In mid-2009, DNB and the Netherlands Bureau for Economic Policy Analysis (CPB) estimated that unemployment in the Netherlands would rise by 300,000 in 2010. When ‘only’ 65,000 were added to the unemployment figures that year, this was referred to as the ‘unemployment riddle’. To solve this riddle and to discover why employers around the world respond so differently in times of crisis in terms of staff policy, DNB decided to perform an international comparative study
When production drops, there can be several reasons why employers do not (immediately) make superfluous employees redundant but go instead for ‘labour hoarding’, that is, retaining personnel despite a decline in production. First and foremost, making employees redundant involves costs, including severance pay and the loss on human capital investment. In addition, employers will be compelled to find new personnel when production picks up, which also involves extra costs.
The higher-educated the employees, the higher the rehiring costs will be. When weighing up the pros and cons of redundancy versus retention, the expected duration of the crisis can be a deciding factor. Employers expecting the crisis to be short-lived are more likely to retain personnel, provided their business has reasonable buffers. The financial position of the business (the debt-equity ratio) is therefore a key factor.
The researchers took a close look at the extent of labour hoarding in 25 OECD countries and related it to the economic structure and cyclical situation of each country. They considered factors such as the degree of employment protection, union density, the economy’s knowledge intensiveness and the indebtedness ratio of the business sector and, finally, the ‘output gap’ as a measure of cyclical stress.
The study shows that international differences in labour hoarding are remarkably large. At one end of the spectrum are countries like the United States, Spain and Ireland, where employers made superfluous staff redundant as soon as the crisis broke. In Spain and Ireland, that was largely because the business sector was already contending with a low output gap and with financial resources that were (too) limited. Added to that mix was the relatively low level of education among employees in Spain and the weak employment protection in Ireland. The fact that labour hoarding barely existed in the United States is due not only to the minimum employment protection that employees are afforded but also to the low output gap in 2007.
At the other end of the scale are countries such as Slovakia, the Czech Republic, Finland, Estonia and Slovenia. These countries had an exceptional spurt of growth in the years immediately before the crisis: their rise in positive output gap from 5.1 to 8.5 in 2008 was phenomenally high.
Netherlands in the middle
By international standards, the Netherlands falls into the middle bracket; Belgium revealed a similar degree of labour hoarding, while the level in Germany was even slightly higher. In comparison with our neighbours, labour hoarding in the Netherlands was encouraged by the tight job market preceding the credit crisis. The upward effect of employment protection on the level of labour hoarding was weaker in Belgium than in the Netherlands, while in Germany it was stronger. Conversely, the high union density in Belgium exerted a stronger upward pressure on labour hoarding than it did in the Netherlands.
The overall result was that in the Netherlands and Belgium, unemployment growth remained subdued during the initial crisis years, while in Germany there was, in fact, a slight decline. In recent months, however, unemployment has risen sharply in the Netherlands. The average business can no longer afford to retain superfluous staff, partly because its financial position has deteriorated. At the same time, the number of people making themselves available on the job market continue to increase.