supplementary pension plan: people with a lower level of education or income, employees of smaller companies, and people with short-term and flexible contracts. This segmentation in the terms of employment is partially avoided by a general compulsory pension. There is not

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only an allocation problem, but also a distribution problem. Within the Foundation of Labor (Stichting van de Arbeid—STAR), there is a desire to fight the white spots and extend the supplementary pensions. In December 1997, an agreement was reached between the government and the social partners to achieve cost control and modernization of the supplementary pensions. In this agreement, the social partners have agreed, among other things, to eliminate the white spots. The inclusion of the compulsory pension in the civil code, therefore, is not a “revolutionary act” (see Jacobs 1994). With the statutory basic pension included, most of the pension plans entitle pensioners to up to 70 percent of the last earned gross pay. Also, in the averagepay plan, the pension claim including the general old-age pension often totals 70 percent of the last earned pay after 40 years of employment, but lower pensions are more common than with final-pay plans. The net amount will be higher (80 percent to 85 percent), since pensioners do not pay basic old-age (AOW) premium and of course no supplementary pension premium either. The high net allowance can be a reason to decrease the maximum level of the supplementary pension. Another reason to reduce the pension allowance to, for instance, 60 percent is that the breadwinner model has come to an end (see the section “Cultural Factors: The End of the Breadwinner Model” in chapter 2). However, the maximum percentage of 70 percent will only be reached if for 40 years premiums have been paid, which means a pension accrual of 1.75 percent per year. With the new Act on the Fiscal Treatment of Pensions (Wet Fiscale Behandeling van Pensioenen) of 1999, this has been changed, in the final-pay plan, to 35 years and 2 percent per year of employment. In an average-pay plan, the maximum yearly accrual for an old-age pension is 2.25 percent. This makes 60 years the new pivotal age when 70 percent of the pension has been reached. This is probably at odds with the government policy that aims at stimulating employment by older people. The question is whether the actuarial discount is sufficient to stop early retirement. The retirement date can also be postponed to the age of 70. This makes the old-age pension benefit go up considerably. However, the majority of employees never reach 35 or 40 years of employment. The average number of pension years at the retirement date is no higher than 18 years. For men, this is 22 years, and for women, it is only 7 years (see Jansweijer 1996). No more than 26 percent eventually manage to reach a pension benefit result of 70 percent or more. This means that for a considerable part of people over 65, especially older women, the statutory old-age pension benefit is their only source of income, and it explains the overrepresentation of women among poor households mentioned in chapter 3. However, the unemployed, flexible workers, and independent workers also miss out on the supplementary pension plan, whether they want it or not. Considering the development of the purchasing power of the basic old-age pension, these people will later end up below the level of subsistence. Currently, this has happened to 10 percent of the elderly. That is why there should not only

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be a pension maximum, but also a compulsory, individualized pension minimum for everybody under 55 years of age, which should be built up in addition to the basic old-age pension. In other words, there should be a general compulsory pension: everybody who cannot otherwise be part of a supplementary plan has to provide for a supplementary pension plan themselves (Verbon, Van Dalen, and Dietvorst 1998:87). Apart from this motive of redistribution, there is also a motive of paternalism for a general compulsory pension: the government favors a scheme in which everybody provides for a good old-age provision for themselves. In addition, there are various economic motives for a general, compulsory pension. More market forces and more freedom of choice lead to more transaction costs. There is a trade-off between increasing returns to scale and standard regulations and customization. The employer has to negotiate with every newly hired employee about the exact content of the whole package of terms of employment, including the pension provision. This increases hiring costs. Standard terms of employment, such as a collective pension plan, reduce transaction costs. Reducing standardization, therefore, comes with a price tag in the form of higher transaction costs and results in higher premiums or lower pension entitlements. An indication of these transaction costs is the lower implementation costs (6.6 percent of the premium revenues) of the company pension funds, compared to 10 to 15 percent incurred by the insurance companies (Kraamwinkel 1995). Because of the lower administration costs of company pension funds as a result of increasing returns to scale, uncontrolled market forces are undesirable from the point of view of cost control. There is serious doubt about whether private insurers are more efficient than pension funds. Pension plans are complex. Transparency of the pension scheme is an important condition for improving the way the market works: the individually insured need to have an understanding of the cost and the yield of the pension insurance, that is, the nature of the plan, the actual investment yields, and the financial prosperity of the pension fund. Eichholtz and Koedijk (1996) see an explicit task for the government in obliging pension-fund institutions to publish annual accounts and to include certain data in these accounts. These are also transaction costs that are intrinsic to less controllable market forces. This is all the more important because small pension funds outsource capital management. A reason to do this could be that they do not possess enough investment expertise to make well-informed decisions. Market forces not only lead to high transaction costs, but also to mismanagement and wrong investment decisions concerning the old-age reserve. Therefore, Hoffman (1996) is correct in questioning whether an individual employee would be capable of making a well-founded decision. Consequently, the considerable amount of asymmetric information between employer and employee in regard to supplementary pensions, combined with more freedom of choice, leads to badly informed individual choices. For example, as of January 1, 2001, the pension plans that provide for a survivor’s pension have to include equal choices between a survivor’s pension, regardless of marital sta-

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tus, or an old-age pension that is higher or starts earlier. A survivor’s pension for cohabiting partners, for instance, might sound more advantageous than the exact way of calculating the old-age pension, while the latter can be extremely important for the resulting level of the pension (Kraamwinkel 1995). In addition, the demand for pensions is affected by different kinds of “shortsightedness.” The undervaluation of future pension revenues leads to a suboptimal result: low pension provisions. Complete freedom of choice combined with myopia leads to loss of prosperity (underinsurance). In this situation, government regulation is desirable and increases prosperity. This can also be a problem caused by free-rider behavior, where newly retired people expect to be helped by people in their direct environment or by the government if they get into financial trouble (Kraamwinkel 1995). Under the influence of the implemented policy, among other things, the Dutch pension system has become increasingly dependent on investment yields. If during a certain period the real yields do not keep up with the basic interest rate, a back-service burden is created and the active population has to pay higher premiums.3 This leads to undesired moral hazard and risk selection (screening). Employees will try to avoid this premium increase by accepting work with companies with a young pension fund. In addition, competing providers will insure companies with, for instance, a young employee base separately, which will leave the company pension funds with the bad risks (Jeurissen 1996). In the current final-pay plan, as well as in the average-pay plan, abolishing compulsory participation will lead to risk selection. Companies will be inclined to choose those pension funds that have a young participant base, since pension funds with a relatively large number of old employees are expensive because of the extra costs caused by the pay-as-you-go element in the supplementary pensions. The existence of the increasingly expensive pension funds is being threatened. Advocates for the creation of a freer market through the abolishing of the company pension funds’ “truck system,” therefore, plead for a transition to a defined-contribution system, which does not suffer from risk selection. Such a system is also deemed better suited to the individual needs of the employee and the employer and has no back-service costs (see, for example, NYFER 1996; Eichholtz and Koedijk 1996). However, this means not only the end of perverted solidarity, but also of solidarity between companies with many and with fewer women as well as with many young people and many older people. Perverted solidarity can also be dealt with by an average-pay plan. Underinsurance can only be prevented by compulsion. The introduction of more market forces by abolishment of the obligation is detrimental to the relative success of the Dutch pension system: large numbers of employees are quite inexpensively insured at the same time (Kraamwinkel 1995). In the Netherlands, insurance penetration, measured by the premiums paid to insurers and pension funds as a percentage of GDP (8.6 percent in 1993), is among the highest in the world. In the United Kingdom (11.7 percent) and the United States (8.9 percent), higher premium amounts are paid. In continental Europe, lower premium

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amounts are paid. In 1993, for Belgium, Germany, and the average of 12 EU member states, these percentages were 5.2 percent, 6.7 percent, and 6.9 percent, respectively (Van der Geest and Van Sinderen 1995:198). In addition, the obligation tool can be used to stimulate policy changes. This obligation is part of the core of the Dutch pension system: intergenerational risk sharing and solidarity. Abolishing it implies a transition to a pension system with a strictly individual character and, therefore, a transition to the Anglo-Saxon model with its uncertain defined-contribution system.

FOURTH PENSION PILLAR The fourth pension pillar consists of performing productive labor, at an adapted rate or not, and/or in an adapted position. Apart from complete pension postponement, this involves income from part-time work over several years that is added to the existing three pension pillars (see Delsen and Reday-Mulvey 1996). Since older employees can take it slightly easier, they can remain active longer. Increasing the employment rate is an effective answer to aging and is, therefore, of essential importance for maintaining the Dutch social security system in general and the statutory general old-age pension in particular. Another advantage of this is that friction in the labor market is prevented. Increasing the employment rate of older people not only has a denominator effect, because the base for financing is broadened, but also a numerator effect, because the number of allowance recipients with a pension, disability, early-retirement, or unemployment benefit goes down. As in other European countries, in the Netherlands various measures have been taken in the past to make older employees retire from the labor process early (see Delsen and Reday-Mulvey 1996; Delsen, Hutsebaut, and Reissert 1999). The Disability Insurance Act (Wet op de Arbeidsongeschiktheidsverzekering—WAO) is used as a veiled redundancy scheme and is the most used alternative retirement route for older men (see Table 7.3). During the first half of the 1980s, the number of older men receiving a disability benefit increased by 18,000. Until 1987, the granting of a Disability Insurance Act benefit was dependent on the labor-market situation. As a result of this, among other things, the absolute outflow via the WAO decreased in absolute numbers, and the number of older, male WAO recipients went down from 219,000 in 1985 to 214,000 in 1990. However, the favorable economic situation also played a part in this. The outflow from the WAO was less than the inflow. Table 7.3 also shows that the relative importance of disability insurance as a retirement channel decreased. In 1980, 86 percent of older men retired via the WAO. Currently, approximately half the older men undergo early retirement from the labor process via the WAO and one-third retire early via the voluntary early-retirement regulations (VUT). In accordance with the Wassenaar Agreement in 1982, apart from collective reduction of working hours and encouraging part-time work, the VUT was con-

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Table 7.3. Male Benefit Recipients in the Age Group 55 to 65 per Allowance (in Thousands)

Sources: SZW 1997:208; CBS 1997b: 169.

sidered in the collective labor agreement negotiations as a tool for redistribution—set against the backdrop of the sharply increased structural unemployment of the 1970s—of existing employment and reduction of working hours and as a tool to fight unemployment among young people. The VUT is fiscally facilitated by the government. The number of men receiving a VUT benefit went up from 18,000 in 1980 to 107,000 in 1990, despite the fact that the labor market improved in the second half of the 1980s (see Table 7.3). The WAO and the VUT act as communicating vessels: the decreased retirement via the WAO resulted in increased retirement via the VUT. The high long-term unemployment among older people is related, among other things, to the regulation for people over 571⁄2 that was introduced in the Unemployment Act (Werkloosheidswet—WW) of 1982. Since that date, the older unemployed have been exempt from the obligation to apply for work and receive an unemployment allowance until the age of 65. The outflow from the WW is very limited. Moreover, based on this “guideline on the elderly” (Ouderenrichtlijn) from 1982, selective dismissal based on age was made possible. As with the case of the disability benefit, the decrease of the number of older men with an unemployment benefit in the second half of the 1980s was related to the favorable economic situation. The social partners’ and government’s joint policy in the 1980s caused a decrease of the employment level of men in the age group between 55 and 64 that was nowhere greater than in the Netherlands. Furthermore, the level of employment of older people in the Netherlands is low compared to that in the other EU countries (see Table 7.4). In Belgium, the employment/population ratio of older people is the lowest. Sweden has the highest level of employment participation. During the 1990s, in a large number of EU countries, including the Netherlands, changes were made to the pension systems and the social security systems in order to break and reverse the early-retirement culture. The pension plans were made more flexible, disability and unemployment allowances were lowered, and thresholds were made higher in order to limit the early-retirement options or make them less attractive. However, the alternative retirement chan-

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Table 7.4. Employment/Population Ratios of Older People (55 to 64), 1979–2000

Sources: OECD 1996a:187; OECD 1997: 166–168; OECD 2001: 212–214.

nels are still being used by companies as veiled redundancy schemes (see Delsen and Reday-Mulvey 1996; Delsen, Hutsebaut, and Reissert 1999). Table 7.4 shows that in the Netherlands the employment rate of older employees increased after 1994, as it did in other EU countries, with the exception of Belgium, and the United States. After 1998, the employment/population ratio was stable in the United States, while in the EU the ratio kept rising. Notably, the Netherlands performed well in 1999 and 2000. The employment rate of women in the Netherlands has been increasing since 1991 (De Beer 1999). The improvement in the second half of the 1990s was greater in the Netherlands than in other countries. Although the level of employment of older people is still low in the Netherlands, it is catching up with the EU average. The favorable economic situation and the decreasing number of dismissals that occur as a result (see also Table 5.5) have played an important part in increasing the employment/population ratio of older people. During the first half of the 1990s, the total number of older men with an allowance was still growing. After 1994, a change occurred and the absolute number of older men with an allowance went down (see Table 7.3). Despite the trade revival, the number of older men receiving an unemployment benefit is still increasing slightly. However, the chance of older men entering the unemployment-benefit system has gone down considerably since 1994 (De Beer 1999). In the Netherlands, as of January 1, 1994, selective, collective dismissals, meaning redundancy of older employees, are no longer allowed. The “guideline on the elderly” that allowed them has been abolished, with the purpose of increasing the degree of employment of older people. After 1994, the number of men with a VUT allowance also went down for the first time. This is partially a result of the collective labor agreements that were reached. In 1998, almost half of them contained agreements about replacing the VUT by flexible retirement.

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In addition, the level of the VUT allowance has been lowered and the age for VUT entitlement has been increased in steps, first from 60 to 61 and then to 62. The changes in the WAO also contributed to the lower outflow of men from the labor process in the 1990s. It is typical for the polder model that the government and the social partners have seen increasing the employment rate of older employees as one of the major goals of socioeconomic policy for the years to come. The second Kok government is aiming at a structural increase of employment among older people— the generation between 55 and 64—from 25 to 30 percent at present to more than 50 percent in the year 2030. In the draft advisory report Arbeidsparticipatie Ouderen (Employment participation of older people), discussed in a Social-Economic Council (Sociaal-Economische Raad—SER) meeting on December 17, 1999, the SER, in the context of working towards this goal, makes a large number of recommendations and suggestions to both trade and industry and the government about how to stimulate employment of older people in a way that can be implemented gradually. The pivotal age will be 60 years. In principle, all people younger than 60 who are able to work should participate in the labor process. Retirement of people over 60 should take place on the basis of individual preference: a conscious weighing of pros and cons for (continuing) working and not working or retiring. Apart from intensifying the current policy, emphasis is placed on the responsibility of the social partners. Companies need to have an age-conscious and eventually age-independent personnel management. The regulations for the terms of employment and early retirement need to have financial incentives built in so that people who continue to work longer are rewarded and people who retire early pay for the resulting costs themselves. The following suggestions have been made to the government: the gradual introduction of a jobsearch obligation for unemployed people over 571⁄2 years of age if it is likely that older unemployed have a realistic chance of finding suitable work; consideration of more advanced forms of differentiation of unemployment insurance premiums per sector; creation of premium groups; utilization of fiscal tools to reduce labor costs of older employees and to compensate for the extra costs of increasing employability, for example, through a contribution discount; providing individual employees with the legal right to a so-called “snip” in the pension calculation when they reduce their working hours or accept work with a lower pay; and consideration of ending the fiscal facilitation of VUT regulations. In chapter 6, we concluded that more advanced premium differentiation in the WW only increases the labor-market problems of older people. A ban of VUT regulations with pay-as-you-go financing is more likely than abolishing the fiscal facilitation. Final-pay plans make it more likely that older people are let go through reorganization in order to avoid a high pension obligation. This also plays a role in recruitment (NYFER 1996:101). After all, an older employee will not contribute much to the pension accrual, but will soon start drawing from the capital of the pension fund. This leads to a pension trap. The final-pay plan

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also inhibits the development of a fourth pension pillar, since demotion and parttime employment lead to a considerable reduction of pension claims. That is not the case in an average-pay plan, since the pension is based on the salary earned during the whole career. Abolishing fiscal facilitation and a ban on final-pay plans can also be relevant, considering the social consequences (Verbon, Van Dalen, and Dietvorst 1998). Limiting fiscal facilitation to the average-pay plan is an obvious step. The reward system can be an obstacle to the development of employment by older people. Seniority regulations limit the employment of older workers when their reward diverges too strongly from productivity development. The relationship between age, productivity, and reward can be explained by the human capital theory and the contract theory. According to the human capital theory, young employees at the start of their career and their employers invest a lot in human capital. This investment can only pay itself back if productivity increases faster than wages. This leads to young employees earning wages that are higher than their productivity, while older employees are rewarded below their productivity. According to the contract theory, however, the wages of young employees lie below their productivity and the wages of older employees lie above their productivity. The younger employees subsidize the older employees. For the employer, in theory, this is without cost consequences, but it does generate a commitment from both the younger and the older employees. Both will apply themselves: the younger employee has much to gain by staying with the company for a long time, and the older employee has much to lose in case of dismissal. The implicit contract is also a solution to the holdup problem and encourages investment in company-specific human capital. Empirical evidence shows that wages increase with age in the Netherlands (see Gelderblom and De Koning 1992; CPB 1995). The productivity curve, however, has its peak around the age of 45. This explains why Dutch employers prefer to let older employees go first. A seniority reward system, that is, a periodic wage increase, is both efficient and effective, since it creates an incentive for higher productivity, investments in company-specific training, and increased loyalty to the company. This might explain why demotion is still rare in the Netherlands. Only 5 percent of the older employees (aged 43 and older) have to deal with a downward change of position, and only one-third also go down in salary (see Groot 1998). Furthermore, it remains a big problem to measure productivity at the individual level (see chapter 4). However, in the future, seniority regulations will increasingly lead to cost problems if the average age of employees goes up as a result of aging and dejuvenation. Training can be a major contribution to improvement of the labor-market position of older employees. Training not only keeps knowledge up-to-date, but also increases mobility. At present, professionally oriented training focuses on older employees only to a limited degree (see, for example, NYFER 1996; Delsen and Reday-Mulvey 1996). This is caused partly by prejudices and partly by the shorter yield period. This last factor makes incentives from the government nec-

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essary in addition to specific collective labor agreements. Furthermore, everyday reality shows that age is a bad criterion with which to determine whether an employee is a candidate for training. As opposed to demotion and external mobility, part-time retirement can lengthen the available payback time of an investment in training and thereby increase the yield. In order to keep older employees motivated and productive, training should not stop at the age of 45, but should continue until the end of the career.

CONCLUSIONS The Netherlands is a model country for the rest of Europe in the area of pensions. The pension system is characterized by partial funding, which is why the Netherlands does not have any acute pension problems as a result of aging, unlike many other European countries where the pension system is fully financed by a pay-as-you-go system. The combination of pay-as-you-go financing of the statutory basic old-age pension and financing through full funding of the second and third pension pillars allows for a certain level of financial flexibility. This flexibility is decreased by the relative reduction of the basic old-age pension allowances. The Dutch pension system is both effective and efficient: large numbers of employees are quite inexpensively insured at the same time. There is serious doubt about whether private insurers work more efficiently than pension funds. The obligation to provide a pension is part of the core of the Dutch pension system: intergenerational risk sharing and solidarity. Abolishing it implies a transition to a strictly individual and uncertain defined-contribution pension system, widely spread in the Anglo-Saxon world. In order to achieve an effective and efficient pension system, the reforms of the pension system have to go beyond changes to the financing and the introduction of a flexible pension date and part-time retirement. Increasing the employment/population ratio of older employees is an essential condition for maintaining the Dutch social security system, since many of the risks covered become greater with age. Good cooperation between the government and the company sector is essential to the development of the fourth pension pillar. Effective stimulation of the employability of older employees requires that both the interests of the employer and those of the employee are being looked after. Therefore, variables in company practice must be improved to make work at the end of the career less expensive and more flexible, customizable, and productive. The polder model offers a good cultural and institutional basis to meet this challenge.

NOTES 1. The ingredients of a cup of cappuccino are coffee as a basis, then a layer of frothed milk, and a pinch of cocoa powder to top it off.

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2. The franchise links the public and supplementary private pension system. This franchise varies between supplementary pension plans from 100 percent to 143 percent or more of the AOW benefit for a couple. 3. The basic interest rate (rekenrente) is the notional interest rate that the invested pension capital is expected to yield in the future. The current decline of capital-market interest and real interest rates to under the basic interest rate makes strong premium increases necessary. This conflicts with the policy of wage moderation. For the treasury, this leads to a loss of tax revenues, but also to a decreasing interest burden.

8

Does the Polder Model Have a Future?

INTRODUCTION Institutions of the polder model have undergone drastic changes during the past two decades. This chapter concentrates on the central question of whether these changes were due to innovations or whether they instead signal the end of the polder model. Internal and external threats to the polder model are examined first. The chapter then considers whether the implemented reforms in the Dutch welfare state can be referred to as policy learning. Next, we look at whether the polder model is worth maintaining and what measures are required to do so. Finally, a number of policy options for the future will be introduced. On the basis of complementarity between efficiency and effectiveness, it is argued that the government should play a more active part in socioeconomic policy in order to increase the degree to which labor is used, reduce permanent inactivity, make labor markets more flexible, and prevent labor-market segmentation, which is created by insiders and employers at a decentralized level.

EXIT POLDER MODEL? The polder model refers primarily to a unique combination of culture and institutions. Solidarity and equality are very important issues within the Dutch culture, which is individualistic and consensus and consultation oriented. The polder model is characterized by organized solidarity and organized decentralization. Essential components include institutionalized negotiations and cooperation, consensus and wage negotiations at a central level, selective governmental interference, the Social-Economic Council, the Foundation of Labor,

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collective labor agreements, the legal extension of collective labor agreements, very strict preventive dismissal protection, the highly developed system of social security, and the mature welfare state. Institutions are adapted or abolished if they are of insufficient or no use to society. The maintainability of the polder model not only depends on Dutch socioeconomic conditions, but also on international economic and political dynamics. The policy pursued during the past 20 years has involved modifications to the unique Dutch economic order. Collective legislation by employee representatives and employers and by the government formed the basis of the Dutch labor system. In this respect, the Netherlands fits in completely with the tradition of the Rhineland model, contrary to the Anglo-Saxon model. Collective legislation forms the basis of the Dutch welfare state. During the past few decades, the relatively high stability of Dutch labor relations, as in other corporativistic countries, depended in considerable part on the “collective equality” of employees. Joint responsibility for socioeconomic policy is another core element of the polder model. On the basis of the Wassenaar Agreement of 1982, the government is taking a step backwards, and the uniform, collective regulations and institutionalization of socioeconomic aspects of the employment factor are gradually being replaced by made-to-measure agreements and contracts. Wage negotiations usually take place at the sectoral level, and the company level became increasingly important for the bargaining system in the 1990s. Both decentralization and “flexibilization” are undermining the role played by corporativistic organizations in the economy. An increasing number of framework and à la carte collective labor agreements are being concluded, which are replacing collective and binding agreements. Tailor-made agreements lead to an increasing inequality in primary and secondary conditions of employment between employees and pose a threat to collective equality and solidarity and in turn to the stability of Dutch labor relations. This risk also applies to individual companies. The increasingly unequal and nonsimultaneous development of conditions of employment between and within companies may threaten cohesion within the organization (Fruytier 1998:88). The socioeconomic policy pursued by the Lubbers cabinets in the 1980s and the Kok cabinets in the 1990s—more market and less government—is based largely on normative neoclassical economic theory and the trade-off between efficiency and equality. European integration, in particular through the European Economic and Monetary Union and the euro, is speeding up this shift from coordination via consultation to coordination via the market. The primacy of the market also implies that there is an increasing shift towards the objective to achieve short-term results (high yield) instead of negotiation, consensus, and cooperation between management, shareholders, and employees and long-term aims. The Dutch are being forced to abandon their corporativistic way of operation and cooperation in the battle for investment by large companies—a development that is threatening the dikes of the polder economy. The tendency of Dutch management to give priority to shareholder value of its company undermines consultations and the polder

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model in turn. The American conflict model is displacing the consultative model in companies. Listings on the stock exchange take preference over the interests of employees and the midterm interests of the employer’s own company. The behavior of Dutch trade unions has also changed as a result of this. They also have no choice but to pursue short-term goals, which means an inevitable demand for higher wages. Consequently, there is no more room for agreements pertaining to solidary “good causes” within collective agreements. The paradox of a successful polder model is that it makes individual parties less visible at the macro level and their contribution less recognizable. As a result, they find it difficult to present themselves to their supporters. Successful cooperation undermines the polder model and leads to legitimacy problems. The polder model is becoming the victim of its own success, which is made glaringly obvious in a tight labor market. The notion of consensus—a basic feature of the polder model—is threatened by increasing scarcity on the labor market. The interests of members prevail at the expense of the common interest. On the one hand, shortages on the labor market, especially among skilled personnel and small and medium-sized companies, leads to demands for higher wages by employees that employers are willing to meet. On the other hand, labor-market shortages lead to a divergence in wage development between categories of employees. In addition, employees are confronted with increasing pressure at work and structural overtime. Structural overtime is at odds with collective labor agreements relating to shorter working hours. The shortages also lead to increasing wages apart from the collective agreements. The market dictates prices. Additional market working reduces solidarity and increases differences between groups on the labor market, resulting in a wage spiral and segmentation between stronger and weaker groups on the labor market. The polder model has been given institutional shape at the national and sectoral levels. The question is whether internationalization, European integration, and decentralization pose a threat to the polder model. Exchange-rate policy is no longer possible due to European integration, especially because of the formation of the Economic and Monetary Union (EMU) and the introduction of the euro. Moreover, differences in costs and wages between countries are becoming more transparent. Countries that limit wages and social security costs have a competitive advantage. This is definitely applicable to small open economies such as the Dutch economy. The monetary union turns the control of wage costs into a central policy theme. Due to the introduction of the euro, the social partners of EMU member states are becoming increasingly responsible for employment levels. The lack of opportunities to correct the exchange rate and the introduction of the euro increase the effectiveness of wage-cost moderation. Policy competition is the result. Other member states will also want to gain a competitive advantage via a policy of wage moderation. Policy competition results in policy convergence, making the Dutch policy of wage-cost moderation less effective. This naturally has implications for the maintainability of the polder model (Faber 1999). The Netherlands will lose its favorable starting

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position. The social partners and the government will have to take far-reaching measures to maintain their competitive position. This may lead to major tensions within the polder model. It is highly questionable whether consensus can be reached again in order to make drastic changes to social security and labormarket policy. Second, more stringent requirements relating to the permissible financing deficit as a result of the Stability and Growth Pact of 1997, requiring EMU member states to establish a budgetary equilibrium or surplus in the medium term, are decreasing the amount of space available to the government to enable it to use budgetary measures to facilitate moderate wage developments. The pact will become really restrictive if economic growth suffers a setback. The EMU forces the social partners to base their wage policy on productivity and costs per product unit. This may lead to differences in wages between countries. Wage negotiations throughout the EMU are required to reduce harmful policy competition and migration. At the same time, the EMU and the euro form an incentive for further decentralization of collective wage negotiations towards the company level. If Dutch employees do not wish to accept wages that are lower than those of their counterparts abroad, this will signal the end of the polder model. This will also be the case if there are collective agreements between countries relating to sectors. The increasing mobility of capital—more and more companies cross borders and transfer their activities—has consequences for the employment factor. Collective labor agreements concluded at the European level should regulate these activities and guarantee social solidarity. Tough times also lie ahead for the polder model due to the harmonization of conditions of employment in the euro zone. A European coordination policy on collective agreements is the most plausible solution, given the agreements made in Doorn (September 1998) between unions from the Benelux countries and Germany and agreements made by the European Trade Union Confederation (ETUC) in Helsinki (July 1999) to prevent wage underpricing. The competencies and conditions that turned the polder model into a success are gradually being eroded. Faber (1999) concludes that only a strong external economic shock such as the one that occurred in the 1970s can ensure that the three partners of the polder model cooperate to maintain the Dutch model of the welfare state. In addition to the common recognition of the problem and greater consensus among the social partners, the fact that the government is better able to intervene in wage determination in comparison with Germany, for example, explains the success of the polder model (Delsen and De Jong 1998). The Dutch government will react if free, open collective negotiations do not produce the desired results. The government will have an initiating and guiding role, as was the case in 1982 and 1993.

IS THE POLDER MODEL WORTH MAINTAINING? To answer the question of whether the polder model is worth maintaining, it is necessary to check whether the combination of an institutional framework and

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the policy pursued in the Netherlands—given the environment—is generating optimal economic incentives. Establishing a direct relationship between economic results and labor-market institutions is a difficult task (Freeman 1998; Van de Klundert 1997). There are three ways to do this. The results of employees who are and who are not covered by a certain institution can be compared within a country by studying the effects of unions in, for instance, the Anglo-Saxon world. Associated problems include the selectivity of employees in both sectors. Even more important is the interaction (spillovers) between the two sectors. Second, the results of changing institutions can be compared before and after the changes. The “Lucas critique” will play a part if this comparison is made on the basis of econometric models. According to Lucas (1976) the use of policy instruments changes the behavior of citizens and companies and the preconditions in which they make decisions. The behavioral relations of citizens and companies on which econometric models as based hold no longer. Parameter estimates are dependent on policy regimes. As a result, it is difficult to predict accurately the results of changes in institutions and policy rules using econometric models. Third, countries can be compared with one another during the same period. A problem in this respect is that a host of different institutions influence national results, making it difficult if not impossible to interpret the results unambiguously. This can be resolved in part by involving more countries in the comparison so that specific explanations are eliminated. Every institution is embedded in a configuration of institutions, making it impossible to compare individual institutions. Groups of institutions as a whole can be compared. Identical institutions within certain configurations of institutions and policies may even lead to opposite effects. Indeed, relevant comparative research has shown that neither the Rhineland nor the Anglo-Saxon model performs better everywhere or all the time (Delsen and De Jong 1998)—not everywhere, because the characteristics of a country are reflected in its cultural values, which are the result of historically long-lasting processes, and it is unlikely that these lengthy processes will undergo significant changes within a number of years, and not all the time, because the preference for an economic system depends on specific economic circumstances. In other words, the optimal relationship between market and nonmarket coordination, for example, by consultation, is a flexible one. According to Van de Klundert (1997:131), the Rhineland model generally functions best in a stable environment due to a relatively high level of commitment. Consultations improve the quality of products and processes. The fact that consultation is time-consuming is irrelevant. In times of structural changes, consultations may lead to the postponement of necessary adaptations. In that case, the flexibility of the Anglo-Saxon model is required. In chapter 5, however, we concluded that confidence in market processes within the scope of employment policy can also be time-consuming and harmful. Since institutions not only produce costs but also have a positive effect on labor productivity and economic growth, it is impossible to establish beforehand which system of labor

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regulation is the most favorable local competitive and settlement factor. Establishing the optimum system is therefore an empirical issue and depends to a large extent on prevailing standards and values and the existing environment. In the Netherlands, the central and sectoral consultative institutions prevent several types of market failures from occurring. For this reason, allocative and dynamic efficiency in the Netherlands is greater than in the United States. In the past, policy makers have assumed that institutions and conventions disrupt the free market. However, institutions have advantages and disadvantages. This implies that liberalization should be used in a selective and restrained manner. Institutions can resolve coordination problems in society and, in doing so, reduce transaction costs. This leaves more money for investments. Additional market working could undermine the social climate (mutual trust, standards, and values) and, in doing so, undermine the basis for economic growth. Chapter 6 revealed that the welfare state plays an important part, both economically and socially, particularly in a small open economy such as that of the Netherlands. Politicians are therefore urged to exercise caution in their initiatives for liberalization. Chapters 3 and 4 revealed that the socioeconomic policy pursued in the Netherlands aimed at increasing market working leads to labor-market segmentation. Moreover, it affects the social infrastructure, increases insecurity, and leads to short-term thinking. As a result, the advantages of the consultative economy are lost. Increasing competition resulting from the globalization of economies augments the importance of human capital as a competitive factor. The comparative advantages, which determine the competitive position of a country, are determined less and less by traditional factors such as location and presence of raw materials and more and more by investment in human capital (Baily, Burtless, and Litan 1993; Porter 1990). Retraining and in-service training are becoming increasingly important due to demographic and technological developments. Aging and dejuvenation of the labor force imply that an increasing number of companies have to acquire knowledge via incumbent employees. Continuous education after initial education is necessary for maintaining compatibility in the rapidly changing knowledge economy. The Netherlands cannot compete on costs alone, but can maintain its position in the international competitive battle by putting more knowledge into its products. Knowledge must be acquired, maintained, and renewed in order to reinforce competitiveness. After all, if capital is completely mobile, the level of education of the labor force is the most prominent decisive factor of international trade. In addition to education and training, technology policy is an important cornerstone of international competition (Van de Klundert 1997:12). Chapter 5 indicated that Dutch consultative institutions form an important explanatory factor for the size, participation, content, and quality of company training courses. Lifelong learning is reasonably well developed. In the past, the polder model has shown its added value in this respect. Chapter 4 concluded that a trade-off exists between numerical flexibility and employability. In the cur-

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rent wave of flexibilization, both in the Netherlands and abroad, the emphasis is on external and numerical flexibility: the one-sided shift of uncertainties and risks onto groups of employees with a weak position in the labor market. This involves social and economic risks. Such forms of flexibilization not only lead to internal and external labor-market segmentation, but also result in shortsightedness and reduce incentives for employers and employees to invest in education and training. Consequently, there are important economic and social reasons for maintaining the polder model.

POLICY LEARNING? The institutions of the polder model have been adapted during the past two decades. Labor relationships, social security, and labor-market policy have been reformed. Some researchers (Visser and Hemerijck 1997; Hemerijck and Visser 1999; Van den Toren and Vos 1997; Theeuwes and Van den Toren 1998) regard the process of adaptation and reform of the Dutch welfare state in the broadest sense as a successful process of policy learning. Institutional changes and the shift in thinking were realized within a stable social infrastructure, which generated considerable confidence in policy processes that were fundamentally uncertain. The institutions of the consensus economy have been able to establish an ability for policy learning on the basis of mutual trust. This has enabled the development of a long-term commitment aimed at modernizing the welfare state and transforming the soft, passive, and tolerant welfare state into a strict welfare state that is geared more towards activation. Embedded in an infrastructure of social coordination, the purple trail of activation and deregulation offers a new perspective on a stable and sustainable compromise. Whether policy learning has really been involved will become evident during the present economic recession. People will then have to use the “modernized” social security system. But we can already conclude that reform of the Dutch welfare state in particular—additional market working and differentiation in premiums—has not been a success. In fact, the opposite has occurred, as indicated in chapter 6. The government has been overzealous in reforming the welfare state. This has also taken place at the expense of the modernization of the Dutch economy, as is revealed in the following examples. In the 1980s, the Lubbers governments gave so much priority to healthy government finances and restoration of the economy in the market sector that government investment (particularly in civil engineering) steadily decreased from almost 5 percent of the gross national product (GNP) in 1980 to 2.3 percent at the end of the 1980s. Unemployment grew as a result (Kapteyn, Keuzenkamp, and Van der Ploeg 1989). Second, although education is considered an important priority within the goals of the purple government, expenditure on education has decreased relatively, while the need for investment in education has increased more than it has decreased. The recent publication Education at a

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Glance distributed by the Organisation for Economic Co-operation and Development (OECD 2000b) shows that the Netherlands spends relatively little on education. Both public and private expenditure for initial education are low. Third, relatively little attention is paid to an active policy aimed at education and training by the government. The current labor-market policy is geared too much towards the short term: increased employment now but minimal employment in the future. More attention needs to be paid to government support for relatively durable and highly qualified jobs linked to the creation of knowledge and the development of high-quality technology. The purple cabinet decreased the education budgets of employment offices and adult education in general. As of 2001, the tax deduction for education and training costs for employees is limited to Dfl 12,000 annually. This will discourage employees from investing in education relevant to the labor market and contradicts the stimulation of employability and lifelong learning that the Foundation of Labor (STAR), the Social-Economic Council (SER), and the government deem necessary (de Volkskrant, January 14, 2000) (also see chapter 3). Within the labor-market policy, employment is mainly encouraged through subsidies and the direct creation of employment. This purple policy is even more amazing since research shows that subsidized employment programs hardly increase employment as a result of displacement (see also chapter 3). Wolbers (1998) concludes that additional education is not a useful strategy for reducing unemployment problems among individuals with inadequate training. Educational measures aimed at the bottom of the labor market may be necessary, but are not an adequate prerequisite for ensuring that such individuals are employed or remain employed. The reason for this is that microeffectiveness is not regarded as macroeffectiveness. Additional training is beneficial to an individual. Although the relative position in the job queue improves, this only leads to displacement and redistribution of unemployment. Reeducating individuals with inadequate qualifications in a slack labor market poses a threat to the employment of personnel who are slightly better qualified. On the basis of job-competition theory, there is a “zero-sum game” in which only the “stock” of jobs will be divided. Displacement and diploma inflation, that is, credential inflation, can only be solved by continuing to upgrade the quantitative structure of employment. On the basis of endogenous-growth theory, however, this is a “positivesum game.” National and international research shows that (re)training is an effective means to stimulate economic growth and employment since it enhances the match between supply and demand on the labor market (Delsen and Jacobs 1999; Mancini and Visser 1995; Van den Noord and Groot 1994). It can be concluded that the socioeconomic policy pursued in the 1980s draws heavily on the future. This does not indicate policy learning, but rather the contradictions in the pursued policy. Dynamic inefficiency is the result. Investments in physical and human capital are sacrificed for the sake of reducing government budget deficits or reducing government debt. This once again underlines the desirability of reintroducing the division between the current account and the cap-

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ital account of the government budget. The current account contains current income (tax receipts) and expenditure (consumption expenditure, including revenues and annual interest burden and depreciation). The balance of the current account determines the change in state capital during a given year.1 The capital account contains expenditure (acquisition of investment goods) and capital revenues (sale of capital goods and shares), which lead to a change in the composition of state capital. In the current account, expenditure is in principle covered by current income. The government was allowed to take out loans for the benefit of the capital account. The underlying thought was that government investment would result in future revenue or sustainable use (such as dikes and roads) and could therefore be financed via future expenditure (interest payments and repayments). In the Netherlands, the 1976 Compatibility Act (Comptabiliteitswet) abolished this division of the government budget into a current and capital account. This was partly due to a shift from an anticyclical budget policy towards a more structural budget policy.2 A disadvantage of this golden rule of finance is that this standard does not take the economic climate into account. The policy is procyclical: government finances increase fluctuations in the economic climate. This is all the more important now that a demand-side policy is virtually impossible within the framework of the EMU. It is also less effective because of the increasing “leak” of effects via an increase in imports abroad. Policy competition between national governments increases in order to attract companies. Structural policy, that is, investments in the supply side, ought to be prioritized (Schram, Verbon, and Van Winden 1997:98–100). At present, negative policy competition is stronger than positive policy competition. Reintroducing the capital account will provide government investment with improved protection against cutbacks. There is a risk that expenditures important to the socioeconomic structure but not regarded as investments, for example, investments in human capital, will be put under pressure if loans are only permissible for expenditures on the capital account. Examples include expenditures on education and training (human capital) and social security expenditures aimed at encouraging harmonious social relationships (social capital: social relationships, norms, and values). On the other hand, ministers could as a result attempt to have their expenditures viewed as investments in order to avoid cutbacks. Society benefits from stable labor relations. A more fundamental approach is to capitalize training costs and introduce depreciation instead of regarding training costs as operational “out-of-pocket” costs. This also requires changes to existing conventions in management accounting and financial accounting (OECD 1994:149). To this end, the government could stimulate companies financially. Consequently, policy learning is not involved. Moreover, policy makers systematically forget or disregard certain long-term effects. However, there are mitigating circumstances (Vollebergh 1999:28–29). We have to accept that measures are often taken when circumstances start getting out of control. This is not due to stupidity but to our limited view of society as a whole, our limited ability to

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predict, and our limited insight into human nature. We learn while acting, which is only possible in a learning climate where it is accepted that mistakes are made and where critical reflection coincides with the willingness to make amendments. It is more practical and cheaper to start earlier and take corrective measures later on. We learn by trial and error, which is fine as long as we learn.

PREVENTING THE SEGMENTATION AND DISINTEGRATION OF SOLIDARITY Social law and the collective labor agreement must play a different role. To guarantee the effectiveness of labor law as much as possible, generic applicability should be affected as little as possible. Increasing labor-market flexibility could undermine social law. From a socioeconomic viewpoint, employees with a flexible employment contract in particular have less power than the employer. There are major differences in employment conditions between employees employed for a limited period and employees with a permanent contract. Employees who are or have been employed for a limited period can be legally protected in three ways. In this respect, De Wolff (1999) advocates a motivational obligation by permitting employment contracts for a limited period only in situations where the temporary nature of an employment contract is given a sound and meaningful motivation by the employer and by allowing the legal position of the temporary employee to converge as much as possible with that of a permanent employee. The third option is to compensate employees for their judicial position, which has on average deteriorated, by offering a special reward, for example. De Wolff (1999) expresses her doubts about the desirability of compensation pursuant to the market, both from a judicial and a social point of view. It may serve as an incentive for concluding such contracts and increase demands made on social security. Furthermore, some disadvantages are either very difficult or impossible to compensate. First, additional market working will enable the strongest parties to exercise their power. This is usually the employer, particularly in a slack labor market. Additionally, an inequality in power between employees will develop. The decentralization of negotiations on employment conditions will increase the tendency towards segmentation and the power of insiders—permanent staff. Asscher-Vonk (1997) correctly points out that inequality of power between employers and employees is an important cause, but not the only one, responsible for inequality, which requires compensatory regulation of social law. Inequality in power within the group of employees can also be a legal reason for the creation of sociolegal regulations. Employment is heterogeneous. Not all employees will acquire a job, receive favorable conditions of employment, get promoted, and receive protection against dismissal. Regulations that even out the inequality in power between employees are also required in addition to regulations that relatively decrease the rights of the employer and relatively increase the rights of employees.

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Formal institutions such as the legal extension of provisions in the collective labor agreements (AVV) to all employers in the industry and the collective labor agreements are also very important with respect to compensation of inequality. Parallel to the changing positions and role of social law, the collective agreement will not only restore the balance of power between the employer and the employee, but will also restore the unequal position between weak and strong employees and between insiders and outsiders at a decentralized level. A strong position of power of employees in the labor process may be the crucial criterion for stable labor relations in the future (Fruytier 1998:85). The famous polder model can only be maintained if a new balance can be formed between the positions of power of employers and employees, considering that the power of numbers can no longer be the weapon of the power of employees. The tightening labor market implies that it is becoming increasingly difficult for unions to protect the interests of vulnerable groups. The power of the strongest employee groups decreases the possibility to conclude protective agreements at a collective level with employers and government. Decentralization of collective agreements threatens solidarity and cohesion in Dutch society. Most collective agreements are still concluded at the business-sector level. However, the nature of these agreements has also changed. The need for uniform agreements is and remains considerable, and a balance of power will have to be provided at the central level. Otherwise, there is a real risk that decentralization will weaken the position of employees who cannot derive power from their position within the work organization. They will be at the mercy of employers and “powerful” employees.

THE NEED FOR AN ACTIVE GOVERNMENT Several issues and areas of policy require an active government. The government must not step back, but should remain strong and active in view of increasing market working and decentralization. Stringent conditions must be imposed that market parties must comply with. An active government is also desirable for several other reasons. The first reason is the new trade theory. A substantial amount of international trade stems from sustainable national differences in sources of raw material, climate, and society. However, trade in industrial products between developed industrialized countries is primarily based on advantages created by branches of industries themselves. One such advantage is positive technological external effects: a strong national industry leads to a national “knowledge infrastructure” that enhances the advantages of industry. A second advantage is economies of scale: a large, extensive market enables specialization and increased efficiency. The fact that comparative advantages are endogenous, that is, they can be created, is a potential argument for government action (Krugman 1996:114–125). Globalization is not really involved; internationalization of economies involves

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regionalization in particular. This is reflected not only in trade flows and foreign investment that are concentrated in the European Union (EU), for example, but also in political decision making (Delsen and De Jong 1998; Kleinknecht 1998; Krugman 1996; Ruigrok and Van Tulder 1995). Consequently, Dutch trade and industry compete primarily with companies in other EU member states. These are countries with similar consultation structures. The Dutch economy is a very open economy. Wage-moderation policy has been implemented in the past to safeguard the competitive position and ensure employment in Dutch industry. The minor increase in wages was looked upon as favorable for export, company profits, and therefore investment. However, wage moderation also hinders labor-saving rationalization. This draws heavily on the future competitive position and employment. As revealed in chapter 2, the Dutch economic reality is such that wage moderation in the 1980s has not increased employment in industry. The Dutch export position has improved, not as a result of lower wage costs, but rather as a result of investment in quality and an increase in productivity, influenced by the strong position of the Dutch guilder. The large and still-increasing part of the service industry in GNP and employment also decreases the relevance of the importance of the growth of world trade and the international capital market. Ruigrok and Van Tulder (1995) therefore conclude that employment in the Netherlands is not primarily threatened by fierce competition from low-wage countries, but by competition from its neighboring countries and by some relatively autonomous technological and demographic developments. A shift should occur from external and numerical flexibility to internal and functional flexibility, whereby both employees and employers invest in a working relationship. Such a shift fits in with the increasing importance of the human capital production factor and the resulting need to educate employees throughout their working life. The government also has an important role to play in this respect. A second reason for an active government is that active labor-market policy needs to be extended further. The Dutch government regards the education and training of adults on the labor market mainly as a task for employers. The government only trains adults who are unemployed and people threatened with unemployment because their knowledge and skills have become outdated as a result of technological developments. Only the Framework Regulation on Training (Kaderregeling Scholing—KRS) has a variation for the employed. In 1990 20 percent of the KRS applicants were employed. In the first half of the 1990s the number of applications for the various training measures considerably decreased following significant cuts in the budget of the public employment office. Evaluation studies of educational measures for the employed and those seeking employment in the Netherlands are scarce or nonexistent (Delsen and Jacobs 1999). Chapter 5 has shown that participation in training during a professional career is not equal for all. Relatively few employees with low qualifications, older employees, employees at smaller companies, and employees with a flexible employment contract participate in training courses. For this reason, it is also very

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important that the government encourage employers and employees to invest in education, for example, through fiscal facilitation and new arrangements for education, including the combination of work and training. Education and training are becoming increasingly important for the competitive position of an economy and for employment. In addition, initial education and the education of employees and those seeking employment improve the match between demand and supply on the labor market. Contemporary wage policy should focus more on the primary distribution of income (creation of income) instead of on the secondary distribution of income (distribution of existing income). The primary distribution of income that is becoming increasingly uniform is mainly the result of employment, which is as high as possible, broad access to education, and extensive investment in human capital. The statutory obligation for employers to spend a certain percentage of the total wage bill on training, whereby companies that spend less have to pay the difference in the form of an additional tax, is an answer to the prisoner’s dilemma and can prevent underinvestment. Belgium, France, Greece, and Spain already have similar regulations. The advantage of a statutory obligation is that even employees who do not fall under a collective agreement are covered. The same applies to companies and branches of industries that do not use or seldom use collective agreements for training agreements. These obligations also ensure that companies do not cut back too extensively on training expenditures during an economic recession (Dercksen and Van Lieshout 1993:98). The right to education can also offer comfort. The introduction of a statutory right to training, in addition to and supplementary to existing collective agreements, encourages employees, especially those in weak groups in the labor market. The implementation of compulsory education can solve the productivity trap, for example, by making benefits subject to participation in training courses relevant to the labor market. People with low skills have profited little from the increase in jobs. In the future, as the workforce and the population continue to age, it will be crucial to significantly reduce the number of inactive people and to shape educational policy, labor-cost policy, and benefits in such a way that they stimulate the employment of low-skilled people. The motto of the current Kok cabinet is “Work, work, and even more work.” The main instruments deployed in order to reach this goal are wage moderation, cost reductions, and employment subsidies aimed at the bottom of the labor market. The bottom of the labor market has become the main issue of the labor-market policy pursued by the purple cabinet. Cost reductions at the bottom of the labor market—for low and unskilled people or for the recruitment of the long-term unemployed—are not always effective because some of these people would have been hired even without subsidies and some would have replaced active employees, as indicated in chapter 3. Two policy options are available for realizing reintegration goals, namely, compulsory and voluntary employment (Delsen 1996b). The Netherlands has opted for the latter. The point of departure was and is that the (re)integration of the disabled people into the employment process, for example, can only be

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achieved with the voluntary cooperation of employers. Chapter 6 has revealed that the pursued policy of integration, which offers financial incentives such as market working and premium differentiation, has not had the desired effect. In fact, it has had the opposite effect on the elderly, the long-term unemployed, and disabled individuals. The question that is then raised is whether the introduction of an obligatory quota system will have the desired effect under present conditions. A quota system excludes the threat of screening by linking the percentage to the stock and not to the flow of disabled individuals. Whether the quota system is an effective means for further integration of disabled employees in open employment depends largely on the structure of the quota obligation and the existence of an effective registration system. A quota can be divided into occupational groups, groups of disabled people, and branches of industry or employers. The quota obligation can also be shaped in such a way that employers who surpass their legal obligation qualify for a concession. Employers who do not fulfill their legal obligation will be fined. Surpluses will be deposited into a special reintegration fund. The German quota system, which compels employers to ensure that severely disabled people comprise 6 percent of their staffing levels, can serve as a model. This system is reasonably effective. The majority of companies (of those with more than 15 employees) fulfill or surpass their obligations. Moreover, registration with the employment offices does not lead to insurmountable stigmatization (Delsen 1996b). A quota system is procyclical. As a result, the introduction of such a system in a situation of high and increasing unemployment appears desirable. A quota system can be introduced in the current situation, which is characterized by an improving economic climate with low and decreasing unemployment figures and a strong increase in job numbers. Under present circumstances, the introduction of an obligatory quota is extremely suitable for permanently improving the prospects of integrating disabled people. In this respect, obligatory employment is an important supplement to the current reintegration policy of the purple cabinet. The third reason for an active government is that there is a need for a more active and aggressive industrial and sectoral structure and environmental policies. The Netherlands is not the most suitable country for particular types of production due to natural circumstances (population density, environmental quality). Furthermore, wage costs in a number of emerging regions are significantly lower. The Netherlands does offer a natural advantage to energy-intensive companies thanks to its natural gas sources. However, the way in which this scarce commodity is used is currently inefficient: a considerable volume of natural gas is wasted in greenhouse horticulture coupled with emissions. Products can be cultivated in greenhouses without the use of natural gas in the south of France, Spain, and Portugal. Sooner or later, greenhouse horticulture will no longer be economically viable in the Netherlands. Due to excess supply manure originating from intensive livestock breeding in the Netherlands will never be processed profitably. Manure generates income in countries such as France. This

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does not mean that Dutch companies should miss out on this activity. The Dutch can relocate their companies to Mediterranean countries where the circumstances for such companies are more favorable. According to Van de Ven and De Kok (1994), natural gas must be used more for reinforcing the production structure and less for export. The answer would not be more protection but a more offensive policy. It would be more favorable for the Netherlands and Dutch entrepreneurs if industries themselves would relocate on time instead of being forced out of the market by third parties. The government should switch to an active emigration policy for agriculture, livestock breeding, and horticulture towards other European countries. This way, the Netherlands can maintain and internationalize its knowledge advantage. The national “soft” sector and highquality knowledge-intensive sectors in particular offer new forms of employment. The relative environmental pressure is also decreasing. But are we not burdening other countries with our problems? The only solution would be to impose environmental levies on polluting activities carried out by Dutch agriculture, industry, and distribution (Ten Raa 1998). The effect of consumption is sheer environmental profit: a shift towards cleaner products. The effect of production is reallocation abroad, which will improve the terms of trade. This will enhance local purchasing power but will be detrimental to the local environment. The “polluter pays” principle should be used consistently wherever possible. The integration of sustainability as a criterion in several fields of policy should be given priority. There appears to be a certain degree of consensus that the present economic system, in which raw materials are becoming scarcer and environmental quality is decreasing further, can no longer be maintained, particularly when this system cuts an increasing number of jobs and does not offer young people the opportunity to find meaningful jobs. We need a model in which employment becomes cheaper and environmental costs become higher—by means of energy and environmental levies, for example. Tradable emissions are another part of the solution. In this way, both employment and the environment are served. This policy can function as an alternative to the present policy in which employment and foreign investment are attracted via low wages and subsidization. Government participation in companies is not the best solution. After all, a “natural law” exists within multinationals: each company concentrates its research and development activities in its motherland, and if problems arise, foreign branches bear the brunt of the first blows. Consequently, when foreign investment is attracted, the added value for the Netherlands should be borne in mind. Dutch investment abroad also allows better control of export markets.

BASIC INCOME WITH A RIGHT TO WORK To date, part-time and flexible jobs are usually available for lower job levels, which may result in an income below subsistence level. A significant part of em-

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ployment growth during the past few years involved marginal jobs, that is, agency work, fixed-term and on-call contracts, and small part-time jobs. It is expected that the number of marginal jobs will continue to increase in relative and absolute terms, partly due to the influence of the EMU. The EMU intensifies competition and hence the growth of marginal jobs. Moreover, temporary workers and small part-time jobs are not always fully covered by employment protection law and the social security system. Cuts in social security will also contribute to this increase in the number of flexible jobs, as revealed in chapter 3. This means that loss of employment will increase the number of supplemental benefits up to subsistence level. The Netherlands will inevitably be confronted with the problem of a guaranteed minimum income, separate from paid employment. In fact, this already is the case in the Netherlands. The General Social Assistance Act (Algemene Bijstandswet—ABW) of 1996 is complementary to a person’s own earnings, those of his/her partner, or personal savings; that is, earnings and capital tests apply above a specific level of income and assets. This complementary safety net character of social assistance has been emphasized by the 1996 act. The ABW focuses on the provision of an income at minimum subsistence level to all Dutch residents, including foreigners with a valid residence permit and “tolerated” foreigners (‘gedoogden’), who do not have sufficient means of income to support themselves. For married couples, the national basic standard is 100 percent of the net minimum wage; for singles it is 50, percent and for single-parent households it is 70 percent of the net minimum wage. In the new ABW, the central attention is shifted to the outflow of benefit claimants to regular jobs. Municipalities are obliged to activate benefits claimants in order to let them (re)enter the labor market. All assistance-benefit claimants now have to look for paid work and have to accept paid work when it is offered. People should do everything they can to support themselves. Partners of unemployed people should also, if possible, look for work. Medical and social circumstances are taken into account here. A person will only receive social assistance after all efforts to be included in the labor process have failed. Only some groups are exempted from the obligation to accept paid work. Single parents with children up to 5 years of age and unemployed persons who are aged 571⁄ 2 or older are not obliged to look for work or accept work. However, in reality, some earnings on the side are allowed, for instance, from a part-time job. To promote substitution of a social assistance benefit for work, municipalities may offer a premium. This premium varies between beneficiaries, depending on an individual’s situation and the municipality in which he/she lives. For instance, earning an income of Dfl 350 net, they are allowed to keep between 250 net and 52.50 net. This implies not only legal inequality, but also that there is a basic income present that cannot be touched by the Municipal Social Welfare Offices (Gemeentelijke Sociale Dienst—GSD) that implement the ABW. Another problem confronting the Netherlands is the low participation in employment. The extent to which the potential labor force is used is still consider-

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ably lower than in other EU member states. Increasing participation in employment should remain the central goal of the Dutch socioeconomic policy. This not only will benefit prosperity, but will also make it easier to meet other objectives of socioeconomic policy. An activating social security system and the obligation to accept work necessitate an active labor-market policy. Four arguments are generally mentioned for the introduction of a basic income: redistribution of employment, leveling of incomes, simplification of the social security system, and flexibilization of the labor market (Delsen 1997). We will restrict ourselves to a number of issues linked directly to the employment issue. A basic income gives employees greater control over working hours and entails a definite right to income independence. It also gives individual employees a certain bargaining power. A basic income enables a significant number of requisite new jobs to be created at lower levels for a salary below subsistence level while maintaining the minimal social standard. A basic income also stimulates employment-intensive activities and entrepreneurship. It encourages part-time employment, freelance employment, and on-the-job training since the entire income no longer depends on the number of working hours. This is especially relevant to individuals with a low income. The social protection of atypical employees improves considerably. The unemployed are always financially rewarded if they seek paid work. A basic income can act as a social safety net, providing protection against social exclusion. Due to the absence of a means test, a basic income actually helps low-skilled and unskilled persons and the longterm unemployed to escape the poverty and unemployment traps because it provides an incentive to find a job to supplement this basic income. The productivity and pension traps are also eliminated. Segmentation is therefore avoided. This is an important reason for politics to embrace the basic income. Moreover, this makes training and parental leave more attractive. Dynamic efficiency increases as well. Another advantage of the basic income is that the income risk associated with changing jobs decreases. This improves employment mobility, and economic dynamics increase. Flexibility in wage costs also increases. It enables employers to adapt employee numbers as well as wages to changing market circumstances since there is less resistance among employees than when their income guarantee would be threatened. Reaching market-clearing wages improves allocative efficiency and leads to full employment and greater economic growth. The current pensionable age is meaningless: there is no longer a difference between 65 and 65. The introduction of a basic income can replace specific measures such as work-experience projects, wage-cost subsidies, and working while retaining a benefit. Distortion of budgets or competition should not be feared. After all, the employed will also receive this basic income. Also, the environment may profit from a basic income. Once the well-being of the neediest is divorced from the question of economic growth, and with it the moral justification of economic expansion, society can begin to concentrate on questions of sustainability (Clark and Kavanagh, 1996).

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Table 8.1. Judgement of Several Social Security Systems in the Netherlands, 1993

Source: Koopmans et al. 1997:132.

The following two options are available for financing the basic income: abolishing part of government subsidies, abolishing the social security system, increasing direct and/or indirect fees, and introducing a levy on business capital. Employment will be stimulated if added value is taxed instead of employment. Despite these arguments in favor of the introduction of a basic income, figures issued by the Social and Cultural Planning Office of the Netherlands (Sociaal en Cultureel Planbureau—SCP) in 1993 (see Table 8.1) indicate that a large majority (65 percent) of Dutch people oppose the basic income. The introduction of a basic income would mean that policy makers should acknowledge that it is no longer possible to offer the entire labor force a paid (fulltime) job. It also means abolishment of the obligation to look for employment and the end of the right to work. In my opinion, this right to work—a component of the Universal Declaration of Human Rights of the United Nations— should be upheld, no matter what. Inactivity is unevenly divided. Chapter 3 indicated that a paradox exists in the Dutch labor market. Certain groups in the labor market are permanently excluded from paid employment and rely on social benefits. There is also a considerable number of hidden unemployed. At the same time, another section of the labor force works overtime on a structural basis, and positions are created that are very difficult to fill. From an economic point of view, this is waste and goes hand in hand with social problems. The government should guarantee a basic amount of work, in other words, a part-time job for everyone in the labor force. The public sector acts as an employer in the last resort. Unemployment is defined in relation to this guaranteed amount of part-time work. The basic income is not subject to personal income and/or wealth. Here, the obligation to carry out a minimum amount of paid work is explicitly chosen. Part-time employment—part of a day, month, and/or year—will become the new norm. The government guarantees a parttime job, which in combination with the basic income amounts to the subsistence level for an individual. Those unwilling to accept a part-time job in the private or public sector forgo their right to the partial basic income. A supplement amounting to 100 percent of the subsistence level for single people is applicable to people who cannot work (elderly and disabled people). Other people

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will receive less, for example, a partial basic income of 50–60 percent of the social subsistence level. They will have to earn their own income or receive financial support from other family members. This can be realized by accepting a part-time job. Family values are encouraged. There should be an explicit equalization of regular paid work and unpaid socially useful activities. Rearing young children, taking care of elderly or ill relatives, or performing voluntary community services could be considered real jobs that provide an income. Providing an individual with a basic amount of work, at least part-time, is advantageous to employers, companies, and society as a whole. The individual has an opportunity to participate socially and economically. Exclusion is prevented, and the right to work is maintained. Financing the basic income is made simpler. International research has shown that part-time employment leads to higher participation among men and women, has a positive effect on the degree to which the production factor of labor is used, and has a significantly positive effect on productivity (Delsen 1995). Fewer financial sources are required for people who are excluded. The burden of taxation and labor costs will decrease, which will have a positive effect on employment. Full employment and a high employment rate are preconditions for a sustainable welfare state and a maintainable social security system, as revealed in chapter 6. Whether these conditions have been met depends on the economic situation and on the system itself. If the system fails to adequately encourage those dependent on benefits to resume work, the safety net will turn into a hammock. There is a moral hazard. If benefits are too generous and/or too easily accessible, they will have a “magnetic” effect. Trommel (1999) states that the right to social security should be accompanied by the obligation to work. This “workfare” can overcome the aforementioned labor-market paradox. Unemployed and disabled individuals who receive benefits and who can carry out work adapted to their situation are used to satisfy the unfulfillable needs of society. Individuals who refuse work offered to them are not entitled to claim benefits. Workfare appears to be an important way to deploy large groups of people at the bottom of the labor market in the short term (Koopmans et al. 1997:132). The poverty trap, the unemployment trap, and social exclusion will be avoided. The concealed unemployment reserve in early-retirement schemes (VUT), disability insurance (WAO), and unemployment insurance (WW) can be activated. Workfare has not convinced the social partners. Employers are wary of the extension of the collective sector and competitive distortion. Unions point towards increasing competition in the labor market, which is exerting pressure on conditions of employment. On the other hand, a considerable group is and will remain dependent on benefits without workfare, resulting in substantial costs. The 1980s lacked the basis for highlighting the obligation to work (Trommel 1999): government pressure in the form of unemployment relief work does not fit in well with Dutch corporativistic traditions. Moreover, the government lacks the instruments to persuade the social partners to limit improper use of the social security system. However, decentralization, flexibilization, and increased

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market working require a government that acts with greater power. The tide changed at the end of the 1980s. The government started to view itself more and more as the actor that bears final responsibility (Trommel 1999). The Youth Work Guarantee-Law (Jeugd Werk Garantiewet—JWG) came into force in 1991 during the third Lubbers cabinet. The JWG is a type of workfare for graduates. Under this act, municipalities are obliged to offer graduates a job for 32 hours a week. Declining such a job will entail a cut in benefits. Workfare is clearly supported by 59 percent of the Dutch population. The unemployed and disabled are obliged to carry out work that is beneficial to society and are paid the minimum wage (see Table 8.1). The minisystem has just as many proponents as opponents. Under this basic system of social security, the government limits itself—by analogy with the General Old Age Pensions Act (Algemene Ouderdomswet—AOW)—to granting benefits at a guaranteed minimum income, and wage-related benefits are replaced by a uniform basic allowance totaling 70 percent of the net minimum wage. The poverty trap will continue to exist since any personal income will be cut from the benefit payment. Consequently, more breadwinners will turn to social assistance for supplements up to 100 percent. The new concept of full employment proposed here consists of the introduction of the legal right to a basic amount of work, the right to at least a part-time job for adults, combined with the stipulated right to a (partial) basic income guaranteed by the government. In this way, the current proposal differs considerably from previous proposals involving the establishment of a basic income or workfare in the form of individualized social assistance benefits with a job guarantee and an obligation to carry out paid work. The advantages of both systems are combined. The right to a basic amount of work and the obligation to work part-time—the carrot and the stick—increase the feasibility of a partial basic income. A stipulated partial basic income and a basic amount of work are two sides of the same coin: both are complementary. Simulations of the proposal have been carried out by the new applied general equilibrium (AGE) model of the Dutch CPB National Bureau for Economic Policy Analysis. The AGE model is the stripped-down version of MIMIC, the applied general equilibrium model of CPB.3 The main simplifications of the MIMIC model concern the exogenous labor supply, no physical capital, no schooling decision, and no division by sector. The stripped-down version of MIMIC allows researchers to keep the results tractable and to focus on the crucial mechanisms that play a role in the impact of active labor-market policies (ALMP) (see Jongen, Van Gameren, and Graafland 2000).4 The results of the simulation concern a combination of the following measures (Graafland and Jongen 2000): 1. A 25 percent reduction in social assistance benefits for recipients who are, in principle, capable of working

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2. A pay cut in job-creation posts in the public sector (relief jobs) from the minimum wage to the “old” subsistence level, and a reduction of working hours in such jobs from full-time to part-time (on average, 16 hours a week) 3. A tax credit of 25 percent of the subsistence level 4. A major increase in the number of job-creation posts available in the public sector for those entitled to social assistance who are required to seek employment 5. A reduction in the gross minimum wage, without affecting the guaranteed minimum income, so that the net income at the minimum level inclusive of the tax credit is equal to the “old” net minimum wage 6. Compensatory taxes, with the government varying the average tax base in order to maintain a balanced budget

Measures 1–3 increase the gap between income from regular work and income from social security assistance and relief jobs. This will encourage those entitled to social security and those in relief jobs to actively seek regular employment. The remainder of those entitled to social security assistance will be given the opportunity to take a relief job in the public sector (a 13-hour so-called Melkert job providing job experience for the long-term unemployed) (measure 4). This measure once again limits the difference in income and prevents social exclusion. The gross minimum wage may be cut as a result of the reduction in contributions (measure 5). Employers will be encouraged to take on job seekers more quickly. The measures will be funded from compensatory taxation (measure 6). The results of the simulations are presented in Table 8.2. The simulations indicate that unemployment will fall substantially and production will increase considerably. Also, the inflation rate drops. The unskilled and low-skilled workers in particular will benefit from the plan both in terms of job growth and in their purchasing power. Private-sector employment of unskilled workers increases by more than 8 percent. Their unemployment rate drops by 6 percentage points. The net real income of the unskilled improves by more than 9 percent. The simulations also show that the proposal is budget neutral. In fact, the average tax burden will fall. This proposal turns out to be in its effects a kind of “Robin Hood” type of income and tax policy: the lower end of the labor market benefits considerably more than the upper end of the labor market. This new concept of full employment is not only economically efficient but also socially desirable. It stimulates flexibility in companies and in the labor market. However, from a policy point of view, it is even more important that the right to part-time work in combination with the right to a basic income increases employment and that social and economic exclusion is neutralized. In other words, it is a form of active labor-market policy and activating social security designed to improve the position of individuals who have been excluded from paid work due to the current social security system, the power of insiders at the decentralized level, and current employment policy.

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Table 8.2. Simulation Results of Proposal

aGross

labor cost per unit of labor, excluding search costs. in the private sector. cEmployment including additional jobs (in persons). dThe stock of unemployment plus the stock of additional jobs divided by the labor force (“inactivity rate”). eIn billions of guilders. bProduction

NOTES 1. The current account can be compared to the statement of profits and losses of any private enterprise. The capital account can be compared to the system of gains and losses, in which depreciation represents the debiting of the loss in value of possessions as a result of economic or technical wear, even though this depreciation does not entail immediate costs. By the time the capital goods have been written off, the loan has been redeemed and new investment goods can be purchased with the loan.

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2. The division between current and capital accounts still exists in the budgets of the lower authorities—municipalities and provinces. The golden rule for financing entails in this case that the only justified loans are those for investments (capital expenditure). Loans for tax reduction or for transfers are not permitted. Current expenditure should be covered by current revenue. 3. MIMIC is the abbreviation of MIcro Macro model to analyze the Institutional Context (see Gelauff and Graafland 1994). 4. The AGE model is calibrated on data for the Dutch labor market in 1993. The flow model is calibrated for three levels of education: high-skilled, low-skilled, and unskilled.

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Index

ABN Amro Bank, 91, 151 Active labor market policy, 22, 44 – 46, 196, 201, 204 – 205 Act on the Extension of the Mandatory Continuation of Payment of Wages by the Employer (Wet Uitbreiding Loondoorbetaling Bij Ziekte—WULBZ), 143, 148 – 149 Act on the Fiscal Treatment of Pensions (Wet Fiscale Behandeling van Pensioenen), 173, 175 Act on the General Application or Inapplicability of Collective Labor Agreements (Wet op het Algemeen Verbindend en Onverbindend Verklaren van Collectieve Arbeidsovereenkomsten—Wet AVV), 13, 19, 195 Act on Linkage with Optional Deviation (Wet Koppeling met Mogelijkheid van Afwijking—WKA), 31, 50 Act on Medical Examinations (Wet op de Medische Keuringen—WMK), 152 Act on Premium Differentiation and Competition in the Disability Insurance

Scheme (Wet Premiedifferentiatie en Marktwerking bij arbeidsongeschiktheidsverzekeringen—PEMBA), 150, 152, 153; privatization, 149. See also premium differentiation Act on Reducing Claims on the Disability Regulations (Wet Terugdringing beroep op de arbeidsongeschiktheidsregelingen—Wet TBA), 150 Act on Reducing the Disability Volume (Wet Terugdringing Arbeidsongeschiktheidsvolume—Wet TAV), 149 Act on Reduction of Sick Leave (Wet Terugdringing Ziekteverzuim—Wet TZ), 147 – 149 Actuarial fairness, 138–139, 142, 160, 164, 171 Adverse selection, 60, 139–140, 152, 164 Agency work, 91, 99, 200; agency staff, 84, 88, 91, 95, 99–101, 103, 106, 155; agency workers, 41, 62–63, 152–153. See also temporary employment Aging, 70, 97, 160, 162–166, 169, 171, 178, 182 – 183, 190; double, 21, 160 – 161; personnel, 132

226

Index

AKZO Nobel, 90, 93 – 94, 97, 117, 126 Anglo-Saxon countries, 75 – 76, 112, 121, 133, 141, 167, 170 Anglo-Saxon model, 3, 4, 8, 9, 22, 31, 118, 121, 133 – 134, 178, 186, 189; enterprises, 38. See also shareholder capitalism “Anorexia strategy,” 91 Austria, 119 Average pay plan, 167, 169, 175, 177, 182 Back service, 164, 167, 169 – 171, 177 Basic income, 22, 199 – 204 Basic pension, 162 – 166, 175. See also General Old Age Act Belgium, 2, 4, 25 – 29, 35, 39 – 49, 46, 56–59, 68, 71, 75 – 78, 113 – 114, 121–122, 141, 178 – 180, 197 Beveridge, William, 141 Bismarck, Otto von, 141 Breadwinner model, 47, 75; principle, 168 Budget deficit, 2, 24, 26 – 27, 192 Buurmeijer, Flip, 146 Christian National Union (Christelijk Nationaal Vakverbond—CNV), 1, 128 Collective bargaining, 2, 97. See also wage negotiations Collective expenditure, 4, 10, 23 – 25 Collective Labor Agreement (CAO), 12, 18, 19 – 20, 29, 31 – 32, 37, 39, 55, 57 – 59, 70, 73, 97, 105, 110 – 112, 117, 120, 124 – 125, 181, 183, 186 – 188, 194 – 195; à la carte, 18, 186; framework (raamwerk-CAO), 125, 186; layered (gelaagde CAO), 125; tailor made, 115; umbrella (mantel-CAO), 125 Collective Labor Agreements Act (Wet op de Collectieve Arbeidsovereenkomst— CAO), 13 Committee for the Supervision of Social Insurances (Commissie Toezicht Sociale Verzekeringen—CTSV), 146, 153 Company agreement (ondernemingsovereenkomst), 127 Company training, 111, 113 – 115, 133, 190. See also training

Compatibility Act (Comptabiliteitswet), 193 Competitive position, 27, 32, 49, 130, 188, 190, 196; competitiveness, 13, 38–39, 190 Compulsory participation in a company pension fund act (Wet betreffende verplichte deelneming in een bedrijfspensioenfonds—Wet BPF), 173 Consultation(s), 5, 7, 10–11, 14–18, 39, 107, 109, 121, 127, 140, 185–186, 188 – 189; autumn, 15; central level, 12, 16; contract theory, 86, 182; economy, 38, 121; institutions, 10, 114, 134; spring, 15 Consultative economy, 15–17, 29, 109, 132, 190 Coordination mechanisms, 6–8 Corporatism, 7, 118, 121; corporatist countries, 76, 118, 120, 124, 186; corporatist organizations, 14, 116–117, 119, 121, 123 – 124, 134, 186; corporatist wage formation, 72, 115, 123–124, 128; Dutch corporativistic tradition, 203; theory of corporatism, 117, 119. See also Rhineland model CPB: Netherlands Bureau for Economic Policy Analysis (Centraal Planbureau), 14 Culture, 9, 11, 14, 133, 140, 185; change in, 49, 145; corporate, 98; Dutch culture, 4, 10 – 11, 106, 141, 185; early retirement, 179; organization, 105 Decentralization, 11–12, 17–18, 20, 60, 107, 117 – 118, 120, 122–125, 134, 186 – 188, 194–195 Defined benefits, 167–168 Defined contributions, 21, 170–171, 177 – 178, 183 Dejuvenation, 21, 97, 160, 162, 165, 171, 182, 190 Delft Instruments, 91 Demographic risk, 161, 166 Demotion, 173, 182–183 Denmark, 25 –26, 75–77, 113, 118, 143 Deregulation, 2, 5, 18, 19, 37, 39, 63–64, 191; results, 40

Index

Diploma-inflation, 55, 111, 113, 192 Disability Benefit Act for the Young Handicapped (Wet Arbeidsongeschiktheidsvoorziening Jonggehandicapten— WAJONG), 142 – 143, 146 Disability Insurance Act (Wet op de Arbeidsongeschiktheidsverzekering— WAO), 11, 21, 24, 61, 135, 143, 147, 150–151, 154, 178 – 179, 181; concealed unemployment, 203; gap, 150; privatization, 21, 147, 149 Disability Insurance Act for the SelfEmployed (Wet Arbeidsongeschiktheidsverzekering Zelfstandigen— WAZ), 142 – 143, 146 Disability risk, 15. See also Disability Insurance Act; work inability Dismissal protection, 129 – 131, 156, 186; preventive, 186; preventive dismissal test, 109, 128 – 131; repressive dismissal test, 129 – 130 Displacement, 55, 113, 192 DNB: De Nederlandsche Bank, 2, 14, 32. See also Netherlands Bank Doorn Agreement (September 1998), 188 DSM, 94, 105 Early retirement, 46, 48, 52, 97, 138, 157, 173, 175, 178 – 179, 181. See also voluntary early retirement Economic and Monetary Union (EMU), 2, 3, 186 – 188, 193, 200; criteria, 4, 16 Economic dynamics, 38, 201 Economic growth, 1, 28, 31, 33, 37 – 39, 49, 73 – 74, 80, 137, 158, 188, 190, 192, 201; labor-intensive, 28; sustained, 64 Economic order, 3, 6 – 8, 11; Dutch, 9, 38, 186; optimal, 7; types, 9 Efficiency, 100, 105, 107, 115 – 116, 123, 125, 135 – 137, 140, 151, 158, 161, 166, 174, 184, 186, 195; allocative, 107, 113, 115, 118, 123, 130, 134, 136 – 137, 174, 190, 201; considerations, 86, 105, 137, 140; dynamic, 107, 109, 110, 115, 117, 130, 134, 174, 190; dynamic inefficiency, 117 – 118, 192, 201; internal, 136; social, 109 – 110, 130, 140 Efficiency wage theory, 73, 86

227

Employability, 20, 43, 64, 84–85, 98–99, 107, 158, 181, 183, 192; lifelong, 92 – 93, 108, 114, 190 Employers’ organizations, 12, 101, 120, 134; organization of employers, 7, 14, 141. See also VNO-NCW Employment growth, 40, 65–66, 72, 81, 88, 101, 106, 157. See also job growth Employment miracle, 20, 22, 40, 49, 54, 63, 81 Employment participation, 48, 56, 66, 68, 70, 73, 179, 181 Employment policy, 7, 16, 205 Employment protection, 63, 101, 130, 155 – 156. See also dismissal protection Employment security, 49 EMU. See Economic and Monetary Union Endogenous growth theory, 73–74, 142, 158, 192 Environmental quality, 20, 51, 78–81; environmental pressure, 20, 51, 69, 78 – 81, 199. See also sustainability ETUC (European Trade Union Confederation), 188 Euro, 3, 186 – 188 European integration, 186 European Union (EU), 1, 29, 52, 56, 87, 100, 113 – 114, 128, 143, 162, 196; member states, 2, 3, 35, 41, 88, 129, 145, 196, 201 Executive Institutions (Uitvoeringsinstellingen—UVIs), 146, 151 Experience rating, 138, 147, 154–156. See also premium differentiation Extraordinary Decree on Labor Relations (Buitengewoon Besluit Arbeidsverhoudingen—BBA), 14 External economic effects, 49, 121, 137 – 138; negative, 79, 110; positive, 37, 111 External mobility, 69, 183 Final pay plan, 167–170, 175, 177, 181–182 Finland, 25, 113, 122 First pension pillar, 163, 171. See also basic pension; General Old Age Act Fiscal Plan 21st Century (Belastingplan 21ste Eeuw), 24, 77, 172

228

Index

Flexibility and Security Act (Wet flexibiliteit en zekerheid), 63, 131. See also flexicurity Flexibilization, 3, 33, 38, 64, 86, 90, 98, 103–15, 107, 186, 191, 201, 203; business economic limits, 100; external, 88, 101, 107 – 108; functional, 107 – 108; internal, 88, 92, 107 – 108; labor conditions, 105; long-term effects, 100; numerical, 63, 101, 108; short-term effects, 98; types, 83 Flexible firm, 85 – 86; theory, 83, 85, 95 Flexible jobs, 33, 41, 62 – 63, 66, 68, 81, 88–91, 199 – 200. See also flexible labor contracts; marginal jobs Flexible labor contracts, 89, 103, 107, 117, 155. See also flexible jobs; marginal jobs Flexible remuneration, 98, 104, 106; effects, 104; flexible payment, 97, 105; paradox, 106; performance related payment, 105 – 106, 117, 127. See also incentive payment Flexicurity, 63, 131. See also Flexibility and Security Act (Wet flexibiliteit en zekerheid) FNV. See Netherlands Trade Union Confederation Foundation of Labor (Stichting van de Arbeid—STAR), 1, 14 – 17, 73, 92, 175, 192 Fourth pension pillar, 21, 161, 178, 182–183 France, 2, 4, 22, 27, 64, 76 – 77, 122, 164, 166, 197 – 198. See also Latin model Free riders, 13, 151; behavior, 79, 112, 137, 177; effects, 37; problem, 20, 110–111, 128, 133, 137, 164 Full employment, 22, 52, 141, 145, 201, 203–205 Funding, 21; full, 142, 146, 164, 166, 173, 183; partial 166, 183; savings fund, 157, 166 General Child Allowance Act (Algemene Kinderbijslagwet—AKW), 143 General Disability Act (Algemene Arbeidsongeschiktheidswet—AAW), 143, 150

General Exceptional Medical Expenses Act (Algemene Wet Bijzondere Ziektekosten—AWBZ), 143 General Old Age Act (Algemene Ouderdomswet—AOW), 49–50, 142–143, 163 – 165, 175, 178, 204; benefit, 165 – 166, 170–171, 184; franchise, 165 – 166, 171, 184; gap, 173; premium, 165, 171, savings fund, 166. See also basic pension; first pension pillar General Social Assistance Act (Algemene Bijstandswet—ABW), 78, 140, 143, 200 General Surviving Relatives Act (Algemene Nabestaandenwet—ANW), 143 General Widows and Orphans Act (Algemene Weduwen- en Wezenwet— AWW), 50 Germany, 2, 4, 8, 11, 25–27, 29, 32, 39 – 40, 56 –59, 68–69, 71, 75–77, 88, 113 – 114, 118, 120–121, 124, 141, 143, 160, 162, 164, 173, 178, 188; east, 35; reunion of, 35, 49; west, 46–47, 67, 122 Gini coefficient, 69–71, 81–82. See also income distribution Globalization, 38, 73, 159, 190, 195; interntionalization, 108, 187, 195; regionalization, 196 Golden rule of finance, 193, 207 Government expenditure, 19, 27, 191 Government finances, 2, 4, 23–24, 193 Greece, 77, 197 Growth and Stability Pact, 25, 188 Health Insurance Act (Ziekenfondswet— ZFW), 143 Heineken, 94 Helsinki Agreement (July 1999), 188 Hidden unemployment, 51, 54, 202; concealed unemployment reserve, 203 Holdup problem, 6, 20, 74, 115–119, 123, 132 – 133, 156, 182 Hysteresis, 43, 52. See also unemployment trap Human capital, 43, 52, 99, 103, 108, 170, 12, 196; accumulation of 115, 170; company specific, 156, 182; competitive factor, 190; general, 99; investment in,

Index

53, 64, 73, 77, 104, 110 – 112, 117, 190, 192, 193, 197; starts, 99; theory, 99, 117, 182; underinvestment 115, 197 Immigrants, 52, 54 – 55 Inactivity 22, 46, 68, 185; distribution, 50, 202; inactivity/activity ratio (i/a ratio), 46–47, 50, 69, 76, 145; problem, 21, 160; remunerated, 39 Incentive payment, 97 – 98, 105 – 106. See also flexible payment Income distribution, 51, 70, 73 – 74, 81, 140, 158; primary, 69, 73, 142; secondary, 69. See also Gini coefficient Income inequality, 69 – 73. See also polarization Incomplete contracts, 5 – 6, 115, 132 Individualization, 14, 18, 38, 97, 127, 161, 170 Industrial conflicts, 11 Industrial Insurance Board (Bedrijfsvereniging), 141, 146 – 147 Industrial Organization Act (Wet op de Bedrijfsorganisatie), 14 Industrial relations. See wage negotiations; collective bargaining Inflation, 1, 25, 29, 33 – 34, 70, 123, 138, 142, 159, 164, 169; rate, 30, 44, 159, 205; risk, 164, 167, 169, 171; unexpected change, 124. See also NAIRU Information asymmetry, 6, 79, 98, 136– 139, 176 ING Bank, 151 Insider-outsider problem, 65, 98, 124, 149, 152 – 153, 155, 157; differences, 125; effect, 128; theory, 86 Insiders (incumbent personnel), 22, 65, 98, 119 – 120, 124, 128, 134, 150, 155, 160, 195, 205; effect, 125 Institutional changes, 17, 20, 191 Institutional economics, 6 Institutions, 1–9, 11–12, 18–19, 38, 70, 72, 74, 109, 112–113, 121, 128, 130, 135, 146, 183, 186, 189–191; consultative, 4, 10, 14, 16, 20, 100, 109, 113–114, 133–134, 190; Dutch, 11, 39, 79; formal, 195; labor-market, 11–12, 20, 109, 125, 159, 189; pension funds, 176

229

Interest rate, 35, 168, 177 Internal mobility, 94–95 Investment risk, 171 Italy, 22, 27, 77, 122. See also Latin model Job competition theory, 55, 192 Job growth, 205. See also employment growth Job mobility, 63–65; external 64, 94, 111; internal 94 Job pools (banenpools), 44–45, 54 Job tenure, 93 Job uncertainty, 66, 112 Kok government, 4, 24, 37, 143, 150, 153, 166, 181, 186, 198. See also purple government KPN Telecom, 90–91 Labor Act (Arbeidswet), 59 Labor-income share of companies, 2, 27 – 30, 34, 50 Labor market paradox, 20, 57, 202–203 Labor pools, 63, 97 Labor productivity, 13, 32–33, 50–51, 62, 66 – 68, 73 –74, 93, 100–101, 105–106, 130, 158, 160, 189, 197; growth, 66–67, 81; level, 68–69, 81, 125; per hour, 6869; per man-year, 67–68; per person, 52, 62 Labor relations, 10, 14–15, 18, 61, 64, 89 – 90, 92, 107, 121, 124, 159, 174, 186, 191, 193, 195; reform, 191 Labor unions, 7, 13, 17, 19, 72, 105–106, 117, 119. See also trade unions Labor union tenner (vakbondstientje), 13, 120 Latin model, 22 Lawyer density ratio, 122 Legal extension of collective labor agreements, 19, 37, 111, 114, 116, 119 – 120, 133, 173, 186, 195. See also AVV Linkage, 50, 70–72, 165; delinkage 69 – 70, 72, 78. See also Act on Linkage with Optional Deviation LISV: Landelijk Instituut Sociale Verzekeringen, 146

230

Index

Longevity risk, 164, 168, 171 Long-term unemployment, 43 – 45, 49, 54–55, 76, 130, 145, 154 – 157, 160, 179 Lubbers government, 2, 4, 11, 23, 37, 143, 186, 191, 204 Luxembourg, 35, 43, 77

New Course (Een Nieuwe Koers) (central accord 1993), 17, 73 Non-market clearing wage differentials, 34, 118, 123, 134. See also wage differences Norway, 43, 76

Management style, 89, 107; and financial management, 90 Marginal jobs, 63, 67, 91, 200 Market failure, 37, 79, 100, 114, 130, 190; sources of, 111, 134 Market forces, 31, 37, 39, 49, 135, 140, 147–149, 154, 159 – 161, 174, 176 – 177 Market mechanism, 7, 13, 38, 115, 118, 157, 186 MDW-project: “Market working, deregulation and quality of legislation” (Marktwerking, deregulering en wetgevingskwaliteit), 5, 37, 39 Melkert jobs, 44, 54, 55 Minimum benefit, 23, 72, 74 Minimum allowance, 143, 156 Minimum wage, 23, 27, 31, 39, 44 – 45, 50, 52 – 53, 72 – 74; freeze, 68, 73 Minisystem, 138, 202, 204. See also social security Moral hazard, 137 – 138, 140, 146, 156–158, 169, 171, 177, 203 Mortgage interest rate, 35 – 36, 70 Municipal Social Welfare Office (Gemeentelijke Sociale Dienst—GSD), 200

Oil crises, 1, 145 Old-age dependency ratio, 162, 165 Old-age pension See General Old Age Act On call labor, 39, 41; contract, 200; staff on call, 84, 88, 99, 101, 106; workers, 62, 174. See also temporary employment Operation Oort, 24–25, 27, 49, 69. See also tax reform Organized decentralization, 8, 12, 126 Organized solidarity, 11, 185 Outsiders, 65, 98, 119–120, 125, 128, 149, 155, 160, 195 Outsourcing, 85, 95, 104, 106, 176 Overtime, 11, 51, 57–60, 84–85, 88, 107, 126 – 127, 187, 202

NAIRU (Non-Accelerating Inflation Rate of Unemployment), 44 – 45. See also natural unemployment Natural gas, 1, 198 – 199 Natural unemployment, 44 – 45 Nederlandse Spoorwegen (Dutch Railways), 115 Neo-classic economic theory, 6, 20, 34, 37, 81, 101, 104, 107, 123, 129, 136, 151, 159, 174, 186 Netherlands Bank, 32 – 34, 49. See also De Nederlandsche Bank (DNB) Netherlands Trade Union Confederation (Federatie Nederlandse Vakbeweging— FNV) 9, 30, 105, 120

Pareto optimum, 136, 140, 160, 166 Part-time employment, 41–42, 47, 49, 68, 182, 201 – 203; part-time jobs, 41–42, 44 – 45, 56 –57, 59, 62–63, 84, 86, 89, 199 – 200, 202–204; small, 42, 59, 63, 77, 81, 200 Pay-as-you-go, 21, 142, 145–146, 164 – 166, 169–170, 173, 177, 181, 183 Pension(s), 12, 101, 156, 160, 169; age, 150; allowance, 163–167; contributions, 27, 169; creeping privatization, 166, 171; funds, 164, 166–177, 182; liabilities, 164, 166; loss, 168, 171; promotion, 169; reserves, 164; rights, 164, 168–171; three pillars, 163; trap, 181, 202; white spots, 174. See also basic pension; funding; supplementary pension Pension and Savings Funds Act (Pensioen- en Spaarfondsenwet—PSW), 172 – 173 Performance linked pay, 105–106; paradox, 106. See also flexible remuneration Permanent jobs, 63, 66, 86, 89, 101, 103, 107; permanent contract, 58, 77, 98,

Index

194; permanent employees, 65 – 66, 95, 97, 100 – 101, 103 – 104, 194; permanent positions, 77, 153; permanent staff, 59, 98–99, 194 Personnel management, 91, 99, 103, 181. See also staff planning Philips, 90 – 91, 93, 97, 117, 151 Phillips curve, 31; relation, 25 Polarization, 69 – 71; Wolfson polarization index, 70, 82 Polder model, 1, 11, 14 – 21, 30 – 31, 33–34, 36, 47 – 49, 55, 81, 98, 105, 126, 128, 130, 132 – 134, 144, 181, 183, 186, 190, 195; changes, 16, 120, 185; definition of, 9; end of, 25, 90, 185, 188; essential components, 185; innovation, 21, 185; learning organization, 12; paradox, 17, 187; policy, 10; synonyms for, 4; trust, role in, 5 – 6, 15 – 16, 190– 191; victim of its own success, 187 Policy competition, 3, 4, 187 – 188 Policy learning, 12, 185, 191 – 193 Portugal, 77, 198. See also Latin model Posting, 85, 107. See also secondment Poverty, 19, 51, 72, 74 – 78, 81, 158 – 159, 163–165, 201, 203; trap, 22, 52 – 53, 77, 204 Premium differentiation, 135, 138 – 139, 152, 160, 181, 198; PEMBA and social security, 150, 152 – 153. See also experience rating Principle-agent-problem, 98, 106, 136 Prisoner’s dilemma, 20, 100, 110 – 111, 133, 197 Privatization, 3, 17, 21, 136, 145, 147–149, 160, 166, 171; creeping, 166, 171; partial, 147 – 148; transaction costs, 160. See also disability insurance; Sickness Act Productivity trap, 22, 52 – 54 Profit sharing, 83, 85, 96 – 97, 101 Prosperity, 17, 37, 68, 76, 78 – 80, 110, 158, 177, 201; company, 172; financial, 176; individual, 110, 160; social, 110, 118 Public sector, 25, 44 – 45, 202, 205 Purple government, 5, 24, 37, 44, 191–192, 197–198. See also Kok government

231

Quasi-monetary union, 10, 34 Rabobank, 94, 151 Redistribution, 34, 74, 81, 139; between generations, 142; cost, 140; employment, 19, 24, 32, 34, 46, 49, 201; income, 34, 48–49, 141–142; motive, 137, 176; perverted, 172; unemployment, 192 Reed Elesevier, 90 Reform, 10, 121, 134; fiscal, 27; institutional renewal, 39; labor market, 121, 134, 191; pension system, 183; policy 12; social security system, 147, 191; tax, 24; welfare state, 3, 21, 135, 185, 191. See also policy learning; reorganization Regional employment office, 43, 54, 132; director of, 128, 131–133 Regulation reduction of contributions of long-term unemployed (Regeling Afdrachtsvermindering Langdurige Werklozen—VLW), 45, 54 Reintegration Act for Disabled People (Wet op de (re)integratie arbeidsgehandicapten—Wet REA), 153 Rent seeking, 118 Rent sharing, 121, 123 Reorganization, 13, 62, 117, 132–133, 181; ABN Amro, 91; government finance, 4, 23–24; KPN, 91; Nedcar, 103; Philips, 91; Shell, 91; social security system, 12; Unilever, 91. See also policy learning; reform Reservation wage, 53 Reversal rule, 171–173 Rhineland model, 3, 8, 17, 118, 132, 186, 189; countries, 121; enterprises, 38. See also stakeholder capitalism Risk aversion, 14, 100, 170 Risk selection, 139–140, 147–149, 152, 155, 160, 177 Risk sharing, 178, 183 Risk transfer, 84; shift, 85, 87 Safety net, 112, 133, 143, 158, 200–201, 203 Savings trap, 163 Schooling, 110–115. See also training

232

Index

Secondment, 63, 85, 107. See also posting Second pension pillar, 163, 166 – 167, 171. See also supplementary pension Segmentation of labor market, 19, 22, 62, 65, 81, 83, 86, 95, 101, 103, 107, 112, 174, 185, 187, 191, 194, 201 Shareholder capitalism, 8, 90 Shareholder value, 90, 107, 120, 132, 186 Shell (Royal Dutch Shell), 91, 105 Sheltered Employment Act (Wet Sociale Werkvoorziening—WSW), 45 Shop Opening Hours Act (Winkeltijdenwet), 39, 59, 88 Sick leave, 61, 145, 147 – 149, 153 Sickness absenteeism, 61, 64, 160 Sickness Act (Ziektewet—ZW), 21, 24, 135, 143; partial privatization, 21, 147–148, 152 Social-Economic Council (SociaalEconomische Raad—SER), 1, 14 – 16, 19, 92, 181, 185 – 186, 192 Social infrastructure, 3, 74, 190 – 191 Social law, 13, 134, 194 – 195; theoretical basis, 13; inequality compensation, 13, 130 Social relations, 6, 193 Social security, 12, 17, 70, 134, 136, 141 – 142, 147, 151 – 152, 158 – 159, 188, 191, 194, 203, 205; benefits, 31, 69, 158; contributions, 1, 4, 10, 19, 23 – 28, 32, 45, 50, 69; costs, 146, 158, 160, 187; expenditure, 51, 143 – 147, 159, 193; private and public, 135, 137, 160; privatization, 24, 145, 147; trap, 145 – 146; volume, 21, 50, 52, 160 Social security system, 4, 14, 21, 38 – 39, 74, 77, 88, 92, 134 – 135, 141 – 147, 158–161, 178 – 179, 183, 200 – 205; activating, 22, 44, 201, 205; modernized, 191; objectives, 146; reorganization, 12. See also basic income; minisystem; workfare Social Security Council (Sociale Verzekeringraad—SVr), 141, 146 Social Security Penalties, Measures and Claims Act (Wet Boeten, Maatregelen en Terug- en invordering sociale zekerheid—Wet BMT), 133, 154

Solidarity, 4, 8, 11, 14, 18, 103, 105–106, 139–141, 155, 157, 163–164, 170–171, 177; compulsory, 139, 142; intergenerational, 163, 178, 183; perverted, 169–170 177. See also organized solidarity Spain, 22, 197 –198. See also Latin model Special contribution discount (Speciale Afdrachtskorting—SPAK), 45, 54 Staff planning, 58, 100; contract structure, 107. See also personnel management Stakeholder capitalism, 8, 90 Supplementary pension, 163, 165–177, 184. See also second pension pillar Surplus, 115, 118, 121. See also rent Sustainability, 79–80, 199, 201. See also environmental quality Sweden, 11, 25, 69, 71, 113, 118, 121 – 122, 141, 143, 145, 179 Tax burden, 1, 2, 4, 24, 26, 135, 205 Tax credit, 24, 70, 77, 205 Tax reform, 24; fiscal reform, 27; lubricant, 24 – 25. See also Operation Oort Tax revenues, 172, 184 Tax wedge, 24, 45, 165, 171; average, 27; employer’s, 54; marginal 24, 27, 45–46 Temporary employment, 4, 58, 78, 99, 155; temporary employee(s), 62–63, 95, 100. See also agency work; on-call labor Ten Cate, 91 Third pension pillar, 21, 163, 170–174, 183 Tinbergen, Jan, 8 Trade unions, 2, 4, 7, 12–13, 17, 19, 29, 60, 187. See also labor unions Training, 16, 20, 27, 46, 53, 55, 60, 64, 74, 93 – 95, 99 – 101, 104, 107, 110 – 112, 125, 153, 182 – 183, 190 – 192, 196 – 197, 201; firm-specific, 93, 115, 117, 182; gap, 114; general, 110 – 112, 117; investment, 63 – 66, 93, 100, 112 – 114, 130, 183; participation, 83, 93 – 94, 101, 103, 113, 196 – 197; retraining, 85, 153, 190, 192; underinvestment, 100, 111, 114 – 115, 117, 197. See also company training; schooling Training and development funds (opleidings- en ontwikkelingsfonds—O&O), 112, 114

Index

Transaction costs, 4 – 6, 18, 79, 117, 121–122, 125 – 126, 139 – 140, 152, 154–155, 160, 165, 170, 176, 190 Tripartism, 7 – 8; tripartite consultative institutions, 1, 15 Turnover, 39, 63 – 65, 94, 99 – 100, 103, 105, 112 – 113, 130; costs, 93 Underemployment, 113 Unemployment, 1 – 2, 4 – 5, 9, 14, 24 – 25, 28–29, 31, 48, 63, 73, 78, 81, 121, 124, 129–130, 133, 139, 141, 145 – 146, 161, 179, 191, 202, 205 – 206; benefits, 46, 52–53, 55 – 56, 112, 153 – 155, 179–180; broad, 52, 57; hidden, 51, 54; inequality, 51 – 52, 54 – 56; insurance, 55, 137, 153 – 158, 203; registered, 42–43, 50, 52, 56; risk of, 138, 151, 154–155, 157, 159; standardized, 43–44; trap, 22, 52, 77, 201, 203. See also long-term unemployment Unemployment Act (Werkloosheidswet—WW): funded unemployment insurance, 157; premium differentiation, 147, 154 – 157; privatization, 21. See also experience rating Unilever, 90 – 91 Uninsurable risk, 137 – 138, 154, 158 – 159 Union density, 19, 112, 119 – 120 United Kingdom, 4, 8, 9, 11, 25 – 26, 35, 38, 42, 46, 58, 65, 67, 69, 71, 75 – 77, 87, 112– 115, 118 – 119, 121 – 122, 124, 143, 145, 160, 162, 167, 170, 177, 180. See also Anglo-Saxon countries United States, 4, 8, 9, 11, 20, 29, 35, 40, 42, 44, 46, 64 – 65, 67 – 69, 71, 75 – 77, 99–101, 112 – 113, 115, 118 – 119, 121–124, 130, 145, 150 – 152, 156, 160, 162, 167, 170, 177, 180, 190. See also Anglo-Saxon countries VNO-NCW (Verbond van Nederlandse Werkgevers-Nederlands Christelijk Werkgeversverbond) Christian Employers’ Federation, 93, 97, 106, 117, 134. See also employers’ organizations Voluntary early retirement (VUT), 11, 154, 173, 178 – 179, 181, 203. See also early retirement

233

Wage bargaining. See wage negotiations Wage Bargaining Act (Wet op de loonvorming), 15 Wage competition, 55, 111 Wage coordination, 123 Wage differences, 72, 115, 118–119, 122 – 124. See also non-market clearing wage differentials Wage drift, 29, 165, 169. See also incidental increase Wage flexibility and rigidity, 123–124 Wage formation, 15, 38, 72, 109, 123, 125; corporatist, 115, 123–124; efficient, 115; wage leaders, 123 Wage increase, 10–11, 67, 101, 105, 119, 125; employee’s, 97; incidental increase, 29, 166, 124, 165–166, 169; inefficient, 106; initial increase, 29, 116, 124–125; margin for, 11; periodic, 118, 182. See also wage drift Wage moderation, 4, 9, 10–11, 17, 19, 23 – 25, 27 –34, 48–49, 66–67, 81, 101, 105, 119, 124, 148, 184, 196–197; attributed to women, 48 Wage negotiations, 12, 16, 42, 112, 188; business level, 19, 115, 122; central level, 185; coordinated, 116, 119; corporatist, 128; centralization, 12, 14, 112, 119; centralized, 12, 112, 114, 119; decentralization, 117–118, 122, 134; decentralized, 121; free, 9; sector level, 116, 118, 186. See also collective bargaining Wage policy, 7, 14, 72, 188, 197 Wage Tax Act (Wet op de loonbelasting), 171 Wassenaar Agreement (Central Accord 1982), 1, 9, 10, 16–17, 19, 23, 27–28, 31, 45, 49, 67, 122, 178, 186 Welfare state, 1–4, 7–8, 14, 20–22, 135, 141, 145, 157, 159–160, 185–186, 190 – 191; defined, 140; Dutch, 20–21, 39, 135, 140, 145, 159, 186, 188, 191; efficiency, 157; foundations, 145; functions, 140, 159; reform, 3, 21, 135, 185, 191. See also policy learning White spots, 171, 174–175 Workfare, 22, 203–204 Work inability, 137–138, 141, 150–152; insurance, 149; risk, 171

234

Work disabled, 150 – 153; partially, 150. See also Disability Insurance Act; disability risk Working hours, 47, 59, 68, 84, 107, 127, 181, 205; actual, 42, 69; control over, 47, 201; reduction, 31, 60, 126, 128, 178–179; shorter, 69, 84, 187; variable, 59, 64, 88, 107. See also Working Hours Act Working Hours Act (Arbeidstijdenwet), 59, 88

Index

Working time. See working hours Work pressure, 51, 62, 91, 95 Works Council, 18, 59, 98, 113, 116–117, 125 – 128 Works Council Act (Wet op de Ondernemingsraden—WOR), 18, 27, 127 Youth Employment Guarantee Act (Jeugd Werk Garantiewet—JWG), 44, 204

About the Author LEI DELSEN is Assistant Professor in the Department of Economics of the Nijmegen School of Management, University of Nijmagen, the Netherlands.