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Wednesday, 18 May 2016

While the chairman of the Dutch National Bank DNB pleads for a substantial raise in wages for the middle class and lower class workers, the employers remain focused on wage restraint.

A few weeks ago, there was a plea for higher wages from an unlikely, and therefore quite unsuspicious source:  chairman Klaas Knot of De Nederlandsche Bank (i.e. the Dutch  national bank).

While Knot’s political position is usually firmly based at the liberal-conservative side of the political spectrum, his plea for higher wages was heartfelt and ought to be taken serious, in my humble opinion.

Knot argued that the Dutch lower and middle class suffered from the circumstance that their average wages had been on a virtual stand-still since the start of the economic crisis in 2008, while their average expenses had soared since that date. This was due to the increase of taxes, (social) housing rent rates and general costs of living. The consequences for the general purchase power among these classes were predictable: it dropped!

This trend was confirmed through Mathijs Bouman’s column in Het Financieele Dagblad, about which I already reported yesterday:

In the meantime, the gross domestic product (GDP) [in The Netherlands – EL] has increased to levels slightly higher than before the crisis started. However, due to the population growth that took place in these eight crisis years, this is not true for the GDP per capita.

Consumer expenditure has been lagging since 2008. There was no 11% growth for private consumption in those eight years, but in fact a 2% decline between 2008Q1 and 2016Q1.

This had devastating consequences for many Small and Medium Enterprises in the Netherlands and especially for the retail industry: the ‘middle of the road’, store chains like V&D, C&A, Blokker, D&A and Hema, as well as the traditional, small 'mom & pop' stores, all went through rough times.

While this policy of wage restraint was more or less defensible during the tough first years of the crisis – roughly from 2009 until 2014 – it has not stopped since, in spite of the fact that the large employers already enjoy very good sales results and king sized profits.

Yesterday, I created a chart using the data from Statline, the online database of the Dutch Central Bureau of Statistics. This chart was based upon the development of collective wages between 2008 and 2016, versus the indexed price level during the same time frame. The results were quite surprising for me:

The Harmonized Price Index, vs the
average collective labour income index
Chart by: Ernst's Economy for You
Data courtesy of:
Click to enlarge
During the timeframe from 2011 until roughly 2015, the rise of the harmonized price level exceeded the lackluster increases of the collective labour income, meaning that the general public in The Netherlands was in fact losing purchase power.

The surprising thing is, however, that – probably under influence of the dropping energy prices and the general deflatory forces within Europe, as well as the cautious rises of labour income since early 2016 – the harmonized price index and the labour income index are roughly at the same level now.

This does not mean at all that the purchase power has actually improved since 2008, but that it at least has not deteriorated since that year.

Nevertheless, the mindset of many people is still crisis-like and they will probably remain very cautious with spending their hard-earnt money, unless some dramatical happens with their purchase power. This is a message that Klaas Knot understands very well. Also to these eyes only a drastical improvement of the general purchase power for the middle and lower classes could solve this depression-like crisis, that has been lingering for more than seven years in a row.

Just like so many other countries in the world, The Netherlands has become a country of two speeds: the high velocity is represented by the large companies and multinationals, and also by the wealthiest people in the Dutch society. These parties all enjoyed massive profits and a dramatic rise of their income and they all have very good prospects in the next few years to come.

The lower and middle classes, including many small and medium enterprise companies and retail companies, represent the low velocity in Dutch society, as they still seem to suffer from the financial, as well as the psychological consequences of the crisis which does not seem to have ended yet.

Not only the income of many lower and middle class members has been on a virtual standstill since the start of the crisis; the certainty of receiving an monthly income at all has diminished dramatically too.

Especially countless youngsters do not have the luxury of getting a fixed contract against a decent salary, when applying for a job. Instead they are often forced to lead an uncertain life, while meandering from one temporary contract to another zero hour contract. Or they are only offered trainee jobs against a token salary, which they accept, hoping that they will be “promoted” to a fixed contract at the end of their traineeship.

This week it was in the news (BNR News Radio – in Dutch) that no less than 25% of all workers in The Netherland works on a flexible contract in 2016 and that 80% of these people (i.e. 1.3 million Dutch workers) is actually a ‘flexworker’ against his/her will.

And while jobless workers, slightly above fifty years of age, still have at least 15 years of working ahead in theory, there are unfortunately not so many companies who want to take the “risk” of hiring these older workers, for various reasons. A lot of these people will stay unemployed for a long time for exactly this reason.

On top of that there is also the growing army of (sometimes involuntary) freelance workers (i.e. ZZP’ers in Dutch), whose horizon of income certainty  lasts as long as their current contract does.

Therefore I was very pleased to hear this plea from particularly Klaas Knot as chairman of the Dutch national bank an influential, non-political figure  hoping that both politics and large employers would see his statement as a serious signal for change in the remuneration of their employees, as well as in the way that large companies employ their workers. That change should be in favour of more fixed contracts and less freelance contracts, flexible employment and zero hour-contracts.

Unfortunately, the employers’ organizations have managed to misunderstand this important signal by Klaas Knot. Their argumentation was again akin to the fixed mantra that has been used over and over again since the economic crisis started:

Higher wages have a negative influence on the competitive power of The Netherlands, as it makes Dutch products and agricultural produce more expensive. This hampers the Dutch export capabilities and is therefore bad for employment. Such a dramatical wage increase should therefore not be demanded by the labour unions or by Klaas Knot, as a matter of fact!

The diminished purchase power of the Dutch middle classes is all the fault of the income and wage taxes and thus the fault of Dutch politics: not the fault of the large employers in The Netherlands.

It is the same ol’, same ol’ as always and the perfect argument to kill every discussion about higher wages and remuneration for the Dutch workers and middle class representatives.

The following snippets come from Het Financieele Dagblad:

The plea of DNB to stronger increase the wages is ‘nonsense’, according to managing director Cees Oudshoorn of employers’ organization VNO-NCW. “Higher wages are just a recipe for higher unemployment”, he warns. “There is no underpayment in The Netherlands”.

VNO-NCW rejects this conclusion of DNB. According to Oudshoorn it is not right that the real wages have lagged. “If you want to judge the pace of the wage development, you have to compare it with the development of labour productivity”, he states. “The development of those two figures is remarkably similar.

The corporate lobby recognizes the fact that the purchase power has lagged in The Netherlands, but blames this on the excess difference between the wage expenses for the employer and the net wages for the employee. “That this wedge has developed over time is devastating for purchase power”, according to Oudhoorn. “Tax redemption is the only way, but that is in the hands of politics”.
According to labour federation FNV it is about time that the wages are increased drastically. “Employers and large principals have now much more room to increase wages and hourly rates for professionals”, according to Gijs van Dijk, vice-chairman of FNV. “Especially the underpayment of “ZZP’ers” (i.e.  freelance professionals) must stop.

It is now much too easy for employers to profit from the fiscal benefits that ZZP’ers currently enjoy, while hiring them, instead of contracting workers on a fixed contract.

“The fiscal benefits [of ZZP’ers - EL] are now used by employers as leverage in order to force their hourly rates down and that is a violation of the purpose of their fiscal advantage”, according to Van Dijk. “Hence, this way it becomes a subsidy on wages and in fact state support”.

VNO-NCW actually resists against the equalization of freelancers and normal employers. “The increase of the number of freelance professionals makes sense, when we look at the high wage expenses and inflexible labour contracts”, according to Oudshoorn. “When they make the rules for hiring freelance professionals just as rigid, as in case of normal workers, the government only creates more unemployment.”

According to the labour unions, it is indefensible that especially large corporations enjoyed soaring profits, but that professionals hardly profited from this development. According to the investigation of DNB, the shareholders did see their yields increase strongly over the last decade. At the same time, the government decreased the taxes on corporate profits, while workers paid more and more taxes.

Cees Oudshoorn is actually right with his remarks about the Dutch labour productivity, as the following chart shows. In this chart the average labour income is compared with the labour productivity [unfortunately, CBS did not have more recent data than 2014 available, so I extrapolated that at the same level through 2016 – EL]. 

The labour productivity index, vs the
average collective labour income index
Chart by: Ernst's Economy for You
Data courtesy of:
Click to enlarge
The question is: who is to blame for that?!

Especially the drop in labour productivity in 2009 is caused by the fact, that employers wanted to keep their workers under contract, in spite of the mounting crisis in those days. When a company has lower production figures to meet with an equal amount of people, every worker has to produce lower numbers in average. This has definitely a negative influence on labrou productivity. 

In those days, the government partly subsidized these excess workers by creating the so-called “part-time unemployment benefit”. This is what I wrote about it in 2011:

Especially the [manufacturing industry – EL] will (in my opinion) suffer from the fact that the part-time unemployment benefit, which was established in 2009, prevented companies from reducing overcapacity in numbers of jobs and production facilities. As a consequence of this special government subsidy, companies kept people under contract that otherwise would have been dismissed. How noble that may seem initially, it makes companies less competitive. Especially now a new crisis is looming, due to the continuing problems in the Euro zone.

In the years afterwards, the labour productivity improved somewhat, but not dramatically. It is easy to blame the workers in The Netherlands for that “lackluster” performance, but it is defensible as well to look at the employers themselves.

As the wages for fixed and flexible workers were restrained or even reduced during the crisis years, as well as the remuneration for ZZP’ers (i.e. freelancers), there were fewer incentives for employers to improve their labour productivity.

The ample availability of inexpensive, go-getting flexworkers and freelancers from inside and outside the European Union made the need for improved labour productivity diminish. People were relatively cheap, so a company could hire a few more quite easily without paying a whole lot of money, instead of trying to improve their labour productivity.

I also do agree with Cees Oudshoorn that the wedge between gross and net salary for many workers is quite high in The Netherlands (in some cases too high). 

However, that is the unfortunate price that our country has to pay for the fact that a large number of citizens and large companies has become very cunning in avoiding taxes through the usage of fiscal constructsWhen the need for tax money at central and local governments stays equal, but the number of tax payers diminishes, every tax payer and tax paying institution has to pay more tax money in any which way possible. The large employers know that all too well, just like Joe Sixpack does, as he feels it in his wallet.

Nevertheless, as long as the large corporations and the wealthy citizens, who live from their investments and dividends, refuse to pay more taxes on their annual income, the tax wedge for workers will remain substantial.

Personally, I think that the large employers and the government should lower their resistance against substantial wage increases for the lower and middle classes, as this would be very good for the Dutch economy as a whole. In that respect I fullheartedly agree with Klaas Knot and I fully endorse his message.

Instead the government and large companies should think about ways to increase their (labour) productivity and to lift their innovative powers, so that the competition on price with bulky export goods, agricultural produce and distribution could finally become a thing of the past.

I rather call The Netherlands “the land of innovation” than “the land of exports”!

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