(Un)employment and protection in the Netherlands

Marloes de Graaf-ZijlJanuary 19, 2011

Den Haag: Ministry of Social Affairs and Employment

Content

Part I• Unemployment• Activation measures

Part II3. Employment protection for open-ended contracts4. Employment protection for flexible contracts

Part I

Unemployment, benefits and activation

Unemployment

Unemployment rate

0

2

4

6

8

10

12

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

%

netherlandsgermanydenmark

Source: Eurostat

Unemployment

Dutch unemployment rate suppressed by:

• The large share of small part-time jobs in the dominator

• The high disability rate

• Substantial shortening of maximum unemployment benefit duration in 2006

• (Financial) incentives for organisations responsible for carrying out unemployment regimes might play a role in determining the unemployment rate.

Unemployment benefits

• First two months 75% of previous wage, afterwards 70 percent of previous wage

• Maximum duration depends on previous work experience shortened substantially in last few years:

- 3 months when worked fewer than 4 out of 5 previous years

- Formula for maximum duration = actual years worked + age – 18 (years worked before 2004 count for 1 year, years 2005 and 2006 count for ¾ year, years worked since 2007 count for ½ year).

- Absolute maximum 38 months. After that Social Assistance (600 Euro per month), means tested

Unemployment benefits

• UWV (=non-governmental institution) responsible for paying unemployment benefits and activating people on unemployment benefits.

• UWV has no financial incentives to reduce number of unemployed. Dismissal of the board of directors is the only steering mechanism, apart from yearly projections made and discussion with Ministry.

• Municipalities responsible for paying social assistance and activating people on social assistance.

• Since 2004 municipalities financially responsible for reducing the number of people on social assistance.

• This appears to have had an effect on reducing social assistance expenditures.

• Cooperation between UWV and municipalities is now obligatory (SUWI law) but far from perfect.

Activation policies

Total expenditures on ALMP as pct of GDP

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

2004 2005 2006 2007 2008

DenmarkNetherlandsOECD

Activation policies

• Most people receive job mediation. According to effectiveness studies, these are most effective. Main effect of announcing the start of a program: scaring of the unemployed.

• Most expenses go to training. Effectiveness studies show negative effect on speed of finding new job. However, long-term effects (e.g. on re-entering UB) not studied.

Part II

Employment protection and flexible employment

EPL open-ended contracts

Share of open-ended contracts for which a dismissal is applied, varies between 1,5% and 3% per year, depending on the business cycle.

Rules for individual dismissal are strict, rules for collective dismissal average, when compared to other countries (OECD, 2004)

The Dutch system is complicated and scores especially high on procedural inconveniences (OECD 1999, 2004).

Employers can freely choose from dual dismissal track: They can either go to the employment office or file for permission by the civil court.

EPL open-ended contracts

Dual dismissal track:

Employment office checks whether dismissal is according to the rules. If not, dismissal is not allowed. Ground for dismissal can be either individual or collective. No severance payment required, but sometimes given. Employee remains at work during the dismissal procedure. In 2009 76% of dismissal requests permitted. Procedures took on average 1,5 month, dependent on ground for dismissal. This track stems for the German occupation in World War II, aimed at regulating the labour market.

Employer files for permission by a labour court, which determines severance pay, roughly according to the formula: 0.5 month per year of service at age <35, 1 month per year of service at age 35-45 years; 1.5 months for workers at age 45-55; 2 months per year of service at 55 years and over.

EPL open-ended contracts

Costs of dismissal

Source: Knegt and Tros (2007), own calculations

Dissolution by civil court is nearly three times as expensive asindividual dismissal permit by the labour office. Mostly due to the severance payments that are four times as high.

Total costsPayment wage during procedure Severance pay Administrative costsdismissal permit labour office - individual € 15,609 64% 23% 13%dismissal permit labour office - collective € 20,252 27% 61% 12%dissolution by civil court € 35,316 36% 52% 11%

EPL open-ended contracts

Until recently approximately half of all dismissals was handled by the employment office, the other half went through civil court. In 2009 popularity of the `cheap’ labour office route increased once more.

Enterprise applications for dismissal at labour office and court

0

60000

120000

180000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Labour office Civil court

EPL open-ended contracts

Rules for collective dismissals: When dismissing at least 20 people within 3 months in one

region on economic grounds (i.e. not personal) Dual track is possible. Summation of the two routes exceeding

20 = collective dismissal (unless less than 4 through court, then these are disregarded).

Timely announcement to labour union is compulsory. Inform unions and works council (OR) about number of

dismissals and who will be dismissed 1 month waiting time, during which union can try to influence

decision making

EPL open-ended contracts

Rules for collective dismissals: Firms cannot select the workers that will be dismissed

themselves. Until 2006 lifo principle prescribed by law, since then the reflection principle: in each age/level cohort lifoprinciple applied.

Firms can exempt a (low) number of valuable employees Unions and/or works councils usually demand social plan

including severance pay, selection criteria for dismissal, outplacement, job mediation, retraining, etc.

EPL open-ended contracts

No possibility to deviate from EPL for open-ended contracts by collective agreement.

Recently a few companies have used ingenious constructions to circumvent the collective dismissal rules, e.g. Cap Gemini in 2009. They made extensive use of the exemption clause that ground for dismissal for collective dismissal is economic. They dismissed more than 100 persons on individual grounds with a so-called termination agreement. They did not even need to go to court or labour office. They paid generous leave schemes in order to circumvent the (collective) dismissal procedures. This possibility is in place since 2006 (but was notintended for this).

EPL open-ended contracts

There is much discussion about the dual track system:

On the one hand it is unfair for workers: they cannot influence the track the firms chooses, but it does influence their severance pay

On the other hand it is efficient in the sense that firms can choose their preferred route (Frenck and Pfann, 2009). E.g. small firms usually choose the labour office route because they cannot afford to go to court.

EPL open-ended contracts

There is much discussion about the reflection/lifo principle:

It hinders creative destruction, since firms cannot freely select the lowest quality workers to dismiss.

It provides incentives not to change job. Still, each year about 35 percent of all jobs end, either voluntarily or involuntarily. One in 10 to 5 is involuntary. This is not especially low compared to other countries. According to Shimer (2005) is around 30-40% too.

76.2%

6.0% 5.1%1.4%

5.9% 5.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

end of ftc dismissalpermit labour

office

dissolution bycivil court

immediatedismissal for

serious reason

mutualagreement

bankruptcy

Breakdown of type of dismissal in 2006, including fixed-term contracts

Source: Knegt and Tros (2007)

Dismissals versus flexible employment

Flexible contracts

OECD (2004) has shown that stricter regulation of open-ended contracts is associated with higher incidence of flexible employment

Source: OECD (2004)

ESP

PRTMEX

FIN SWETURFRA NLD

CHECAN JPNDEUGRC

ITA NORDNK CZEHUNBEL AUT

GBRIRL SVK.0

5.1

.15

.2.2

5.3

aand

eel t

ijdel

ijk w

erk

in w

erkg

eleg

enhe

id, 2

002

1 2 3 4ontslagbescherming vaste contracten, 2002

Flexible contracts

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1990 1995 1996 1999 2000 2002 2003 2004 2005 2006 2007 2008 2009

ftctaw

Share of fixed-term contracts and temporary agency work in the Dutch labour market

Source: Berkhout and van den Berg (2010)

Flexible contracts

International comparison ftc and taw

Austria

BelgiumGermany

Denmark Spain

Finland

France

Italy

Luxembourg

Netherlands

Portugal

Sweden

United Kingdom

Hungary

Poland

Switzerland

Norway

0

1

2

3

4

agen

cy w

ork

pene

tratio

n ra

te 2

008

5 10 15 20 25 30% temporary workers

Flexible contracts

Regulation since 1999:

Flexibility and Security Act with implications for fixed-term contracts (ftc), temporary contracts (taw) and on-call work (ocw).

F&S Act was prepared by social partners and made into law.

Aim: increase flexibility for firms and security for workers.

Fixed-term contracts

Before 1999 revolving door construction: during the 1990s the law stipulated that after one FTC an open-

ended contract should be offered employers circumvented these rules by employing

FT-workers and after one year dispatched them to a temporary work agency for one month, after which they hired them again on a FTC.

Flexibility and Security Act

Fixed-term work:– F&S Act relaxed conditions on use of ftc’s: 3 subsequent contracts

instead of 1 (or fewer if total duration exceeds 3 years).– After 3 ftc’s in a row with same firm, no 4th ftc possible for 3 months– Deviation possible by collective labour agreement– 23 percent of all CLAs include deviations regarding the maximum

number of fixed-term contracts, half of which restrict the maximum to less than three and half extend it to a higher maximum (Houwing, 2010).

– No restrictions on reason for using ftc– Since then use of this type of contract increased to nearly 18 percent.

– Share in new hires is much higher than in stock of employment: 70%in 2006 (De Graaf-Zijl, 2011)

Temporary agency work

• Dutch agency sector plays leading role in the global development of TAW

• Share of TAW relatively large compared to other countries

• Industry well organised, strong lobby by employers’ federation ABU

• Since 1971 collective labour agreement for agency workers: makes it possible to deviate from EU equal pay directive (which is the same in F&S law).

Flexibility and Security Act + CLA’s after 1999

Temporary agency work: – 1999 F&S law brought TAW within mainstream labour

law: TWA is employer with all accompanying obligations– Until 2,5 years contract can be ended on day-to-day basis

by both parties. Ends by law when disposition to hiring company ends.

– After 2,5 years, worker gets successive fixed-term contracts usually for 3 months

– Start building up pension rights and training budget after ½ year

– In case of collective dismissal, reflection principle not necessarily applied (Ontslagbesluit)

On-call work

On-call work:

– Before 1999 extremely flexible

– Since F&S law, only 6 months completely flexible

– After 6 months right on average pay over last 3 months

– Firms need to pay at least 3 hours per call

– Since 1999, the use of this type of contract halved

Flexibility and Security Law

• Can be deviated from by CLA• This happens in a quarter of all CLA’s• E.g CLA for temporary agency work exempt TAW

sector from equal pay and extend the period of day-to-day flexiblity to 2,5 years instead of 0,5 years.

• E.g. 23 percent of all CLAs include deviations regarding the maximum number of fixed-term contracts

• E.g. Deviation can be made regarding on-callwork: the 6 month period without continued wagepayment can be extended.

(Small) self-employed

Increase in the number of own account workers (without personnel)

0

200

400

600

800

1000

1200

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

(x 1000) self-employment with personnelown account employees

Conclusions

• Dutch unemployment did not increase as quickly as in many other countries in recent crisis

• Maximum duration of unemployment benefits has been shortened substantially during recent years

• Active labour market expenditures above OECD average, but below Denmark.

• Dismissal of open-ended contracts strictly regulated. Flexible employment since F&S law rather liberal.

• Temporary agency work, fixed term contracts and (increasingly) own-account self-employed play a prominent role on the in Dutch labour market

• Dismissal law, especially for collective dismissals, hinders creative destruction and optimal matching