Cyclopedia Of Economics 1st edition

IIg. The Rhineland Model, the Poldermodel, and Other European Ideas

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IIg. The Rhineland Model, the Poldermodel, and Other European Ideas

The Anglo-Saxon variant of capitalism is intended to maximize value for shareholders (often at the expense of all other stakeholders).

The Rhineland model likes to think of itself as "capitalism with a human face". It calls for an economy of consensus among stakeholders (shareholders, management, workers, government, banks, other creditors, suppliers, etc.).

Netherlands, too, has an advisory Social and Economic Council. Another institution, the Labour Foundation is a social partnership between employees and employers. Both are relics of a corporatist past.

But the Netherlands saw its unemployment rate decline from 17% to less than 2% while ignoring both models and inventing the "Poldermodel", a Third Way. Wim Duisenberg, the Dutch Banker (currently Governor of the European Central Bank), quoted in an extensive analysis of the Poldermodel prepared for "The Economist" by Frits Bolkstein (a former Dutch minister for foreign trade), attributed this success to four elements:

  1. Improving state finances;

  2. Pruning social security and other benefits and transfers;

  3. Flexible labour markets;

  4. A Stable exchange rate.

According to Thomas Mayer and Laurent Grillet-Aubert ("The New Dutch Model"), the "Dutch Miracle" traces its beginnings to 1982 and the Wassenaar Agreement in which employers' organizations and trade unions settled on wage moderation and job creation, mainly through decentralization of wage bargaining. The government contributed tax cuts to the deal (these served to compensate for forgone wage increases). These cuts generated a fiscal stimulus and prevented a contraction in demand as a result of wage moderation. Additionally, both social security payments and the minimum wage were restricted. Wage increases were no longer matched by corresponding increases in minimum social benefits. Working hours, hiring, firing and collective bargaining were all incorporated in a deregulated labour market.

Small and medium size businesses costly regulation was relaxed. Generous social security and unemployment benefits (a disincentive to find work) were scaled back. Sickness benefits, vacation periods, maternal leave and unemployment benefits were substantially adjusted.

The Netherlands did not shy from initiating public works projects, though on a much smaller scale than France, for instance. The latter financed these projects by raising taxes and by increasing its budget deficit. The Dutch preferred to rely on the free market.

Long term (more than 12 months) unemployment in Europe constitutes 30% of the total. About half the entire workforce under the age of 24 is unemployed in Spain - and about one quarter in France and in Italy. Germany, Austria and Denmark escaped this fate only by instituting compulsory apprenticeship. But the young unemployed form the tough and immutable kernel of long-term unemployment. This is because a tug of war, a basic conflict of interest, exists between the "haves" and "have-nots". The employed wish to defend their monopoly and form "labour cartels". This is especially true in dirigiste Europe.

While, in the USA, according to McKinsey, 85% of all service jobs created between 1990-5 paid more than the average salary - this was not the case in Europe. Add to this European labour immobility - and a stable geographical distribution of unemployment emerges.

The Dutch model sought to counter all these rigidities. In a report about "The Politics of Unemployment" dated April 1997, "The Economist" admiringly enumerated these steps:

  • The Dutch reduced social security contributions from 20% (1989) to 7.9% and they halved the income tax rate to 7% (1994).

  • They allowed part time workers to be paid less than full timers, doing the same job.

  • They abandoned sectoral central bargaining in favor of decentralized national bargaining.

  • They cut sickness benefits, unemployment insurance (benefits) and disability insurance payments (by 10% in 1991 alone - from 80% to 70%).

  • They made it harder to qualify for unemployment (from 1995 no benefits were paid to those who chose to remain unemployed).

  • The burden of supporting the sick was shifted to the employer / firm. In 1996, the employer was responsible to pay for the first year of sickness benefits.

Even the Dutch model is not an unmitigated success, though. More than 13% of the population are on disability benefits. Only 74% of the economically active population is in the workforce - one third of them in part time jobs.

But compare the Dutch experience to France's, for instance.

The Loi Robien exempted companies from some social security contributions for 7 years, if they agree to put workers on part time work instead of laying them off. Firms promptly abused the law and restructured themselves at the government's expense.

The next initiative was to reduce the working week to 35 hours. This was based on the "Lump of Labour Fallacy" - the idea that there is a fixed quantity of work and that reducing the working week from 39 to 35 hours will create more jobs.

In Spain, hiring workers is unattractive because firing them is cost-prohibitive. The government - faced with more than 22% unemployment in the mid-90's - let more than 25% of all workers go on part time contracts with less job protection, by 2001.

Still, no one knows to authoritatively answer the following substantial questions, despite the emergence of almost universally applied UN-sponsored Standard National Job Classifications:

How many are employed and not reported or registered? How many are registered as unemployed but really have a job or are self-employed? How many are part time workers - as opposed to full time workers? How many are officially employed - but de facto unemployed or underemployed? How many are on "indefinite" vacations, on leave without pay, on reduced pay, etc.?

Many countries have a vested interest to obscure the real landscape of their destitution - either in order to prevent social unrest, or in order to extract disproportionate international aid. In a few countries, limited amnesties were offered by the state for employers' violations of worker registration. Firms were given a few, penalty-free, weeks to register all their workers. Afterwards, labour inspectors were supposed to embark on sampling raids and penalize the non-compliers, if need be by closing down the offending business. The results were dismal.

In most countries, the unemployed must register with the Employment Bureau once a month, whether they receive their benefits, or not. Non-compliance automatically triggers the loss of benefits. In other countries, household surveys were carried out - in addition to claimant counts and labour force surveys, which deal with the structure of the workforce, its geographical distribution, the pay structure, and employment time probabilities.

Yet, none of these measures proved successful as long as government policies - the core problem - remained the same. Faced with this trenchant and socially corroding scourge - governments have lately been experimenting with a variety of options.

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