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Saturday, 22 August 2015

Discussion about labour hoarding and government subsidies on employment with one of the macro economists of the Rabobank.

Today, after a hiatus of two-odd months, I want to make a new start with writing interesting articles for you on my blog. A few months ago, I was so fortunate to get a very interesting new assignment as business analyst at a leading bank in The Netherlands; a different one than the bank where I resided during the last six years.

Side-effect of this new assignment was nevertheless, that the learning period and hectics, as well as the fatigue caused by learning all those new things, was simply too much to maintain my usual pace of two or three articles per week. In other words: I needed a break from writing. However, after two months of rest, including a short, but yet very relaxing holiday, I hope to have built up a new source of energy.

A column in the Dutch financial newspaper Het Financieele Dagblad pointed me at an excellent research study report of the Centre of Knowledge and Economic Research of the Rabobank in The Netherlands (unfortunately this report is in Dutch, but it is definitely worth a read when you use Google Translate or another online translation tool).  

Here are the translated main conclusions of this report:

An analysis of the structural pillars under the economy of the Euro-zone:

  • The economic losses during the “Great Depression” in the Euro-zone almost totally landed upon the labour market. Unemployment will first and foremost decrease when elevated, steady growth will be combined with a reduction of the structural unemployment via reforms of the labour market. The reduction of the structural unemployment with 1% will yield more than 900,000 extra workers all over Europe.
  • A risk for recovery of the labour market is the flawed connection between demand and supply of labour – the so-called mismatch. Also the development of the so-called Total Factor Productivity (i.e. TFP), which measures the efficiency of an economy, is worrisome.
  • The decreased efficiency of many economies in the Euro-zone is declared by a.o. the lower corporate dynamics, lower investments in innovation and a decrease in the spread of innovation.  These developments obstruct renewal and cause that people stay in jobs in which they don’t contribute maximally to growth.
  • Besides that, a less effective monetary policy is a possible explanation for the disappointing growth during the last few years. In case this would be the consequence of an excess real interest rate (caused by the so-called 0 boundary on the official interest rate), this could be partially mitigated with the new Quantitative Easing policy of the ECB. Yet, we think that an excessively low interest rate, in combination with QE could also cause all kinds of disruptions, putting even more pressure upon innovation, investments in the real economy and long-term growth.
  • Measures that could improve the growth perspectives of the Euro-Zone are:
    • better coordination of the international monetary policy, 
    • stimulation of labour mobility and re-education, 
    • reforms of the labour market, 
    • stimulation of entrepreneurship, 
    • investment in renovation and renewal 
    • and last, but not least: striving for an level institutional playing field.
While reading through this interesting report, I was also pointed at an earlier publication of this Centre.

This publication argued that the disconnection between labour demand and supply in The Netherlands – the aforementioned mismatch – was in reality quite low and even among the lowest within the Euro-zone. This conclusion strongly contradicted with the ‘communio opinis’ among ‘Corporate The Netherlands’ that this mismatch is substantial in The Netherlands and was therefore quite surprising.

Combined with the conclusion in the aforementioned report about the lower corporate dynamics in the Euro-zone (see bullet three), this rather surprising conclusion urged me to ask a few questions to one of the people from the Centre of Knowledge….

One of my strong opinions during this depression-like crisis starting in 2008 has been that the part-time unemployment benefit measures introduced by the Dutch government in 2009 – in combination with a phenomenon called ‘labour hoarding’ (i.e. keeping improductive, excess personnel under contract, while hoping for the return of better times with again increased demand) have eventually increased the effects of the crisis, instead of dampening these effects.

The reason is that excess personnel is either working in an improductive role or at a position with already excess capacity, thus adding close to nought added value to the company’s results. When such an improductive person would have lost his job instead, and would have found a more productive new job at a position more suitable for his capacities, he would have added much more value to his new company’s results than that he could have added to the results of his old company. 

Especially in countries with a low mismatch between labour demand and supply, it is relatively easy for well-educated / well-trained people to find a new job, preconceived that there are indeed new jobs on offer. [Having said this, I understand the micro-economic implications for individual households of this macro-economic view - EL].

It seemed that this old opinion of mine was founded by some of the conclusions in these two reports, so I wanted to check this through a few questions to people involved in writing these reports. As my email conversation with the Centre of Knowledge representative was ‘off the record’ and perhaps more frank than an official statement would have been, we agreed that I would not disclose the name of my contact person. I will therefore refer to him as ‘contact’.

Ernst: One of the intriguing conclusions about the disappointing growth in the Euro-zone was, that the productivity in Europe (and The Netherlands?) had also developed disappointingly, due to the circumstance that people had been working in positions in which they offered little added value to the productivity of their corporate or civil service employer.

Could it be that the Part-Time Unemployment Benefit from 2009 and beyond, as well as other supportive measures from the (Dutch) government aimed at the preservation of employment, have caused that companies with excess capacity did not fire their excess personnel? And that such “social” plans to keep people at work have eventually added to a less competitive and weaker Dutch economy at the moment?

Contact: Generally, I think that the corporate dynamics and innovative force in The Netherlands are less problematic than in especially the Southern European countries (i.e. the former PIIGS Portugal, Italy, Greece and Spain), Belgium and France. To put it even stronger, where the share of either new or improved products in the sales figures has been rather disappointing for quite a long time in The Netherlands, Dutch entrepreneurs made much improvement lately, according to the most recent Community Innovation Survey (CIS) of Eurostat. Also the share of innovative companies has increased (see the following chart).

Percentage of change in the number of innovative companies
among the total company base
Chart courtesy of: Rabobank.
Click to enlarge
Nevertheless, your question, whether the Dutch Part-Time Unemployment Benefit (PUB) had a hampering effect on growth, is a very justified one. This was a measure which indeed enabled unprofitable companies to keep their personnel much longer in service, as it gave a substantial subsidy on wage expenses. Yet, in The Netherlands this PUB was very limited in size, so it only added to a lower economic dynamics in The Netherlands to a limited extent.

However, this hampering effect could have been much more in play in Germany, where there have been very little restrictions to the usage of the German equivalent of the PUB, the so-called 'Kurzarbeit'. During the crisis, this Kurzarbeit has been widely used by companies to mitigate loss of demand. Especially in Germany one sees that the innovative dynamics have indeed decreased, even though the country still resides at the top of the Euro-zone, when it comes to the level of innovative companies and its share in the European sales.

Ernst: And would it not have been better, when the labour market in The Netherlands would have caught the blows of the crisis ‘cold turkey’ – that is, without dampening interventions of the government – in order to make it stand at its own two feet sooner? So that the newly unemployeds could have started at companies where their labour would have added more to the company's productivity, as well as to the national productivity?!

When we look at the very limited mismatch between labour demand and supply in The Netherlands, mentioned in your report from July (see the second link in this article), this could have been a genuine possibility.

Contact: You also make a valid point here. Nevertheless, I don’t think that the PUB and other government interventions have been the real problem here – even though you can blame the Dutch government for maintaining a strong procyclical policy, by enforcing €50 billion in austerity measures on top of the economic downturn, during this crisis time. 

Companies in The Netherlands themselves have ubiquitously kept personnel in service during 2009 and 2010, even though there was no work available for them. This behaviour is called ‘labour hoarding’ and it was partially stimulated by the scarcity at the Dutch labour market in the years before the crisis.

Companies simply did not want to say goodbye to people and resources that took them so much pain and effort to acquire in earlier years. In the process, these companies anticipated upon a quick economic recovery. 

This recovery never really happened (except for the successful first half of 2011) and soon we were firmly in a double dip. This was one of the conclusions of the mismatch investigation: there were simply too little jobs to make a match at all!

Only recently we notice that the employment in the Dutch market is recovering and that the number of unemployeds is decreasing proportionately.

On top of that, it doesn’t help that the Dutch government effectuated all kinds of measures recently, which increased the supply of labour:
  • The gradual raise of the legal retirement age to 67 from 65
  • The abolishment of the partner subsidies within the Common Old-Age Pension law (i.e. AOW) in The Netherlands.
  • The Participation Law etc.
The same government, on the other hand, is carrying through substantial budget cuts at the demand side of the labour market. Especially in healthcare, which has traditionally been a strong engine for employment, these cuts have been felt badly. With this statement, I don’t want to state that a new VUT (an official Early Retirement arrangement from the Dutch past) or another similar arrangement would be a good idea. Such arrangements destroy labour supply and wealth in the long run.

The best idea would have been to reduce the taxes and levies on labour in a much earlier stage. From recent estimates we know that when the development of wage expenses is lower than the structural growth of productivity, companies can much quicker increase their production capabilities, causing even the long-term unemployment to drop. That the Dutch Cabinet starts only now with taking some of these measures within the new tax reforms, is too little too late, in my humble opinion.

I thank this macro economist and his colleagues for these thorough reports and for his revealing answers. Answers, which were generally in line with my views about the Partial Unemployment Benefit and other government measures to help the Dutch labour market, but especially pointed at the role of companies and employers themselves in years past.

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