Dutch Labor Reforms Don’t Address Root Causes of Liberalization

Why are firms reluctant to hire full-time employees?

Amsterdam Netherlands
Night falls on the Damrak in Amsterdam, the Netherlands (Unsplash/Elias Ehmann)

The Netherlands is finally about to have a new government. Ten months after the elections, and three weeks after parties did a deal, Mark Rutte is due to present his fourth cabinet in a week.

I’m happy with many of the proposals in the coalition agreement, which I summarized here before Christmas; not surprising, since it’s a coalition of four centrist and center-right parties, led by my own (Rutte’s).

I am worried about their plans for the labor market, which would raise costs for employers and freelancers in order to discourage abuses of self-employment laws.

(I also wrote a column on this in Dutch for deZZP.)

Too liberal

I reported here in June that the Netherlands was likely to tighten labor regulations.

Both the OECD, the club of 38 wealthy nations, and the Netherlands’ own Social and Economic Council (SER), in which trade associations and labor unions are represented, have argued for shifting part-time and temp workers into full-time employment. Dutch public opinion has been against liberalization for a while. There have frequently been stories in the press about home health-care workers being switched from full-time employees into nominally self-employed contractors as well as food and mail deliverers struggling to make ends meet. Not even a center-right government could go against such a consensus.

The question was how to shrink the gap between contractors and employees. The OECD proposed making it cheaper and easier for employers to hire workers full-time. The SER argued for making freelance and temporary work contracts more expensive.

I agreed with the OECD. The ruling parties chose the SER’s approach.

The next government’s plans

  • Self-employed workers will be required to get unemployment insurance.
  • Tax benefits for the self-employed will be gradually reduced.
  • Zero-hours contracts will be banned.
  • Freelancers will be limited to three contracts per employer every three years.
  • Employment agencies will need to be certified, and employers who work with uncertified agencies risk a penalty.
  • Companies will be allowed to cut working hours for their staff by one-fifth during a crisis.

Only the last proposal benefits employers, and that one is still opposed by trade unions.

Root causes

The policies don’t address the root causes of the Netherlands’ relatively high share of self-employed workers (13 percent):

  • Full-time workers are expensive. The minimum wage is €10 per hour or €1,725 per month, but the median wage is over €2,800 per month or €36,500 per year. Employees are automatically enrolled in a pension plan and unemployment insurance. Employers share the costs.
  • Sick workers are even more expensive. Firms must pay 70 percent of wages for up to two years when an employee falls ill. That’s a huge burden on small companies and a major reason why they don’t hire.
  • Firing workers is costly and time-consuming. Dismissal can either involve going to a judge or paying a severance of up to one year’s salary, sometimes both.

Making it easier to fire workers (or reducing working hours in a crisis) and reducing sick pay from two years to one (which was the law up to 2004) would go a long way to incentivizing companies to hire more workers full-time. Then we wouldn’t need to make high-end freelancers more expensive by requiring them to get unemployment insurance and reducing their tax deduction.