How to fight unemployment during a general reduction of excess production capacity?!

It is one of the most important themes in The Netherlands currently. How can we fight the soaring unemployment that is holding the country in its grip?!

The fact is that the general unemployment in The Netherlands has been soaring during the last 6 months, bringing the seasonally adjusted unemployment rate to the unprecedented level of 8.3% in April 2013.

To make clear how the general unemployment is built up in The Netherlands, I took the unemployment rates for males and females in the most important age groups and put those in three graphs. All data is courtesy of the Dutch Central Bureau of Statistics:

Dutch unemployment in %, age 15-25
Data courtesy of: www.cbs.nl
Charts by ernstseconomyforyou.blogspot.com
Click to enlarge

Dutch unemployment in %, age 26-45
Data courtesy of: www.cbs.nl
Charts by ernstseconomyforyou.blogspot.com
Click to enlarge

Dutch unemployment in %, age 46-65
Data courtesy of: www.cbs.nl
Charts by ernstseconomyforyou.blogspot.com
Click to enlarge

For the Dutch youngsters (age 15-25), the development of unemployment is definitely worrisome. For both male and female youngsters the unemployment rose to 16% from 8% in 2008. This means a bad start for many youngsters, who finished school and want to work. However, compared to countries in the Southern and Eastern European areas, the development of youth unemployment is still very ‘containable’ in The Netherlands. Nevertheless, the general outlook is poor, for the time being.

The unemployment of ‘elderly’ workers (age category 46-65) also doubled, since 2008. In general, male unemployment rose sharper than female unemployment. However, during the last year, the female unemployment rose sharper than male unemployment, due to the fact that the unemployment of the elderly males recovered slightly during the last two months. Nevertheless, the rising unemployment is only moderate for both men and women, when it is compared to men in the age categorie 26-45.

The chart that worries me most is the graph for the age category 26-45 and especially the development of male unemployment in this chart. The male unemployment soared to 7.9% in April 2013 from 2% in January 2008: almost a 300% increase.

Since December 2012, the male unemployment jumped by not less than 1.7%(!). Also the female unemployment jumped by an impressive 0.6%, since last year. Due to the spectacular recovery of the female unemployment in April in this age category, this figure remained relatively limited.

Then there is of course the question, why especially the male unemployment in the age category 26-45 rose so sharply?! I guess that this is caused by the circumstance that especially these men often work in industries, which have been severely hit by the crisis: building & construction, the manufacturing industry, transport & distribution, the financial industry, the ICT-industry etc.

Women and elderly workers probably work in other industries, which are less vulnerable to the crisis: for instance healthcare and commercial services. However, this is all speculation on my behalf, as I don’t have more detailed data at this moment.

One thing, however, is clear: the unemployment is on the rise and it appears to me that the momentum for unemployment growth is rather growing than declining at this moment. To make things worse: there is no signal whatsoever that the unemployment will soon change for the better, as all the economic signals are currently set to "red".

This brings me to the point of this article: what should the Dutch politicians do or don’t do in order to fight unemployment.

That is a rather difficult question: if it were not so difficult, the crisis would have been solved a long time ago. Yet, I want to answer this question, by looking at the solution from four different points of view:

• The ‘Keynesian’ solution;
• The Monetary solution;
• The ‘Healthy National Budget’ solution;
• The ‘Ernst’s economy’ solution; 

The Keynesian Solution

The Keynesian Solution would be, summarized: if you would bring in government stimulus at a number of strategic areas in the economy, it has a cascading effect that helps the economy as a whole.

In plain English, if you f.i. build / refurbish roads, build new houses and commercial buildings and if you instate subsidies on high value items and services, like new cars, home improvement and durable consumption goods and services, the workers, shopowners and other people that build, produce or sell these items earn extra money in income.

Theoretically, these involved parties spend this extra income again on other consumption and durable goods, services and items and thus help other people to earn extra money.  This cascading effect is said to reinforce itself, according to the theory: one billion of government stimulus is said to trigger various billions of extra economic growth through this cascading effect.

First, I have serious doubts about this cascading effect. It sounds like a perpetuum mobile: an object that remains moving for eternity, after it has been put in motion. You (as a government) add one euro to the system and the system itself produces many euro’s on top of this euro. It sounds almost too good to be true, doesn’t it?!

Further, during the first decade of this century we have been involved in an economy of structural overproduction and (almost hedonistic) excess consumption: too many luxury houses have been built and too much Commercial Real Estate, too many cars, too many consumer goods and too many services have been produced and sold, with often borrowed money. There were just too many objects, goods and services in those days, that people could easily do without.

The final result was that people and companies borrowed themselves into misery, in order to buy these luxury houses and office buildings and to buy all these services and consumer goods. Risk awareness was virtually non-existent and banks were happy to lend excess money to everybody and their sister, in order to pay for or finance these excess goods, products, services, houses and buildings. After all, that was the main reason that the crisis started in 2008.

At this moment we are at a crossroads: at one hand we are still in this situation of excess production, as still too many people produce too many goods and services that are in too little demand nowadays. At the other hand, the process of 'moral cleansing', debt destruction and austerity makes that people become less and less interested in hedonistic consumption and debt hoarding.

It is my firm opinion that Keynesian stimulus is exactly the wrong method in such a situation, as it could lead to ‘bridges to nowhere’, 'buildings and shops for nobody' and probably fails to trigger higher consumption anyway. At this moment, the mindset of people is just aimed towards more austerity and less debt, as people got acquainted with the dark side of debt, during the last five years.

This diminishing debt and increasing austerity of households will definitely lead to less consumption, instead of more consumption. This is the reason that Keynesian stimulus will fail, in my humble opinion: the time is just not right for it. 

The employment situation might be increased slightly in the industries where the stimulus is distributed, but this won’t be a long-lasting effect. The mindset of people yet didn’t change from risk-averse and consumption-avoiding to risk-loving and consumption-minded. When people remain spending less money and getting rid of excess debt, instead of taking more debt, this will definitely lead to reduced consumption and reduced employment.

The Monetary Solution

The monetary solution is – roughly – to supply loads and loads of cheap money, by letting the money presses run overtime.  The central bank distributes this cheap money to the banks, hoping that the banks subsequently redistribute it to their customers: companies and private citizens. 

It is true that this solution could eventually help to reduce debt, by diminishing its value through inflation. Nasty side-effect is, however, that it "kills" the savers and cautious people, in favor of the ‘big spenders’ and people with large debts. Besides that, it doesn’t change the mindset of people and companies and thus their current risk averse and consumption-avoiding behaviour:

• Banks, which learned their lessons from the crisis, hoard most cheap cash as a buffer, instead of lending it to companies and private people. This reduces the effect of the monetary solution;
  
• Nevertheless, theoretically healthy companies still can borrow money at much lower rates than normally and therefore they can produce cheaper goods and products, as their financing costs are reduced;
  
• However, as a result of this crisis and especially the consequences it had, normal citizens don’t become more willing to borrow and spend money from low interest rates alone anymore, even when these rates are close to zero. Many people paid a high price for their hedonistic consumption and took this to a lower level during the last two years, especially as their jobs are not exactly safe at this moment. 

And if people and companies are not willing to do extra consumption and investments (that is exactly the point during this crisis), the extra production capacity that companies have due to this cheap money, is futile in reality. 

Hence, the effect of monetary stimulus on unemployment is futile too. This is the reason that this monetary solution won’t have much effect on unemployment in The Netherlands.

The ‘Healthy National Budget’ solution

The Netherlands should get its national budget balanced out, in order to help the Dutch economy. This is the solution that is currently advocated by the Dutch government and the European Commission. Goals is to bring the Dutch national deficit below the ‘magical’ 3% threshold from the European Stability and Growth Pact (SGP). 

The opinion of PM Mark Rutte and his henchmen: “if the state budget is healthy and within the boundaries of the SGP, this increases the trust of the Dutch citizens in their government and in the stability of the Dutch economy. When people have more trust, they are more at ease with spending money on consumption and durables again. Hence, the economic situation will improve again”.

Through a system of fierce austerity measures, mass lay-offs among civil servants (the “smaller government” doctrine, where government tasks are increasingly delegated to the “market”) and tax increases in all kinds of direct and indirect taxes, the state budget becomes healthy again. Or doesn’t it?!

The positive effect of Keynesian and Monetary stimulus on unemployment is probably quite small. However, the negative effects of mass lay-offs, widespread austerity measures and tax increases on the unemployment situation are devastating. 

All these measures lead to increasing unemployment, more general insecurity, diminished consumption and thus – as a logical consequence – to less tax income. And when tax yields are indeed disappointing, another round of tax increases, mass lay-offs and austerity measures seem inevitable, leading to a vicious circle.

This is enough to smother an economy into a deep coma, where everybody (the government, companies, banks and private citizens) keeps their cards to their chest. As a consequence, the ‘holy grail’ of the 3% budget deficit becomes a mirage: you can see it, but never touch it. This is the situation that The Netherlands is currently in. The result: soaring unemployment.

The ‘Ernst’s Economy’ solution

There is no “quick and dirty” solution to fight unemployment. The overproduction in the economy must disappear and the process of debt destruction among banks, companies and private citizens must be finished first, in order to get a healthy economy again. This is a long and painful cleansing process and the more governments do to avoid it, the longer this process will take.

Still, this ought not to be a hopeless situation.

What can be done to reduce unemployment within a few years, is: 

• Governments should make strategic investments in education. Good general and targeted education is very productive. Innovation-spurring studies and fundamental research are often even more productive, at least in the long run.
  
• Innovation among companies, universities and science centers should be stimulated. This can be done through special subsidies, but also through the creation of preconditions and a special infrastructure, wherein innovation can be triggered more easily. A good example is the ‘Brainport’ near Eindhoven, where local governments, universities and high-tech companies are all working together towards innovative solutions and thus create much added value.
  
• Governments should not per sé want to liberate the labour market as a goal by itself. By doing so, the labour market could become a ‘wild west’ situation, where people and companies bend and break the rules at will. What the government should do, however, is enabling a level playing field for everybody and all parties involved: foreign and domestic.
  
• When some companies are allowed to cheat upon the labour laws and collective labour agreements, in order to hire foreign personnel at discount tariffs, this is not a healthy development.
  
• It is also not good when labour rights and dismissal laws are all bluntly dismantled, in order to make it much easier for companies to ‘hire and especially fire’ workers. When companies can virtually do what they want and workers lose almost all of their acquired past rights, it won’t improve the national labour situation eventually
  
• What the government should do, however, is taking away obvious boundaries for companies to hire people:
  
• Softening labour and dismissal laws, when these laws are obviously withholding companies from hiring people. The functional parts of these laws should be maintained, while the disfunctional parts should be skipped;
  
• Diminishing the void between the gross and net salary of workers, thus making it cheaper for companies to hire people;
  
• Partially subdizing job-trainings and extra educational programs-on-the-job in order to make people more flexible and more multi-functionally usable.

• Investing in the education of unemployed, but enthusiastic people in order to make them more fit for the labour market.
  
• Taking away boundaries in the labour laws on a pan-European, supranational level. If people can easily move to places where ample labour is available, this leads to better functioning labour markets in all European countries and thus in The Netherlands; 

Neither of these measures will lead to a quickly dropping unemployment. 

People should get rid of their excess debt first and than they should regain their trust and confidence in the economy and especially their own future again. This will require political change at many fronts in the Dutch economy. The labour market, the RRE/CRE market, the building industry, the financial industry and local and central governments. Change that many politicians still scare away from.

However, by spurring education and innovation and by investing in people and companies as a government, you increase the odds that you see the train with ‘the next big thing’ arrive.  When this train comes, your country can step in at it, instead of waiting for improvement at the sidelines.

Mini-Jobs: According to Flemish party Open Vld and employer’s organization Unizo, Belgium should follow Germany on the path towards underpaid and underprotected jobs. Is the ‘race to the bottom’ spreading over Europe?!

Slightly surprising news from Belgium: the liberal-conservative Flemish-Belgian party Open Vld has made a U-turn and is now in favor of the so-called Mini-Jobs, after months of resistance against it.

Mini-jobs are jobs, which are rewarded with a maximum of €450 per month. These jobs are not liable for income taxes and social security premiums, but consequently offer no social security protection for the workers that have such a Mini-job. Besides that, the maximum of €450 per month is not enough for a person or household to live from. Consequently, people are usually forced to take another (mini-)job in order to avoid poverty.

The Flemish (i.e. written in Dutch) newspaper Het Nieuwsblad wrote upon this developing story:

Open Vld pleads in favor of ‘mini-jobs’

Open Vld states that it is time for the introduction of ‘flexible, affordable (temporary) labour’, like the German Mini-jobs. Labour unions and social-democrats have always resisted against the introduction of the German-style Mini-jobs. According to these stakeholders, the Mini-jobs lead to an increase in poverty, diminishing job-security and social inequality. However, from now on they face severe headwinds from the liberal-conservatives. Open Vld supports the call from Karel van Eetvelt, chairman of the Belgian employer’s organization Unizo, to introduce an ‘adjusted version’ of the mini-jobs in our country.

Open Vld-chairwoman Gwendolyn Rutten:’I don’t like the expression Mini-jobs, due to the negative connotation it might bring. In spite of that, we are the demanding party for the introduction of a system for flexible, accessible and affordable labour, maybe/maybe not on an hourly basis, in order to lead people to the labour market more quickly’.

According to Rutten, there is a large need for this kind of labour, especially in industries like the food, beverage and hospitality industry and the healthcare industry. A precondition is that these mini-jobs don’t replace the regular jobs.

The Flemish Social-Democrats, represented by the Sp.A of Johan Vande Lanotte, are not in favour of the mini-jobs. In Germany, 5 million people work in such jobs, but in the country with the strongest economy in Euro poverty has become twice as high as in Flanders, since the introduction of these mini-jobs. The government made occasional labour less expensive, but this is about ‘making an occasional buck’ every now and then, according to Vande Lanotte. The emergence of permanent Mini-jobs should not be a target of this policy. People cannot make ends meet with €450 per month, he added.

This morning, there has been a discussion upon this topic on BNR business radio. Some disturbing data were mentioned during this discussion:  

• 7.5 million workers in Germany currently have such a mini-job;
   
• Currently 25% of every new job is a mini-job;
  
• 50% of every new job in the food, beverage and hospitality industry is a mini-job;
  
• People with mini-jobs are often forced to take a second job to get sufficient income;
  
• People with a mini-job are considered to be the new poor;
  
• Only retirees seem to profit from the mini-jobs, as they can add a few bucks to their pension payments; 

Michael Moore’s shocking documentary ‘Bowling for Columbine’ gravely showed a.o. the negative consequences of the American equivalent of mini-jobs: poor people in a desperate situation, who have to work for 16 hours per day to make ends meet, thus neglecting their families and children. Children run wild and start to skip school, thus aiming at a future of joblessness, drug addiction and lurking criminality and victimship.

Workers in such jobs might get caught in a poverty trap, without having the chance of ever getting out. They probably don’t have a right for social security, they are out-of-scope for the labour agencies (‘not unemployed’) and when they get ill, someone else gets their job. It seems to be one step closer to 21st century ‘virtual’ slavery in this European race-to-the-bottom and it ultimately leads to a reduced group of ‘haves’, a small group of extremely wealthy ‘haves’ and a large group of ‘have nots’.

People, who don’t believe me, only have to look at the extreme numbers of foodstamps that are handed out in the US monthly. In April, 2013 a record 23-million households has been living on foodstamps: one-in-five households in the US. Many of these people probably have one or two (mini-)jobs.

Besides that, employers get spoilt by such ‘no strings attached’  labour like the mini-jobs, as these offer exactly the wrong kind of flexibility. Workers with these kinds of jobs can be treated with disdain by the higher-paid workers and can be tossed away like a used paper towel, when they don’t meet the high company standards that even these jobs seem to have nowadays.

Companies that care for (all) their workers, should offer them a decent salary. And companies that can’t pay a decent salary nowadays, seemingly don’t have what it takes to survive this crisis! This statement on my behalf might sound too harsh, but the streets are currently littered with companies that could only survive in good times, but failed hopelessly in the current, bad times.

In my daily situation, I start to notice a more harsh stance of employers towards their employees. The national attitude of employers seems to be: ‘my way or the highway’. Employers want simply the best and most flexible workers and don’t settle for less anymore. The awkward economic situation has changed the labour market in a massive supply-market, where demanding companies only look for the best-of-the-best.  

The extremely diminished demand for consumption and business2business products on the European markets led to a substantial overcapacity in almost any industry. Many companies in Europe are currently in a situation wherein they strongly reduce their overcapacity and only want to maintain workers that work very hard, but cost their company very little money. All others can go! This is an predictable, understandable and defendible paradigm shift in the current labour market, when compared to the same labour market eight years ago.

However, when the floodgates of underpaid and underprotected jobs are opened, this leads inevitably to deterioration of all job payments and a deterioration of jobs in general, except for the best paid management jobs. The demand of Open Vld in the earlier mentioned article, ‘that the Mini-jobs should not replace the regular jobs’ is made in vain: this will definitely happen in many, many regular, steady jobs.

The European youngsters already suffer from strongly diminished job security and the elderly workers might follow soon, when their current fixed jobs are exchanged for flexible jobs with strongly reduced payments. Mini-jobs might be a soaring phenomena soon, as I expect many countries to follow the German example.

I am definitely not per sé against more flexibility in the labour market, but I am against a situation on the labour market where nobody has any kind of security upon his job anymore. Flexibility on the labour market is only successful when there is something in it for the workers too and not only for the employers alone. The former is not so obvious as the latter, unfortunately.

The Rheinland model with its high job security, good salary payments for everybody and substantial welfare provisions always suited continental Europe fine and brought the continent prosperity and fortune in the past seventy years. It would be a shame to toss this all away, in favor of the Anglo-Saxon model with its focus on shareholder’ value, its limited job-security and its extreme rewards for the top-layer of specialized workers and managers.

Therefore I wish the Belgian political parties good luck and I hope that they offer the mini-jobs a critical assessment before introducing them in Flanders and Wallony. I also hope that the Germans don’t continue much further on this path-to-the-bottom.

Will the terrible accident in Bangladesh finally trigger some positive change in the international fashion and footwear industry?! Let’s not be overenthusiastic!

Hi, it’s me again.

Today, I publish my first blog in more than one month. For no other particular reason than physical and mental exhaustion, I had to stop blogging for a while.

What I initially reckoned to become a short break of a few days, turned into a month of ‘total abstinence’ from using my beloved computer. This happened, in spite of a substantial number of Dutch national holidays during this month, which offered me all the possibilities in the world to write.

I had the time, the opportunity and ample subjects to blog, but my mind showed a ‘blur’ when it came to inspiration for stories and de facto writing. I regret it, but that’s the way it was. With this blog, I hope to celebrate my ‘return to the typewriter’ with you, my dear readers.

Of course, this period-without-blogging didn’t mean that I stopped following the news and the daily business. We have had our share of (inter)national quarterly results of the leading companies and international macro-economic data, hovering between ‘promising’ and ‘extremely poor’.

We have had the European leaders discussing the pros and cons of an international banking union. However, we also saw the German representatives,  who put the handbrake firmly on the decision-making process, concerning this banking union.  And we scrupulously followed France, desperately trying to outsource its massive domestic, economic problems to the EU and the European Central Bank ECB

We saw France and Germany running the gauntlet on a pan-European approach against the massive youth unemployment within the Euro-zone and the EU. But we also knew that we can only believe in such plans at the time that these plans are actually executed and start to show real results. This time is not now yet…

And finally, we saw how the minutes of Ben Bernanke and his latest Federal Reserve meeting led to a panic reaction in the Far East and Europe, with especially the Japanese Nikkei index showing a mindboggling 7% rate-drop today.

Still, there was one story, which totally stood out to me during this last month. A story, which developed in its gruesome details and massive loss of life. This was the Bangladesh building collapse disaster, which claimed the lives of more than 1127 workers in the vast Bangladesh clothing and footwear industry.

During the last 8 months, we have had the two massive factory fires in Pakistan and the likewise, massive factory fire in Bangladesh, which claimed many hundreds of lives combinedly. And then I don’t even mention the numerous smaller incidents. After these incidents, I hoped that we had hit rock-bottom, when it came to work-related misery in the low-wage countries. Sadly, we didn’t…

On April 24, the eight-story Rana Plaza Building in Savar, Bangladesh (a suburb of capital Dhaka) collapsed, under a structural pressure it couldn’t stand anymore. This terrible event happened, just days after the occurrence of various anomalies, like expanding cracks in the walls and strange noises from within the structure of the building.

These obvious warning signals have deliberately been ignored by the inhabitants of the building – a.o. a number of factories in the fashion industry –, who were clearly more concerned with their production targets and deadlines, than with the safety of their hundreds of workers. As a grave consequence of this almost criminal ostrich view, the world witnessed one of the worst work-related catastrophes ever.

The results of this accident have been devastating: one month after the disaster happened, the counter stopped at 1127 dead workers and countless grieving families, who lost their family members and loved ones and (probably) their main source of income. Some of these families are now facing a life of sheer poverty.

The disaster had seemingly been caused by the outrageous combination of a poorly built and extremely dangerous, high-rise office building and vastly overcrowded factories, operating from within this building. Investigation showed that extremely poor building materials have been used, while ‘every rule in the book’ has been breached by the owners.

Other incidents, like the ones mentioned earlier in this article, had been largely ignored by western companies. However, the Savar incident did send shockwaves through Bangladesh itself and through the western world, as the sheer loss of life was simply too big to overlook.

Outraged workers hit the streets everywhere in Bangladesh. They protested against their working situation and extremely poor payments, which sometimes led to circumstances close to modern slavery. They also protested against the totally failed safety regulations and virtually non-existant labour inspections in their country, leaving them under jeopardy of large and lethal working accidents. They demanded better payments, more job security, fewer working hours and more safety.

At last, the notion set in at the boardrooms of some leading fashion and footwear companies in Europe and the US, that something had to be done about the labour circumstances in the low-wage countries. Otherwise, the situation in Bangladesh could massively backfire at them, eventually. Everybody in the industry and outside it knew that there is a blatant correlation between the outrageously poor labour and safety regulations in the low-wage countries, like Bangladesh, Vietnam and Cambodia, and the occurrence of deadly accidents, like Savar and the Pakistani factory fires.

Cynically speaking, the poor regulation and non-existent labour inspections were the main reason for the attractiveness of these countries: it enabled production of clothing and footwear at even lower prices than in other low-wage countries, like f.i. China, Romania and Turkey. Small accidents were collateral damage, which could mostly be ignored. Every discouraged worker leaving such sweatshops, attracted ten others, who all wanted to take over his job.

However, this Savar incident became too big to ignore; even for the thick-skulled people in the boardrooms of world-famous fashion brands and leading chains of fashion shops in Europe and the US.

Since Savar, already 31 companies have signed a covenant, which spurs action against the poor labour and safety circumstances in the Bangladeshian sweatshops: the so-called ‘Clean Clothes’  campaign. Among these companies were: Tchibo, PVH (Tommy Hilfiger / Calvin Klein), H&M, Zara, Mango, C&A, Marks&Spencer and Benetton (for the complete list, you can check out www.schonekleren.be).

This is good news, right?! Well, it might be, but I’m not so sure about it yet…

I am afraid that ‘the usual suspects’ only pay lip service to the good cause, now that the heat is on them after the Savar incident. However, they might soon return to business-as-usual, when this all has blown over!

Simply, because the leading brands and fashion chains need the extremely low prices for clothing and footwear, in order to keep their profitability upright. The millions of workers in the low-wage countries cannot miss the jobs and even the offensive payments of these companies are better than receiving nothing at all.

The governments in these countries will maintain their policy of looking the other way, probably spurred by the millions of dollars in briberies and kickbacks they receive. So, the system remains intact…

In one of my first blogs, I wrote about Adidas, which at the time left China in favor of Laos and Cambodia, due to the soaring wages in the People’s Republic.

Sadly, companies like Adidas and others need probably more than one collapsed building and factory fire to change their attitude. Therefore the consumers in the western world must realize, that in the end THEY decide about where their fashion, available at bargain prices, will be manufactured in the near future.

To finish with one tell-tale example: at the same evening that the 8 o’clock news was filled with the grim reports from Savar, Bangladesh, a commercial of Zeeman (a Dutch fashion discounter) was broadcasted. The message of this commercial was: “At Zeeman, you can buy a €50 dress for just €5”.

The company didn’t mention, of course, that – figuratively speaking – this dress was made from the blood and misery of numerous Bangladeshian and Pakistani workers.