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INTERNATIONAL WORKSHOP ON “JOBS AND EQUITY IN A GLOBAL WORLD” SANTIAGO, CHILE - JANUARY 7, 2008

1st session:
Welfare and employment policies in a flat world: the Dutch experience

By Ad Melkert *

Introduction

1. The role that I have been asked to assume before you today is one of critical observer of today’s social and economic fabric in Chile, sharing experiences from the Netherlands in the wider context of globalizing markets of goods, services and labor. I am honoured to have been invited by the President to do so. Please accept from the outset two important disclaimers.

• One, even as a critical observer I will not hide my admiration for much that has been achieved over the past fifteen years in Chile. I still remember vividly my first visit to Santiago in 1979. The circumstances were grim not only because of the persecution of political, trade union and civil society leaders but also because of the depressing reality of poverty and exclusion that made this place look like most of Latin America. Whatever the weight and urgency of tasks ahead, Chile is now part of another league with democracy and solidarity as key references for measuring progress. All those who have contributed to this turnaround deserve admiration.
• Second, in building upon experiences in The Netherlands I would not like to pretend that what has been achieved is to be seen as a universal model. Even within the European Union there are quite different ways and means to strive for economic growth and social equity. On a continual basis adjustments are required because systems always carry certain trade-offs in achieving different goals at the same time; and because the international context of doing business is rapidly changing, affecting most of all countries with an open economy regardless of the size of their GDP.

With Chile on the road to membership of the Organisation for Economic Cooperation and Development (OECD) there are good reasons to look at experiences from other countries. Institutional trust – involving social partners of employers and trade unions – is the foundation for creating a climate for ongoing analysis, learning and action by all stakeholders to jointly agree the objectives of near full employment and a balanced distribution of income.

Although I tend to agree with Friedman that the world has become a lot more flat, it is remarkable that with increased global competition it is still by and large possible to maintain comparative economic advantages in countries like Norway, Sweden, Denmark, Belgium, Germany, Austria and The Netherlands. These countries have been based on public-private partnerships rather than on unilateral market determination. Therefore I feel in good company to share with you some past experiences with social policies in The Netherlands, with specific reference to the period between 1994 and 2001.

Chile in comparison to other countries

2. Building an equitable society requires a non-ideological acceptance that three pillars are indispensable under any circumstances: i) economic growth based on the strengths of the market economy; ii) political stability relying on consensus based institutions and; iii) universality of access to the labor market and appropriate social security arrangements, fostering an inclusive society. Equally it requires the rejection of three fear factors that continue to fuel strong advocates of one sided interest representation and information. First the myth of a trade-off suggesting that expenditure for social policies will necessarily diminish economic return; second the ghost of taxation as the enemy of entrepreneurial success; and third the fear of globalization as the recipe for a race to the bottom of social standards and norms.

3. Looking at where Chile stands today two issues are particularly striking:

• First the level of income inequality. With the OECD average below 40 on a scale of 100; Chile stands around 54 much like most of Latin America, with Brazil at the top. Although in many countries, including in Europe, the number of excessively rich people is rapidly on the rise, the important message is that high economic performance can go hand in hand with modest levels of income inequality as is the case in Ireland (35), The Netherlands (31), Belgium and Sweden (25) and Denmark (23).
• The second issue is labor productivity. Over the past ten years labor productivity in Chile has just kept up with costs. In other words: apparent productivity, real labor costs and real hourly wages have risen in tandem on a scale of 100 in 1996 to around 125 in 2007. Although higher than in Latin America generally, productivity remains substantially lower than in emerging Asia. In terms of working hours Chile belongs to the top of countries counting an average of almost 2000 hours per year. In the same category, Korea has 2390 working hours per year, the US 1777 and Spain has 1745 working hours per year. However Denmark with 1423, Norway and Sweden with around 1320 and The Netherlands with 1309 show a different pattern, reflecting higher labor productivity gains. Over the past 50 years average working hours in The Netherlands decreased by 34%, ten times as much as in Chile (around 3%).

There are of course many other issues that Chile is struggling with much like other OECD countries. However I consider income inequality and labor productivity key to achieve jobs and equity on a sustainable basis – regardless whether the globe is round or flat.

The case of The Netherlands

Labour market absorption

4. Let me now mention some features of the labor market that in our case defined much of the challenge to achieve this balance – and I see some similarities in your case.
Demography conditions the need for labor market absorption. Although population growth in Chile has come down substantially, the average population is still relatively young so the labor market will have to absorb a 15% growth over the next twenty years or so, equivalent to a little over a million jobs. This is about half the task The Netherlands faced in the eighties and early nineties, having to cope with oil shocks, rapid changes in the world economy and a high influx to the labor market all at the same time. The implication of a relatively young population is simply the need for a more pro-active labor market policy than would be the case under a more flat demographic scenario. A complication both with us and also here is a parallel trend of an ageing population. This is compounded with the extra complication that in Chile the results of pension savings are certainly not yet shared over the population as a whole. In The Netherlands the single most revolutionary social security initiative in 1957 pertained to the introduction of a state pension on a pay-as-you-go basis, serving effectively as a minimum income guarantee at subsistence level to all, regardless any other income or savings. This put a considerable burden on labor costs in the form of employers’ and workers’ social contributions. In turn this created a permanent pressure on the labor market to keep primary wages in balance with economic growth. This was an effective entanglement of labor and social security arrangements which will be even more pertinent in the years ahead with a now exponentially ageing population.

Female labour participation

Labor participation is another important feature. The Dutch substantially trailed most other European countries, except Ireland, in terms of female participation. Meanwhile a big jump has been made (from under 40% in the eighties to more than 70% now), in particular as a consequence of rapidly increasing part-time work. I will come back to that aspect. Recent IMF figures suggest a relatively low participation of women (under 40%) in Chile, which is just above Turkey but behind all OECD countries. The Nordic countries are on top with scores around 80%. I would not be surprised if the grey economy plays a role in explaining the Chilean data; however for sustaining jobs and social security in the long run it is essential that the share of the grey economy remains at tolerable levels. In any case there is potential for strengthening labor market supply. As in most countries girls are likely to be or become on average better educated than boys it is crucial that facilities for women entering and staying the labor market improve – I believe this is also on the government’s agenda.

Immigration

A further feature that can put considerable pressure on social security systems in rapidly growing economies is immigration. Legal immigration in principle will potentially strengthen the basis for supporting payments into the system. However such contributions could be offset by benefit claims which happened in my country. In The Netherlands there were many workers from Mediterranean countries that had worked under low quality circumstances and after their forty-fifth year of age they were either incapable of working or rejected by the labor market.

Illegal immigration in principle will undermine the sustainability of the social security system as productive workers will not contribute and to a certain degree replace legal workers. For Chile the challenge may be a bit less pressing than in most other fast growing economies due to its location; still this physical factor will become less relevant and with ongoing growth there will certainly be immigrants, other than Peruvians, that form part of the rapidly increasing flow of a global labor force relocating to places where money is made.

Education and training

A final reason for a pro-active labor market policy in many countries is the existence of groups lacking access to education and training or discrimination in the labor market. In the Dutch context a relatively high number of second or third generations from Moroccan, Turkish or Caribbean background were in need of additional initiatives to lower the threshold of access to work. Avenues to achieve this varied from encouraging employers to consider certain quotas to directly creating jobs in the public sector or even imposing quotas by law; as well as establishing mechanisms to deal with complaints of job discrimination. I suppose in Chile, as generally in the Americas, indigenous background can cause problems for entering the labor market and therefore would be a good reason to address with specific measures.

Achieving high employment and social protection

5. So given these features of domestic concern and the need to adjust to global competitiveness requirements how can the double goal of high employment and high social protection nevertheless realistically be pursued?

In highlighting some crucial directions I’d like to underscore that the ambition to achieve the double goal is not an erratic utopian vision following a kind of social democrat trend – although there would be nothing disrespectful in that – but already formulated by no one less than Adam Smith in his “Wealth of nations”, more than two hundred years ago:
“(…) what improves the circumstances of the greater part can never be regarded as an inconvenience to the whole. (..) No society can be flourishing and happy, of which the far greater part of the members are poor and miserable.”

Bridging the gap between insiders and outsiders

The key to open employment and social protection for all is to bridge the gap between insiders and outsiders. Insiders are those with clear contractual rights often including health benefits, end of career and pension provisions. Outsiders are the workers without job security, often without contracts and deprived of secondary arrangements which mean no health or pension provisions or the need for private insurance against high or prohibitive costs.

Under my responsibility around 1996 after intensive consultation with social partners at employers and trade union side a package was launched under the title “flexibility and security” that essentially tried to address the gap I just referred to. On the one hand, the package aimed to adjust unreasonable rigidities protecting sitting employees; and on the other hand it introduced proportional protection rights for part-time and temporary workers. Thus the labor market evolved towards the recognition that more and more jobs will not be for life; and that people should be encouraged to take risks beyond permanent contracts by granting access to relevant health and pension provisions – on the basis of a public-private sharing of contributions.

I would like to repeat again and again that when it comes to balanced social policies there is never one silver bullet to hit the target. Therefore it is important to note that this “flexibility and security” package was part of a broader effort to turn on the Dutch job machine. Let me mention the key ingredients.

• First regular and intensive consultations took place between the government and social partners so as to promote wage moderation over a long period of time as an outcome of coordinated sectoral collective bargaining. Although not all economists share the same analysis, there is ample evidence of the need for an open economy with a relatively small domestic market to rely on relative wage moderation in order to sustain competitiveness and productivity as well as employment growth.
• Additional measures were put in place to lower thresholds of access to the labor market, notably;
- shortening of the average working week;
- increasing the share of part-time work;
- strengthening the role of temporary employment agencies;
- and addressing obstacles to increase female participation in the labor market.

I should emphasize here that introducing new rigidities instead of old ones doesn’t often solve the problem. Imposing average working week standards – as has been the case in France – is probably not effective in the longer run. Often it would be more possible in sector arrangements to agree on an appropriate trade-off between job creation, wage levels and working hours in the light of overall labor productivity trends and gains. The role of the government is not in the first place to impose but to encourage, with particular emphasis on the interests of outsiders and young people entering the labor market.

For trade unions it became easier to accept part-time work and the specific role of temporary employment agencies as a consequence of bringing rights and responsibilities into the mainstream. I have no doubt that this quite Dutch phenomenon has been a vital part of employment recovery as, generally speaking, it enabled a connection between increasing market flexibility, lowering the threshold to enter the labor market and cultural patterns of combining work and life between men and women. Moreover in recognizing the value of part-time and temporary work both practically and psychologically the gap between insiders and outsiders has gradually decreased. For quite a few job seekers it was the first step towards full participation in the labour market – with of course the risk of abuse by employers, but this is where legislation aimed to step in. As such a comprehensive policy on integrating part-time and temporary work is indispensable to approach full employment.

Including the less skilled job seekers

6. Yet this was not enough to address the most stubborn challenge: to include the less skilled and low-productive job seekers. A worrisome expression of this lies in the high unemployment and social exclusion of youngsters in banlieus, favelas or poblaciones; it is therefore not only a labor market issue but a crucial challenge to a just and stable society. And the market is not going to solve this just by its own invisible hand. There are two major factors defining market failure. On the one hand the costs of labor pressing too much on marginal job productivity of low skilled workers will lead to redundancies and job replacement by technological innovation and increasing productivity by sitting employees. On the other hand global convergence towards lower levels of taxation in developed countries has contributed to elimination of low skilled jobs in the public sector.

These root causes have been tackled along two lines: first progressive decrease or abolition of employers’ contributions to social security for private sector jobs at or just above minimum wage levels. And second, the creation of additional jobs in the public sector to assist teachers, nurses, doctors and the police in an effort to increase their productivity and improve service quality for the public.

Also in hindsight I believe these measures, as part of the total package starting with wage moderation and flexibility and security, have been indispensable. As it goes with political initiatives not everything has survived. However it is quite likely that exclusion would increase with the absence of specific incentives to lower thresholds and open doors. To maintain broad political support over time for what is essentially a market correction is however quite a challenge.

Quality of education and vocational training systems, R & D and access to health care

7. I will refrain from elaborating on other factors that are decisive for maintaining the basis for competitiveness and hence a labor market supply opportunities to the less skilled workers and also attractive to the high skilled – who otherwise would go to North America or Asia to test their luck. Just to mention the quality of education and vocational training systems and especially the teachers, including their salary levels; the level of research and development as investment by companies and as supported by the state including creative interaction between universities and enterprises and an attitude favoring technological innovation; as well as the access to health care, including proper occupational health and safety provisions in preventing accidents at work contributing to higher productivity. Data on Chile showing comparatively poor educational outcomes with a relatively small share of the population completing higher education and also a remarkably low academic output in terms of publications in scientific and technical journals clearly underline the importance – which I believe has received widely shared political recognition.

Institutional Arrangements for stability and change

8. I would now like to come back to the importance of institutional arrangements underpinning stability and change that are equally necessary. The long standing experience in The Netherlands has been referred to by quite many scholars in terms of the “trust” between key actors that is vital for achieving success beyond only shareholder only. There must be institutions that recognize the public interest in avoiding the dichotomy between insiders and outsiders; between extreme rich and poor; between inclusion and exclusion. If you allow me a generalization: in many Latin American countries employers in the private sector rather avoid having to deal with unions; and employees in the public sector through their trade unions rather avoid adjustment of privileges to modern requirements. It is important that such traditional patterns will change, especially by narrowing the gap between insiders and by allowing for short-term wage flexibility in order to respond quickly to economic changes which in turn requires commensurate social protection.

In this vein particular group interests will be subject to general equilibrium considerations, recognizing the inextricable linkage between institutions and social policies; incentive structures to serve the labor market and production structure; and the overall economic performance both as outcome of and condition for maintaining the equilibrium.

Political encouragement and incentives can help to engage social partners in pursuing common goals that would make a country stronger in the wake of globalization. I see this workshop and the crucial initiative to establish the presidential Employment and Equity Council very much as recognition of this importance.

State pensions

9. I have spoken at length on the role of employment to create growth, raise incomes, combat poverty and generate the basis for social protection. There is no alternative to this priority. However equal opportunities and equity are not necessarily the outcome – so for the benefit of society as a whole more is needed.

In The Netherlands the introduction of the basic state pension as mentioned as well as a relatively high level of unemployment or disability benefits as well as a general safety net of welfare benefits have contributed to virtual eradication of long-term absolute poverty. I must add to this that keeping the balance between generousness on the one hand and the need for contributions on the other hand at times has been very difficult. Tightening entitlements; reducing overall costs and thereby sinking employer’s labor costs; keeping the minimum wage competitive instead of prohibitive; and replacing part of welfare benefit resources for labor market subsidies and public sector job creation; have all been part of Social Affairs ministers’ toolkit to keep the system in shape until today.

10. UNDP, the World Bank and many governments belong to those who show great interest in Chile’s successes in bringing unemployment and poverty significantly down. The Basic Solidarity Pension, Chile Solidario, and the public health universal access and guarantees AUGE are important initiatives creating the prospect of achievement over time of true universal access at a level of what in The Netherlands is called: the social minimum. I do not want to dwell here on specific characteristics and comparisons. In his contribution to the World Bank’s global learning conference in Shanghai in 2004 Alejandro Foxley has well analysed Chile’s “successes and failures in poverty eradication”.

Taxation

Still there is one important dimension that tends to receive less attention and yet is crucial for defining the level of the social minimum and the ultimate choice of the welfare state model. This is the level of tax revenues and the political support to withstand the sirens of ever lower tax tariffs. In the international comparison of total revenues (tax and social contributions) again Sweden and Denmark are around 50% of GDP; Belgium and Norway around 45% and The Netherlands with close to 40% are in a different category to Spain (35%), Mexico (20%) and the US and Chile (around 27%). There is no golden rule on what the appropriate level of taxation should be; and it is clear that the tax basis should take into account the risk of taxing mobile factors (companies and high skilled labor) as opposed to immobile factors (payroll and VAT). However there are important empirical data showing that shifting of costs (of health and social security) between state and market will hardly affect the aggregate costs of social protection in any advanced economy. Hence the quantitative differences in total (public and private) expenditure on health and social security insurances between the US and Europe are much smaller than is generally assumed. The choice between public or private financing does however have important consequences for the overall distribution of welfare and poverty and will affect societies’ capacities to adapt to structural economic change.

Conclusion

11. Finally allow me some concluding remarks. I have touched upon many relevant aspects of a modern social policy that not only is compatible with the challenges of globalization but is even a prerequisite to face the issues that nobody can escape. The times that the dikes would protect Holland or Cordillera could protect Chile from ‘alien influence’ have long past. I have not given a scientific account. Others may be more qualified although they would certainly not agree to any quick and ready recipe. Importantly it is not about a recipe or a model. It is first about a vision for society: is it the market defining the direction and space of social interaction; or is it the social order and its arrangements guiding entrepreneurship and initiative. Both options can create prosperity as history has shown. However the first option will come at the price of exclusion of those that are or become vulnerable and it will keep the rewards for many public services rendered low. The second option has the potential to be superior under important provisos: the proviso that the right to work and universal entitlement to welfare and pension should be matched by the duty to contribute; the proviso that labor participation and labor productivity growth will offset the volume of claims; and the proviso that maintaining and strengthening global competitiveness is condition sine qua non for sustaining jobs and equity over the long run.

The key conclusion is: jobs and equity as an outcome of a set of politics of choice is feasible and compatible with today’s and tomorrow’s global competition; if designed well it will strengthen the competitive edge and social policies will be a productive factor.

As with everything in life it comes with a price to pay: to price of discipline by all actors – accepting that a basic consensus is needed on the overall construction of the most relevant policies and arrangements. A stop and go practice will bring polarization to society and insecurity to investors. The long haul predictability matters most; this is the most difficult challenge in any four year domestic policy cycle. Open dialogue cannot substitute for eventual democratic decision-making but it will enhance convergence of understanding the foundations for the future. This is what I highly value in the President’s initiative and in her kind invitation to contribute. This is indeed the way forward to serving the public interest, with Chile as a potential example and inspiration for many other countries on their way to claim their place in the ranks of “developed” countries building a productive labor force, decent jobs and social standards for all: “fuerte y solidario”.


* Ad Melkert is UN Under-Secretary-General and Associate Administrator of the United Nations Development Program (UNDP). He was cabinet minister of Social Affairs and Employment in The Netherlands (1994-1998) and parliamentary leader of the Dutch Labor Party (1998-2002). He has been bestowed with the Gran Cruz en la Orden de Bernardo O’Higgins.