Government accepts SER recommendation on unemployment insurance reform
In April 2005, the Netherlands' tripartite Social and Economic Council (SER) issued a unanimous recommendation, requested by the government, on reform of the Unemployment Insurance Act (WW). Subsequently, the government announced that it would be implementing the recommendation. virtually in its entirety. The unemployment insurance system will thus be reformed, for example by cutting the maximum period of benefit entitlement and tightening the rules on the previous period of employment required. At the same time, there will be greater emphasis on prevention of unemployment, reintegration back into work and activation of unemployed people, along with changes to dismissals law.
In February 2004, the government asked the tripartite Social and Economic Council (Sociaal Economische Raad, SER) for a recommendation on amendments to the Unemployment Insurance Act (Werkloosheidswet, WW). In broad terms, the government asked the SER for its views on how 'future-proof' the WW is in terms of funding and legitimacy.
While the SER was considering its recommendation, the government itself initiated amendments of the WW and submitted legislative proposals relating to:
- deducting compensation awarded to dismissed employees from their subsequent unemployment benefits (NL0410103F);
- abolishing 'short-term' unemployment benefits (ie based on relatively brief periods of prior employment); and
- tightening up the prior employment requirements for receipt of benefit.
The social partners objected strongly to these proposals. The dispute was dampened by the wide-ranging tripartite 'social agreement' of 5 November 2004 (NL0411102F). As part of the deal, the government offered the SER an opportunity to propose alternatives on WW reform and indicated that the SER's recommendation would weigh heavily if it achieved a similar reduction in the volume of unemployment benefit recipients as envisaged by the government (ie an annual cut of 43,000 'benefit years').
In separate requests to the SER for recommendations (submitted on 2 December and 21 December 2004), the government raised two other topics:
- proposals to deregulate the unemployment insurance system, including changes to the way in which it is assessed whether a person is unemployed through their own fault;
- further differentiation in the level of WW insurance contributions.
After complicated negotiating rounds, the SER issued a unanimous recommendation concerning reform of the WW on 15 April 2005. On the one hand, the SER concludes that there are no purely socio-economic or funding arguments (with regard to benefits and contributions) that constitute grounds for questioning whether the current WW is 'future-proof' and, furthermore, that the Dutch unemployment insurance system does not lag behind in relation to those of other EU countries. On the other hand, the SER identifies a number of 'bottlenecks' that require amendment of the WW, in order to ensure the system’s viability in the future. The bottlenecks concern: long-term unemployment amongst older and less well-educated people; and the ineffectiveness of labour market reintegration policy and failure to use the available reintegration tools effectively.
The current WW
In an international perspective, the official unemployment rate in the Netherlands is relatively low. According to the Organisation for Economic Cooperation and Development (OECD) Employment Outlook for 2004, at 2.5% Dutch unemployment was the lowest of all OECD countries- except Luxemburg (2.1%) -in 2001. After 2001, however, economic growth in the Netherlands began to slow more than in most European countries, as a result of which the unemployment rate has risen in relative terms in recent years. According to the OECD, it was 3.8% in 2003 and Eurostat reports that it reached 5% in February 2005. Even so, unemployment is still relatively low: the Netherlands is in joint fourth place with Denmark, after Ireland (4.3%), Luxemburg (4.4%) and Austria (4.6%).
Internationally, the Netherlands does not fare too badly with respect to 'benefit dependence', the SER finds. The ratio between people on benefits (inactive) and those with a job (active) - the 'I/A ratio'- dropped to 0.3 in the Netherlands between 1990 and 1999. In 2004 this figure rose to 0.34. The share of unemployment benefit recipients in the Netherlands as a proportion of the total number of benefit recipients is significant (the most important after occupational disability benefits). This can be largely attributed to the fact that in the Netherlands the WW is often used as a route to retire from the labour market, where in other countries (such as Germany, France and Sweden) older people who become unemployed transfer to an early retirement scheme. This also means that the number of people eligible for WW benefits is substantially higher than the official unemployment rate. Until recently, older WW claimants were not obliged to seek employment, which meant that they did not actively look for work. While they did receive WW benefits, they could not be counted as part of the unemployed workforce.
Cost of WW
The SER concludes, on the basis of figures published by Eurostat in 1999, that the Netherlands spends relatively little on unemployment benefits. As a percentage of GDP, the WW 'burden' was relatively low in that year. However, the SER finds that recent economic developments (less favourable in the Netherlands than elsewhere in Europe) provide cause for a further examination of the extent to which the WW is future-proof.
The international comparison conducted by the SER indicate that the Netherlands has relatively strict entry requirements for receipt of unemployment benefits, while the benefit level is rather high for all income levels. Along with Germany and France, the Netherlands has higher replacement rates (ie unemployment benefit as a proportion of former pay) for higher income brackets than in other European countries. Additionally, the Dutch WW is characterised by a strong 'accrual rate'. As a result, there are wider differences than elsewhere in the rights enjoyed by young and older people, in terms of the maximum benefit duration. In comparison with other countries in Europe, Dutch young people have relatively limited benefit rights, while for older people the Dutch WW provides relatively generous benefits, with respect to both amount and duration.
Long-term receipt of WW amongst older and less well-educated people
Although in almost all countries in Europe, older people are over-represented in the population receiving unemployment benefit, this is most pronounced in the Netherlands. This group claim WW benefits for longer. In comparison with the average figure, they take three times as long to find employment. Moreover, only a small proportion of them (20%) find employment again within a six-month period. This can be partly attributed to the fact that older people have less chances of finding employment. During the 1980s, the WW was intentionally used as a retirement route for older employees in the face of rising unemployment amongst young people. This is no longer a viable option in view of the ageing population. The recruitment behaviour displayed by employers has yet to adjust to this shift, according to the SER. Aside from the weaker position of older people in the labour market, however, their longer maximum benefit duration and exemption from obligations to seek work certainly play a role in the limited outflow of older WW recipients. Some 42% of this group reach the full benefit duration, indicating that the WW still serves as an alternative retirement route. The SER warns that in the near future more older employees may claim WW benefits as a consequence of forthcoming amendments to other arrangements - early retirement and occupational disability schemes - that have acted as a means of retiring from paid employment (NL0411102F, NL0409105F, NL0406102F and NL0404101N).
Long-term unemployment amongst less well-educated people can be attributed to their weak position in the labour market. The expectations is that this problem will become worse in the near future if remedial measures are not taken. The formerly increasing average educational level of the workforce began to decrease strongly in the second half of the 1990s, according to the Centre for Innovation in Training (Centrum voor Innovatie van Opleidingen, CINOP). The Council for Work and Income (Raad voor Werk en Inkomen, RWI) states in its 2005 labour market analysis that, according to predictions, one third of the workforce will be of foreign extraction by 2050. Because, on average, people from abroad are less well educated, an increase in the size of this category will lead to a lower average educational level, in the absence of appropriate measures to address the situation. Because the growth in employment opportunities predicted by the RWI for 2006 will mainly relate to positions for well-educated employees, an even more significant disparity will develop between supply and demand in the labour market.
Ineffective reintegration policy
Although the SER identifies a shortage of information on the effectiveness of labour market reintegration policy and instruments, it finds sufficient reason to conclude that it falls short. For example, a study conducted by the Foundation for Economic Research (Stichting voor Economisch Onderzoek, STEO) at the University of Amsterdam finds that the targets specified in the current 'closing approach' (Sluitende Aanpak) policy - ie offering unemployed people a job or reintegration path within a year of unemployment, based on the European employment strategy - are not being met. Result-oriented funding for companies providing reintegration services reinforces the incentive for them to give preference in their activities to unemployed individuals with the greatest chances of finding a job ('creaming') and achieving short-term results (ie swift as opposed to sustainable reintegration), the SER states. This also hinders the use of relatively costly paths (including educational ones) for target groups at a relatively great distance from the labour market. It also leads to uniformity in the reintegration paths offered (ie a lack of 'customisation').
A new WW
On 29 April 2005, the government announced that it would essentially be adopting fully the SER recommendation on reform of the WW - despite it falling somewhat short of the cabinet's cutback targets - and would draw up legislative proposals on the reform. The key points of the proposed new WW are as follows:
- a significant decrease in the maximum benefit duration. Instead of a maximum of five years, the new WW benefit would be paid for three years and two months at most;
- more stringent employment-history requirements. Under the proposed scheme, in order to be eligible for short-term benefits for three months, claimants must have worked for 26 weeks of the last 36 weeks (39 weeks out of the last 52 at present) - known as the 'week requirement'. For more long-term benefits, claimants must have worked for at least four of the last five years - known as the 'year requirement';
- reforming short-term benefit. Employees who meet the 'week requirement' but not the 'year requirement' (see previous point) would receive benefit for three months (previously six), at 75% of the last-earned wage for the first two months and then 70% (the previous minimum rate);
- determining the duration of the WW benefit on the basis of actual employment history. After the third month of unemployment, the remaining benefit duration would be calculated on the basis of the individual’s employment history, with one month's benefit for each year worked. Thus an unemployed person with an employment history of four years could claim benefits for four months, rising to a benefit period of 38 months with an employment history of 38 years. While the 'year requirement' applies now, the benefit duration is mainly determined by the individual’s age (ie 'assumed' employment history). The new criterion would be introduced gradually;
- tightening the reintegration obligations imposed on benefit recipients and shifting the reintegration initiative (after the first three months of benefit) from the benefit recipient to the Employee Insurance Schemes Implementing Body (Uitvoeringsorgaan Werknemersverzekeringen, UWV). A 'gatekeeper test' would be introduced after three months of benefit; and
- preserving a separate income scheme for older unemployed individuals following receipt of WW benefits. Unemployed individuals who are aged 50 or older on losing their jobs, and are entitled to claim WW benefits for a period of more than six months, could seek recourse to an income scheme under the terms of the Older Unemployed Workers Income Scheme Act (Wet Inkomensvoorziening voor Oudere Werknemers, IOW). For older people entering unemployment between the ages of 50 and 60, the family income would be supplemented to the 'social minimum' level without requiring a means test. Older employees losing their job at or above the age of 60 would receive an individual benefit at a minimum level (70% of the minimum wage), with their partner's income not being taken into consideration.
The proposed new system is geared towards increasing the 'activating' impact of the WW on recipients. The primary point of departure for revision of the WW is the importance of achieving greater dynamism in the labour market. The WW is planned to become an 'intermediate station' between jobs instead of the 'end station' on the road to benefits or retirement. The government shares the view expressed by the SER that, aside from tightening the conditions for receiving WW benefits, an adequate prevention and reintegration policy is needed to improve the labour market's operation. Additionally, the government and the SER believe a relaxation of dismissal rules is vital. In this context, they refer to the 'Danish model', which combines relatively relaxed 'hire and fire' conditions, a relatively high unemployment benefit level (at least for those in lower income brackets) and a stringent reintegration policy. The Danish model is not undisputed however, and the SER recommends subjecting it to a more thorough analysis. Nonetheless, the government has already, at the recommendation of the SER, adopted measure to improve prevention and reintegration, and to relax dismissal rules - see below.
Prevention and reintegration
The SER and the government believe that unemployment should be prevented in the first place. Concrete proposals directed at establishing an adequate prevention policy include:
- measures directed at adjustments of 'labour volume' (ie secondment, internal transfers etc);
- measures directed at raising employee availability; and
- although this is primarily the responsibility of employers and employees at a decentralised level, the use of more public resources in this area.
In addition, proposals for the WW benefit regime must be paired with improvements to reintegration policy, it is stated. Reintegration instruments must be used more effectively and customisation must be centre stage.
Changes in dismissals law
The government will also be taking a number of measures concerning dismissals law (NL0308104F) in conjunction with reviewing the WW:
- adjustment of the 'last-in first-out' principle. In future, the principle of 'proportionality' will be applied, ensuring that dismissals are spread out more evenly affecting employees in different age categories;
- assessment of fault in unemployment. Employees who become unemployed through their own fault are not entitled to claim WW benefits. In order to prevent being considered in this light, employees now appeal against their dismissal as a matter of course. In order to curtail this cumbersome and costly practice, the test as to whether unemployment is the individual's fault will now be limited to a number of carefully detailed situations;
- collective redundancies will no longer be tested to see whether they arise out of business necessity, if the employer and unions reach agreement on this; and
- the plan to deduct compensation awarded to dismissed employees from their subsequent unemployment benefits has been scrapped.
Decision on WW funding postponed
The government wishes to investigate further an SER proposal gradually to begin partial funding of the WW from taxes, instead of entirely from unemployment insurance contributions, as is now the case. The SER wants to continue funding WW benefits from contributions (shared equally by employers and employees), set on a sectoral basis, during the first six months of unemployment because it is especially during this period that unemployment can be influenced most by employers and employees in the sector concerned. The SER is calling for far-reaching differentiation of contribution rates. Because actors in a particular sector can influence the length of unemployment far less after the initial six-month period, a more appropriate arrangement would be to establish a tripartite funding structure (using nationally-set contributions and general resources).
Revision of the WW represents the closing stage in a series of social security amendments characterised by heated differences of opinion between employers, trade unions and the government. In this perspective, the unanimous WW recommendation issued by the SER and the government’s acceptance thereof is a major achievement. Ad Kolnaar, the chair of the SER’s WW committee, rightfully asserts that this recommendation will restore momentum in the Dutch socio-economic arena. Instead of a complete deadlock, the negotiations are once again full of dynamism.
Additionally, the intended amendment of the WW includes several substantive improvements compared with the original government plans. The balance between young and old stemming from retention of short-term benefits and a reduced maximum benefit duration is justifiably seen as a positive gain derived from the SER recommendation. Following changes to the occupational disability and early retirement schemes, the WW too will now become a less attractive alternative retirement route from the labour market. Criticism of the SER recommendation on - provisionally - retaining the income-support scheme for older employees after leaving the WW was raised in the government's discussions, but this is unjust given the extremely weak position older individuals currently occupy. A minimum income scheme would not be out of place in such circumstances for the time being.
However, revision of the WW still has a number of important 'loose ends'. Prevention and reintegration are key concepts in this respect. Educating young people to a minimum entry qualification level, increasing the employability of employees and establishing sustainable, effective reintegration paths for the unemployed are important preconditions for the WW to play an activating role. If these are not met, the new stringent regime will not prompt sufficient activation, but will instead lead to exclusion and poverty among the weaker groups in particular. The government emphasises relaxation of dismissals law as a way to make the labour market more dynamic. alongside the stringent WW benefit eligibility requirements. However, a prevention and reintegration policy that works properly for all groups should form an integral part of the WW in order for it to play a genuinely activating role. Professor Peter van Lieshout of the Advisory Council for Government Policy (Wetenschappelijke Raad voor het Regeringsbeleid, WRR) justly points out that education is one of the themes at the heart of western welfare states. This means an ongoing investment in citizens that transcends the 'classic' welfare state; there is a direct link between stimulating the 'knowledge economy' and the future of the welfare state, according to Professor Van Lieshout.
Finally, in order to give real substance to this policy, factors related to implementation should not be overlooked, as this is what really matters. There are too many problems here to continue to discard them as incidental; the quality of implementation with respect to the activation policy within the scope of social security is a point of concern. (Marian Schaapman, HSI)