Dutch Central Planning Bureau: The current recession might have a much bigger impact on unemployment than the biggest recession since 1930 had.

Yesterday the Dutch Central Planning Bureau (www.cpb.nl) presented a very intriguing report. Intriguing, because it tried to answer the question that has bothered me during the last three years: Why was there not more unemployment during the biggest crisis of the last 80 years?

I looked for the answer to this question in the part-time benefit, the government subsidy to protect jobs that would otherwise be lost. The CPB, however, sought in a different direction: companies were relatively wealthy in 2008 and were reluctant to fire people that they presumably would need again a few years later, considering the relative scarcity of educated and well-trained personnel.

Here are the pertinent snips of the CPB report, but for people that can read Dutch the whole report is a must-read.

After the credit-crisis broke out at the end of 2008, the Dutch GDP dropped by an unprecedented amount. According to similar situations in the past, unemployment should have increased by at least 4%, but it did rise by not more than 1,5%.

The really spectacular decrease of the GDP in 2009 led only to a minor increase of unemployment (www.cbp.nl)

The explanation for this surprisingly little increase was lying largely in the behavior of companies. Companies kept more personnel in service than could be expected, based on development of production. They could handle this financially. The Dutch business community was relatively in good shape when the crisis started; in much better shape than in earlier crises. Profits were high, the net cash position favorable.

It is clearly visible that the forecasted production and 

realized production are severely out of synch here (www.cbp.nl).

On top of that the labor costs could be reduced slightly by reducing overtime and limiting bonuses and profit sharing. Considering both the trouble that companies before the crisis had to find personnel in a very tight labor market and the coming wave of retiring baby boomers, the choice to maintain personnel could be understood.

The experiences of the Great Recession teaches us that the relation between production growth and the development of employment is not necessarily constant, but depends on the economic situation. When companies had trouble to find good personnel during a considerable amount of time, they are more willing to maintain their personnel´s position when the economy deteriorates. Important is also the financial situation of companies. A good starting position diminishes the necessity of quick reaction in a deteriorating economic situation.

What do these lessons mean for the unemployment development in the near future? According to the most recent data, companies in the non-financial industries are still financially healty, their solvability is stable and high from a historical perspective. The productivity per worked hour increased further in 2011.

However, the profitability of production increased hardly after it was almost cut in half in 2009. Besides that, a shortage of staff is currently hardly a setback for production. The latter suggests that companies during a new economic shock would be less willing to maintain non-productive personnel. Reduced profitability offers less room for this too. Therefore unemployment might increase much stronger during a another economic shock

During the last months the unemployment increased. This is not caused by companies firing personnel, as the number of working persons increased actually. However, the number of persons looking for work increased even stronger. It is too early to know what is the exact reason for this increase. It is clear, however, that other factors played a role in the increasing unemployment than in 2009 and 2010.

It was a surprise for me to read that the Part-time Unemployment Benefit did not play a major role for companies maintaining their personnel (this subsidy concerned only 40,000 workers). I think though, that this research of the CPB makes much sense.

I totally agree with their conclusions that the next crisis – that we seem to be in currently – will cost much more people their job than the crisis in 2008-2009 did. And I think that this is an inevitable development, due to the relatively low productivity and profitability that Dutch manufacturing industry currently has.

I want to remind you of one of the charts in my last article, that I print again here:

The new manufacturing orders in the strong Euro-countries

I already pointed in this chart at the relative underperformance of the Dutch manufacturing industry that is  going on for almost 10 years now. The message that is sent from this chart is that Dutch manufacturing is too expensive and that this has a negative impact on the numbers of new orders for the Dutch industry.

This means two things: the production costs must go down and therefore the productivity per employee must go up. And this brings me to the last (red-printed) paragraph. I suspect that the number of people looking for employment increased due to an ongoing influx of workers from Spain, Poland and Romania. These people bring the reduced costs of labor that the Dutch manufacturing industry desperately needs at the moment to increase productivity and reduce costs per unit. This might be harsh for Dutch people working in those factories, but it is a logical consequence of the increased costs of labor in The Netherlands.

The aforementioned chart is a warning of what could happen when this recession picks up speed. The excess personnel that adds too little to productivity will probably not be able again to keep their position in the company, but might be destined to pack their bags. Added to the recent trend of mass lay-offs, we could be in for a nasty 2012.