In the past few years, the global downward development of the LIS has met with growing attention from policymakers and academics alike, with the debate centring on the mechanisms underlying the trend. They have concluded that the decline of the LIS in advanced economies is driven by globalisation and technological progress. A factor that has been insufficiently explored but nevertheless seems to play an important part in the Dutch context is labour market flexibilisation. In the Netherlands, the share of the flexible segment of the workforce, comprising employees on flexible contracts and own-account workers, has increased much stronger than elsewhere in Europe.
Labour income share decline driven by labour market flexibilisation
The main reason that the increasing flexibilisation of the labour market may go hand in hand with downward pressure on the LIS is the weakened negotiating position of workers on flexible contracts. Research shows that this weaker negotiating position partly results from government policy. For example, dismissal costs are higher for employees on fixed contracts than they are for flexible workers, which is why the latter have lower job security and hence a weaker salary negotiation position.
In addition, they generally have a lower level of engagement with employee organisations. On average, some 10% of flexible workers were members of a trade union between 1995 and 2011, while this was more than double for employees on permanent contracts (24%).
At the same time, the expansion of the number of workers on flexible contracts weakens the negotiating position of employees on permanent contracts, as this group must compete with flexible workers that are generally cheaper and easier to dismiss due to different legal and tax regimes. According to calculations made by the Ministry of Finance, own-account workers at minimum-wage level cost up to 40% less than employees.
Empirical relationship between the labour income share and the flexible part of the workforce
The relationship between the LIS and labour market flexibilisation was examined by comparing the two trends at industry level between 1996 and 2015. The analysis comprised the following industries: manufacturing, construction, trade, transport and storage, catering and hospitality, information and communication, specialist business services, and rental and other business services. Real estate and the financial sector were not included due to statistical considerations. The size of the flexible segment of the workforce is calculated as the share of employees on flexible contracts and own-account workers in the total employed labour force.
Figure 1 - Labour income share and flexible layer trends (1996-2015)
Difference in level between 2015 and 1996; percentage points