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Long-Term Unemployment and the Great Recession in the Netherlands: Economic Mechanisms and Policy Implications

Abstract

A decomposition of GDP changes during the Great Recession shows that a relatively large part of the economic shock in the Netherlands translated into unemployment. Wages absorbed a larger part of the shock in Germany, the UK, and the US. The Netherlands has faced more long-term unemployment than other countries, particularly in recent years. Long-term unemployed workers are on the margins of the Dutch labour market. Neither real wages nor the number of vacancies respond to an increasing rate of long-term unemployment. Long-term unemployment is for an important part a problem of older unemployed workers. In the Netherlands, 40 % of the long-term unemployed workers are over age 50, which is almost twice as much as in the EU and the US. We identify three possible avenues for labour market reform: unemployment insurance, employment protection legislation and active labour market policies.

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Notes

  1. Erken et al. (2015a) provides a complete derivation of the decomposition and an extensive description of data sources.

  2. Taxes and subsidies refer to charges on production and imports such as the value added tax, import tax and excises. Direct taxes such as corporate tax and income tax are not part of this term.

  3. The Wald test rejects the Null hypothesis that \(\beta _1 =\beta _2\), with the exception of \(d=3\).

  4. We are however unable to test the significance of this pattern in the estimates of \(\beta _1 \).

  5. See Luginbuhl (2015).

  6. E.g. additional days off, fewer shift work obligations.

  7. The reservation wage is defined as the lowest wage that an unemployed worker wishes to earn in a new job.

  8. The termination of unemployment benefits may either lead to a drop from UI benefits to zero or to some other form of (lower) benefits, usually social assistance.

  9. This conclusion is based on a literature started by Shavell and Weiss (1979). Further references are discussed in Tatsiramos and van Ours (2015).

  10. Chetty (2008) finds that an optimal unemployment insurance in the US would last for 6 months and pay out a constant benefit of 50 % of pre-unemployment wages. Kolsrud et al. (2015) have recently argued that a declining benefit profile may lower unemployment, but may not be welfare improving in general.

  11. See de Graaf-Zijl et al. (2015). Of course, the age effect is related to the higher wages that senior employees generally earn.

  12. Another explanation for the non-decreasing reservation wages is selection. Workers with lower reservation wages find a job more quickly, leaving workers with high reservation wages behind in long-term unemployment.

  13. Benefits equal 75 % of the last earned wages in the first 3 months of unemployment, and remain constant thereafter. Benefits are therefore by definition constant for the long-term unemployed.

  14. Note that even in the US, with less generous unemployment insurance than in the Netherlands, Krueger and Mueller (2014) find that unemployed workers do not sufficiently lower their reservation wages in order to find a job.

  15. See, e.g., Deelen et al. (2007).

  16. Only Spain, Portugal and Poland have a higher share of temporary workers.

  17. On the other hand, job search and sanction/threat programs have a relatively small effect on the job finding probabilities of the long-term unemployed.

  18. In contrast, subsidized public sector employment has only small effect, both in the short and in the long run.

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Correspondence to Marloes de Graaf-Zijl.

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The authors would like to thank Maurits van Kempen for his invaluable research assistance.

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de Graaf-Zijl, M., van der Horst, A., van Vuuren, D. et al. Long-Term Unemployment and the Great Recession in the Netherlands: Economic Mechanisms and Policy Implications. De Economist 163, 415–434 (2015). https://doi.org/10.1007/s10645-015-9263-y

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  • DOI: https://doi.org/10.1007/s10645-015-9263-y

Keywords

  • Long-term unemployment
  • Great Recession
  • Wage adjustment
  • Unemployment insurance
  • Labour market institutions

JEL Classification

  • E20
  • E24
  • J63
  • J69