Response to OECD report
Speech door de minister van Economische Zaken, mevrouw M.J.A. van der Hoeven, bij de presentatie van het OECD-rapport, Nieuwspoort, 31 januari.
Introduction
Mr Secretary-general, let me start by complimenting you on the excellent choice of subjects. The OECD shows to have vision; you have managed to supply our special Commission Bakker - that looks at all aspects of labour participation - with a must reader, right on time. I was pleased to see that the report acknowledges our reform efforts of the past few years. But more remains to be done. The OECD's analysis is very useful to that end. The recommendations provide plenty of food for thought on future policy initiatives
International financial turmoil
The Dutch economy has a strong starting position, thanks to structural reforms of the past. High economic growth, low unemployment and sound public finances make our economy a top-performer within the EU.
So far, economic growth has been solid and the effects of the international financial turmoil have been modest. Still, the financial turmoil and the US slowdown have induced a time of uncertainty for the world economy, which might well depress economic developments. The economic interdependence of the Dutch and the American economy runs not just through international trade but also via financial markets, which are increasingly moving synchronously.
Unfortunately, the government can't control these international economic developments. But we can control the way we react to these developments. In that respect, our budget policy is characterized by full automatic stabilization on the income side. Windfalls on the income side lead to an improvement of the budget balance, while setbacks lead to a deterioration of the budget balance. An advantage of this system is that the budget on the income side is able to go along with economic developments. In the event of any setbacks that push the budget deficit to the 2% warning level or make us no longer comply with the Stability and Growth Pact we stand ready to take further measures, preferably on the expenditure side.
Labour market tension
Unfavourable external conditions could have the side-effect of taking some pressure of our labour market. The number of vacancies is on a record high and wage pressure is mounting after subsequent years of above potential economic growth. The OECD warns us for a repetition of the previous business cycle, when rising labour costs damaged our competitiveness and profitability. I acknowledge this risk. In fact, I would argue that a shortage of labour poses a much bigger threat to our economy than an international economic setback.
Social partners should therefore keep a close look on the business cycle and make sure that wage cost increases are moderated as soon as the business cycle is reversed, which will inevitably happen at some point. However, different sectors and companies won't face the same effects of the international turmoil. Some may take hits while others can have trouble finding workers for many more years to come. This calls for a more differentiated wage cost increase that reckons with specific economic developments in sectors and individual companies. The process of decentralisation of the collective bargaining process, that started in the nineties, is a welcome development in this respect. While progress has been made, further decentralisation is welcome, especially with regard to working time- and pay provisions.
Increasing labour supply
As the ageing of the population is a structural phenomenon, addressing labour market problems will have long term rewards as well. Measures should be directed at working longer hours on the one hand and higher participation of inactive groups on the other.
Working longer hours
With regard to working longer hours, calculations show that when every current worker would work 1½ hour more per week this would have the same rewards in terms of economic welfare and public finances as an increase of labour participation in persons to 80%. It should be made more rewarding to work an extra hour. The OECD puts the finger on the sore spot: our marginal effective tax rates need to be lowered. The Cabinet takes several steps to this end, for instance by raising the existing tax credit for working couples with young children and making it more income-related ("income-related supplementary combination credit").
Reactivating the inactive
With regard to inactive groups; too many people that loose their job are either incapable or unwilling to find a new job within a short period after becoming unemployed. A prolonged spell of inactivity makes their chances of finding a job drop rapidly, creates a large cost for society and increases the risk of social exclusion. This calls for more prevention and more effective reintegration.
To start with prevention; employers should take more responsibility in making sure that workers have the skills to easily find another job in case they become unemployed. But employers will need a stronger incentive to do so. One of the challenging questions is therefore how to change current institutions in a way that the employers are stimulated and rewarded for keeping their workers employable. Not only in their current, but also in future jobs. The fact that lifelong jobs do no exist anymore makes this issue all the more relevant.
With regard to reintegration; if we want to get people back on the labour market we need the best form of reintegration that we can get. And we need it sooner rather than later. A recent assessment shows a mixed picture of the current way we reintegrate the inactive. There are some good results but there is also room for improvement. So why not profit from the good experience we recently gained with municipalities? In 2004 we successfully introduced financial incentives for municipal authorities to diminish the amount of people on social welfare. We could therefore consider giving local authorities an earlier role in reintegrating unemployment benefit recipients. This would fit in with the expertise that municipalities have built up in guiding social assistance recipients to work, especially now that work first elements are going to apply to people that have been unemployed for over a year as well.
Labour migration
To conclude, a few words on immigration. I can see why the OECD didn't leave this subject unattended, as it is very much related to the question how we meet our demand for labour.
Indeed, the number of vacancies would have been even higher if we hadn't opened our borders for employees from the new EU member countries.
Overall, we can be positive about the contribution of these workers to our economy. Of course, there are challenges related to housing and schools that we have to address. Concerning the situation for workers from Bulgaria and Romania, referred to by the OECD, we are currently awaiting an evaluation of the transitional regime and its effects so far, before taking decisions on extending or abolishing restrictions to the labour market.
Conclusion
Mr Secretary-general, it's obvious I haven't touched upon all recommendations made in the report, since they are too many. I hope that in the future we can continue to benefit from the OECD's thorough analysis on the challenges of our economy. Thank you very much.