Will reduction of the duration and the height of the Dutch Unemployment Benefits really help older, unemployed people to find a job sooner? As it is akin to Damocles’ Sword hanging above their heads? The Dutch Central Planning Bureau thinks it will!

Regular readers of my blogs know that I’m an ICT consultant, specialized in software testing, and they may also know that I started as a freelance consultant for Dutch company The Future Group since December, 2014. 

Those people may also know that I suddenly lost my nearly two month assignment at a renowned Dutch bank at the end of March 2015, due to budgetary reasons within the department where I worked. That was a quite painful event for me which made a big impression, but as a freelance consultant you know that you always work ‘in borrowed time’.  You should never take your assignment for granted; even when the outlook is that it will last for quite a long time.

Now I am more than happy to state that I have found a new assignment and I will soon be back to work again. Thanks to my testing experience and the financial knowledge that I acquired during the last twenty-odd years.

What still bothers me, however, is the fact that I am quickly approaching the ‘dreaded’ fifty years of age, which ‘apparently reduces one’s chances on the labour market significantly’, albeit more of a problem for unemployed people looking for fixed or temporary contracts, than for freelance consultants.

I feel that I might have been lucky to find a new and extremely interesting assignment again, within a few months of searching; especially as having no assignment means having no income for a freelancer.

People around the age of fifty and older, working on fixed contracts, have the reputation of being very expensive. They earn relatively high wages in exchange for their work, based on the ‘superiority’ of their gathered skills and experience, in comparison with starting workers. And on top of that, they receive a progressive number of extra holidays, in accordance with their age. These days are known in The Netherlands as “old fart days” (i.e. ouwel*llendagen).

While especially these ‘aging-worker-days’ seem not inappropriate by themselves for heavy, hands-on jobs or work that is otherwise really exhausting,they apparantly lead to older workers being harder to mediate, when in search of new jobs. Personally, I never had the feeling to be entitled for them, leave alone that I really needed those days. They simply belonged to the privileges I received, without really asking for them.

Many employers are scared to assign older workers on a fixed or even a temporary contract, due to their “ill” reputation of being old, very expensive and ‘often on sick leave or furlough’, even though the former of these last two is hardly true.

This is the reason that being above fifty and unemployed is a bad omen for many companies in search of new personnel on the labour market.

Consequently, becoming unemployed at that age, is sometimes a ‘one way street’ towards receiving the maximum duration of unemployment benefit, before ending up with a welfare payment, which lasts until the unemployed worker reaches the age of 65/66/67 (depending on the official retirement age).

That is not good for companies, who miss out some very skilled and experienced workers, of which the vast majority possesses the right attitude for workers. And it is very sad for these workers, who are effectively sent on a very early retirement, after which there is hardly a chance for return to the labour market.

A few days ago, the Dutch Central Planning Bureau presented an interesting report about this phenomenon on the Dutch labour market, trying to find new ways to deal with this.

While the classic media jumped on the most ‘newsworthy’ conclusion, that the a. old fart days should be abolished and b. the height and (to a lesser degree) the duration of the Unemployment Benefits should be reduced, the report itself was quite discerning and well considered, and it made some valid points about this very tough subject.

Here are the pertinent snippets from this CPB-report, accompanied by my comments:

Long-term unemployment will decline as the economy recovers, but this will not solve the problem of older long-term unemployed. Institutional reforms are needed to solve this problem.

In the aftermath of the Great Recession, the Netherlands is faced with 270,000 people who have been unemployed for more than one year, representing over 3% of the labour force. In this respect, the Netherlands is doing worse than Germany, the United States and the Nordic countries.

As the economy recovers, long-term unemployment will go down, even without government intervention. Following earlier recessions, the decline has been around 1% and this is currently also a realistic prospect. The current relatively high level of long-term unemployment in the Netherlands is the result of a slower economic recovery than in other countries.

My comments: This red and bold text points to a distinctive problem of the Dutch economy. In spite of the very strong and competitive nature of this Dutch economy itself, the recovery has been extremely slow during the last few years. In my humble opinion, this is caused by the limited focus of the Dutch government and employers on:

• tax increases;
  
• austerity and budget balancing, in an economy in which companies and consumers already kept their hands firmly on their pockets;
  
• exports and – as a consequence – wage restraint, in order to keep the Dutch prices competitive.

At the same time, the Dutch consumers came in a standstill mode, with wages and rewards that hardly rose or even dropped during the crisis years. And as a consequence of the failure of the Dutch government to really do something more about the Mortgage Interest Deductability, than in fact kicking the can down the road for another 30 years, the mortgage debt of Dutch households remains skyhigh. 

On top of that, it will rather rise again than drop further, as municipalities and cities keep their groundprices very high and there is still an (artificially maintained) elevated demand for additional housing.  This keeps the Dutch mortgage debt at seriously high levels, in spite of the special savings’ and investment accounts, which are established by the mortgagors to pay back the mortgage eventually and still cash in the full amount of MID returns.

So the situation occurs that the export-oriented part of the Dutch economy is doing fine, while the domestically oriented parts of it are faltering: the consumers, as well as the Small and Medium Enterprises and retailers. Of course, this is reflected in the yet elevated unemployment data and the current, poor track records of SME-companies and the Dutch retail industry.

The worst part is that this conundrum did not lead to drastically changed policies yet, aimed at really aiding the faltering, domestic economy. The focus of the Dutch government and employers’s organization remains on exports and on pampering large companies, through favourable fiscal arrangements and tax rulings..

Nevertheless, certain short-term measures may help to reduce long-term unemployment. A temporary measure that could be effective is to provide unemployed people with a financial bonus when they manage to find and hold on to a job. Retraining may help people who used to work in one of the few shrinking sectors and who are therefore unable to return to their former profession.

My comments: This red and bold text bothers me personally. Although I have been without a job or an assignment on a small number of occasions, I always felt the challenge and need to find a job or a new assignment as soon as possible. I think that most unemployed people really do, except for perhaps a few ‘diehard-unemployeds’, who prefer sitting at home above working with new colleagues.

In my humble opinion, the idea of offering a bonus to unemployed people, in order to let them search harder for a new job and work harder when they have found one, is preposterous and sends the wrong signal to the other unemployeds that immediately do their best to find a suitable job. While I understand the ‘Pavlovian’ mechanism behind it, it seems a no go-area, as far as I’m concerned.

The current long-term unemployment has however brought a persistent problem to light, namely that of the labour market for older people. More than 40% of the long-term unemployed are over the age of fifty. Older employees do not lose their job more often than others, but once they do become unemployed, their chances of ending up in long-term unemployment are nearly double the average. Employers hesitate to hire older unemployed people because these often demand a higher wage than the employers are willing to pay.

My comments: The problem of people at the age of fifty is, that they often have older children, which are either on medium or high vocational education or at the university. The first jobs of these children are often hardly enough to pay for all of this. Consequently, these children require a lot of money from their parents for their study and career development. That means that their parents have higher expenses too than young, starting families or bachelors.

Many older people would by themselves not have a problem with earning a lower income, while starting at a new job, but would be confronted with having “too much month for the height of their salary”.

On top of that, I suspect that many companies have cold feet when hiring older workers anyway; not so much from their higher wages, but rather due to their unfavourable reputation, which is often based upon the wrong assumptions.

The high share of older people among the long-term unemployment is a structural problem rather than a cyclical one. Before the start of the crisis, this level was already on the rise. The current package of policy measures – largely aimed at lower wage costs – is insufficient to help the older unemployed to find another job. 

The correlation of the duration of the Unemployment Benefit
and the chance of the unemployed person to find a new job
Data courtesy of: www.cpb.nl
Click to enlarge

More fundamental reforms– such as unemployment benefits that decrease with the duration of unemployment, employment protection that is less dependent on the length of the labour contract, and less age-dependent arrangements in collective labour agreements – are necessary to permanently improve the position of the older unemployed (see the aforementioned chart). 

My comments: Two of the three measures are seemingly based upon the assumption that older workers rather remain unemployed and ‘wait for the perfect job at the perfect salary’ than accept one with less salary. For me this is quite hard to believe and – when true indeed – I suspect that this is more out of necessity, than out of a position of comfort.

Few people like being unemployed, in my humble opinion. Therefore most people will accept a job with (slightly) less salary when the remaining salary is enough to take care of their family and when the job itself is interesting and challenging enough.

Forcing the unemployment benefit down progressively, will probably not make it easier for people to find a job and it will make it much harder for people to ‘survive’ their already hard and mood-spoiling time of being unemployed.

However, as far as the age related benefits are concerned in jobs, which are neither physically nor mentally extremely demanding – the so-called old fart days – I would not mind when these are taken away from the collective labour agreements (measure three within the aforementioned red and bold text). These old fart-days are a genuine‘ blast from the past’, from times when jobs could be really heavy and physically/mentally demanding for older people.

A generous social benefit system also leads to more long-term unemployment and a slower recovery from recession. In countries with higher and longer unemployment benefits, the unemployed hold on to their high wage demand, which in turn means it takes longer for them to find a job.

Such a higher ‘reservation wage’ – the lowest wage that the unemployed are willing to accept for their new job – also has a positive side: the quality of such a new job will often be higher, which leads to higher productivity for those that do find a new job.

My comments: This red and bold text exactly describes the conundrum for older workers: should the government force people to accept lower paid jobs or not through progressively diminishing Unemployment Benefits.

The ‘higher qualification’ jobs make people happier; not only from the higher payment, but also from the intrinsical reward of having more demanding and satisfying work. Hence: they lead to higher productivity and more ‘working pleasure’ than a lower qualification job. Downside: such higher qualification jobs are much more difficult to find and might therefore take much longer time of unemployment.

In an ideal situation, reservation wage levels decrease under prolonged unemployment. This would prevent human capital being discounted through scarring and signalling. The degree by which the reservation wage reduces, in actual practice, strongly depends on the maximum duration and level of the unemployment benefits.

My comments: I have a sneaky suspicion that the concept behind this red and bold text might actually be true. There is, however, a dangerous aspect in it, as it could push people in accepting jobs that they don’t like and in which they don’t find any pleasure, with brute force.

When this is only for a short time, it is more or less OK, in my humble opinion.

However, this policy change might cause older people to get structurally off track in their career and in their lives, as it is very hard to make the steps towards a better qualified job again, when you are involved in a less interesting, but yet time-consuming job. This is the reason that I consider this to be a quite dangerous part of this plan.

In my personal opinion, the reduction of Unemployment Benefits should only be administered when genuine long-term unemployment is looming for particular, individual persons, which don’t try hard enough to get a new job.

It should not be meant as a structural policy for all older, unemployed people after having passed a certain time boundary.

High and long-term benefits enable the unemployed to hold on to a high reservation wage. With 3 years and 2 months, the Dutch maximum duration of benefit payments is long, from an international perspective. This maximum duration will be brought down to 2 years under the new Dutch Employment and Security Act (WWZ), which will be implemented on 1 July 2015

The correlation between the reservation wage and
the duration of the unemployment in The Netherlands
Data courtesy of: www.cpb.nl
Click to enlarge

Unemployed people in the Netherlands are hardly prepared to accept lower wages the longer they are unemployed (see the left side of this double chart).

Older unemployed people hold on to a higher reservation wage than young people (see the right side of this double chart). On the one hand, this is because of the higher wages that older people had before they became unemployed, and because of more social security rights, on the other. Older employees with a longer labour history, after all, have longer rights regarding their unemployment benefit entitlements than do young people with a shorter labour history.

My comments: The first paragraph of this text already states that the duration of the Unemployment Benefits will considerably decrease soon in The Netherlands. In my opinion it would too much of a double whammy, when together with the duration also the amounts payable of the UB would progressively decrease.

Perhaps it would help people to find a job sooner or perhaps it wouldn’t.

What it definitely does is putting people in an unfavourable situation much sooner, as a consequence of not only the shorter duration, but also the lower UB payments. This is a very negative kind of stimulus, as it forces people at a certain age to accept any job that they can find.

Summarized, I see the potential of the CPB plans to get people to work earlier. Especially when these people are confronted with Damocles’ Sword in their private life, due to largely losing their current income and lifestyle. Thus they are stimulated to accept any job at any price.

Either way however, whether it is through payment of a bonus for finding and keeping a new job or through the diminishment of the duration and the height of the Unemployment Benefits, it is a very Pavlovian and therefore rather uncivilized way of stimulating people. 

In fact, it  reduces those same people to a kind of animals, which have to obey their duties or else… I really don’t like such treatments personally.