Public Management

Wage subsidies with no prospect of success

By Marc Vermeulen | May 7, 2015 | 2 min read

The use of subsidies to reduce the cost of labor at the bottom of the labor market is unsustainable, according to Professor Marc Vermeulen.

Image: © Nationale Beeldbank 

The CPB (Netherlands Bureau for Economic Policy Analysis) proposes making the bottom part of the labor market cheaper with subsidies. The CPB hopes that this measure will help involve more people currently left behind. This proposal is outlined in a report entitled Kansrijk arbeidsmarktbeleid (Promising labor market policy). Minister of Social Affairs Asscher responded positively. As did the municipalities. It is the municipalities, after all, that are the first to feel the pressure of having to pay (long-term) unemployment benefits, which are concentrated at the bottom. Good news then? I personally see little innovation in this proposal. And, therefore, this is not a sustainable solution.

Technological innovations ensure that work becomes more capital intensive and complex. As a consequence, people with limited training are rarely able to provide a tangible economic contribution. Even then, their wage costs soon far exceed the economic benefits on this type of labor. Poorly educated people thus find themselves excluded from the labor market.

That is not a new phenomenon. Traditionally, the remedy was to invest in education through training, work experience placements and similar measures. The idea is that such education helps people increase their level of competence and gradually become attractive again. What is new in the debate on this subject over recent months is that this time more attention is given to the group of people who cannot be educated to a higher level anymore. An estimated 15% to 20% of the population simply lacks the talent to participate in a high-tech labor process. No coach or training can remedy that. And, frankly, nor can a wage subsidy, which will only prove to be a temporary stopgap and will not reverse the trend in which people who lack talent increasingly end up being excluded from the labor process. 

I think that the funds for the wage subsidies should definitely be made available, but they should be used to redesign work and make it attractive in the long term. This is necessary for several reasons:

  • Groups that are excluded from the labor market for a long time drop out of society: They become cynical, engage in risky behavior or organize their own enterprise in the informal and/or illegal economy.
  • The existing solutions rely too much on the idea that you have to help people adapt better to increased demands of the labor market: those options are simply too limited now. This pushes us toward a reverse approach: adapting jobs to the abilities of people.
  • In an aging labor market, you can simply not afford to exclude large groups from the labor market for long periods.
  • This is not just about the lack of a labor force but also about substantial unemployment benefit payments the burden of which now primarily rests on municipalities: they can do much more useful things with that money.

Technological development over the past few decades has only led to upgrading and – in combination with high wage costs – to a new caste of outsiders. That same technology can easily be used to reverse his trend. Using technology to simplify manufacturing processes and to make them accessible again to people who would otherwise not be able to work. Social innovation both in companies and in public institutions make it possible to organize work in such a way that it can be performed by people with limited mental and/or physical abilities. This sounds like sheltered employment and this is exactly what it is, but on a high innovative level.

A case study

I sometimes drink coffee at a restaurant which employs people with Down’s syndrome. They use iPads and, with a push of a button, I can order exactly the kind of coffee I like. The same goes for ordering an apple pie: a message is sent to the kitchen, they place your pie on a plate and service you with a smile. The technology behind the scene is fairly simple: an app, Wi-Fi, links to the cash register, pantry, and the baker’s ordering system.

That is how simple it can be.

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