Proposal to exempt long-term unemployed people from legal minimum wage

A bill that allows Dutch employers exemptions from the legal minimum wage aims to improve the chances of long-term unemployed people obtaining a full-time job. Although the bill will probably have only a minor quantitative impact on the level of unemployment, it has provoked a new debate on the legal minimum wage

The Dutch Government wants to allow employers temporary exemptions from the legal minimum wage (WML- wettelijk minimumloon), and to that end, a bill was submitted to Parliament in 1996. The target group consists of long-term unemployed people aged between 20 and 65. The purpose of the bill is to give such people the prospect of qualifying for a full-time job while working. The definition of "long-term unemployed" is taken from an existing statutory regulation.

Details and effects

Employers will be entitled to enter into an agreement with a person who has been unemployed for a period of at least one, and not exceeding four, years. During the first half of the term of the contract and for a maximum of two years, the employer is allowed to pay less than the WML. The minimum wage an employer is allowed to pay is 70% of the WML for adults (that is, 23-year-old workers). In return for the reduction in labour costs, an employer has to provide the employee with training and supervision. These obligations and the right to pay less than the WML are both derived from the bill's assumption that the employees concerned are not yet able to achieve a normal level of performance on the job. Members of the target group who, because of this proposal, might fall below the guaranteed minimum income will not be forced to participate, which means that the bill applies only to single people who have been unemployed for a long time and not to breadwinners and lone parents.

Earlier estimates by the Central Planning Office (CPB- Centraal Planbureau) -an economic advisory body of the government - show that the proposed measure will, at most, lead to a reduction in unemployment of 11,000 people in the long term and about 3,000 people in the medium term.

Background and debate

The bill derives from agreements reached during the 1994 formation of the cabinet of the current "purple" coalition Government - that is, comprising Social Democrats (red), Liberals (blue) and progressive Liberals. The parties forming the cabinet agreed that the WML as such would stay untouched, but that at the same time proposals for exemptions would be developed. The first proposal was presented in 1995. The responses in the Social and Economic Council (SER- Sociaal-Economische Raad) - a central tripartite advisory body - were critical: representatives of the employers' organisations and trade unions as well as Crown-appointed members considered the effectiveness of the proposed regulation too low. In addition, trade union representatives thought the proposal socially unacceptable.

After a period of silence, the debate started anew in December 1996. The responses to the - slightly revised - proposal remain critical. The Dutch Federation of Small and Medium-Sized Enterprises (MKB- Midden- en Kleinbedrijf Nederland) opposes the proposal. In the MKB's view, it will result only in an increase in bureaucracy. Instead, MKB urges a reduction of employers' costs. The trade unions remain opposed because they still consider the proposal socially unacceptable. The Dutch Trade Union Federation (FNV- Federatie Nederlandse Vakbeweging) - the largest trade union federation in the Netherlands - announced that it will not cooperate in applying the proposal in collective agreements. The FNV states that it has done enough by cooperating with the introduction of wage scales equal to, or just above, the WML in various collective agreements.

The Government is presenting the proposal as part of a set of measures to fight unemployment, especially that of lesser-skilled or unskilled workers. One of these measures is the reduction of employers' costs in respect of workers who earn 115% or less of the WML. Furthermore, the Government is aiming to achieve the aforementioned reduction of the lowest wage scales in collective agreements to the level of the WML or slightly above. Prior to 1994, the difference between the WML and the lowest wage scales was considerable, as much as 30% in the building industry. Since then, the Government and representatives of employers' organisations and trade unions have, on a national level, agreed to fill the vacuum between the WML and the lowest wage scales. Some progress seems to have been made: while the lowest wage scale in collective agreements amounted to an average of 111.9% of the WML at the end of 1994, it had decreased to 108.3% by the end of 1996. A recent survey by the Labour Inspectorate (Arbeidsinspectie), which also performs research for the Ministry of Social Affairs and Employment, shows that in 31 out of a sample of 51 collective agreements, wage scales up to 105% of the WML have been created.

The "big stick" avaialable to the Ministry of Social Affairs and Employment is that it can refuse the extension of parts of collective agreements if the bargaining parties refuse to create such scales. In the past, a request for extension was usually granted automatically. The extent to which these scales are populated - ie, how many workers are actually covered - is not clear.

Commentary

There is a wide range of proposals and views regarding the solution to the problem of unemployment. The lowering of, or temporary exemption from, the WML is just one of the proposals, and it has provoked some controversy within the government parties, Parliament at large, employers' organisations and trade unions,as well as in the national press. Three years ago, the same type of debate focused on the extension of collective agreements. Most of the lines of argument in these debates have a long history. Prior to the introduction of the WML in February 1968, advocates of the WML had already mentioned the intrinsic value of labour, the difference in power between employers and employees, the function of the WML as a living wage and the furthering of social harmony. Opponents called attention to the dangers that a WML would pose to employment and the competitive position of the Netherlands. The same arguments also dominated the debates on the extension of collective agreements and recur in the current debate on the government bill.

The quantitative impact of the present proposal will probably be minor. Firstly, the direct growth of employment will be small, as noted earlier, though admittedly, this is not the main aim of the proposal. Secondly, and more importantly, the relevance of the WML in the wage structure is probably not as great as one might expect, even taking into account the increase in occurrence of lower wage scales in collective agreements. The fact should also be noted that the WML for adults is much higher than the legal minimum wage for young workers. Employers have to pay the adult minimum wage (from 1 January 1997, NLG 2,220 a month) only if the employee is at least 23 years old. The legal minimum wage for a 20-year old employee is 61.5% of the WML for adults and the level for people under 20 decreases rapidly. This also explains why the Government proposal is restricted to the group of long-term unemployed older than 20: the WML of younger unemployed people is already less than 70% of the WML.. Why would employers hire someone who has been unemployed for a long time, committing themselves to the provision of training and supervision, when they can also hire a younger person more cheaply? On the supply side there is another problem: Why would any person accept a job which pays no more than the present guaranteed minimum income (70% of the WML for a single person) even if he or she is entitled to training and has the prospect of a full-time job?

This draws attention to the relationship between the WML and the minimum level of social security benefit. Is it plausible that the proposal will work only if the minimum benefit is reduced simultaneously? A study by the CPB has revealed that a 10% reduction in the WML would result in a fall in unemployment of only some 10,000 people. However, a simultaneous reduction in the minimum benefit would raise this figure to 60,000 people.

The experiment with the WML will not, however, be accompanied by changes in social benefits. At present, there seems to be a broad consensus in the Netherlands that minimum benefits should not be reduced. This consensus mitigates the seemingly rather heated debate on the bill. The acuteness of the debate is further relieved by the recent growth in the number of jobs in the Netherlands. According to the Central Statistical Office (CBS- Centraal Bureau voor de Statistiek), a further 120,000 jobs were created in 1996, while the number of people receiving an unemployment benefit or a social security payment decreased. (Robbert van het Kaar, HSI)

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