Tuesday 30 October 2012

The Netherlands exit the rusty labour market

Yesterday, our new government finished negotiations. The two parties that together form a majority, VVD and PvdA, have reached agreements on their mutual policies for the next four years. It's a challenging combination of right-wing (VVD) and left-wing (PvdA).
Even though these definitions vary considerably across the globe, I think I can suffice by saying that VVD generally favours the rich, while PvdA favours the poor

But, all that doesn't matter. The topic for this post is the definitive decision that severance pay will be maximised at 75 thousand euros - period. Where it currently would be double, triple or even more of that

I wrote about this before, way before anyone thought this would even be feasible or acceptable - in our current society.
Well, it's a feat now

The impact of this can't be understood unless we consider median income, do some calculations, and go back in time. Or I could just give away the punch line: this will make firing people so much easier, and improve the Dutch economy in such a big sense, that it will ensure its overall health and make them a leader of Europe as we know it

Why? Because the current labour laws we have protect the employee too much. Yes, too much. It's not as bad as in Denmark, where employees get severance pays if they quit their job voluntarily, but the current formula used is ensuring that old roots dead-weight the company down into mediocrity, or even beyond.

The median income in the Netherlands is 31,000 euro before taxes for a one-person household. After taxes, that is 19,000 euros (I'm conveniently rounding figures at thousands of euros).
Working for the government? 44K / 33K euro (before / after taxes).
CEO / board? 64K / 41K.
Self-employed? 39K / 30K.
If you work in IT services, your average income will be around 65K / 42K when you're a senior with 15 years of experience. 25 years? That could be double that, given the fact the fact that you started out around 1985 and surfed the IT wave. With 30 years or more, you may have floated on top and earn 150K before taxes, or even 200-250K

You see the workings of our progressive tax system there, but nonetheless. Let's take a few examples here, and see what it would use to cost to get rid of an employee - let's be honest about that please, you don't fire people because you want to keep them, do you?

  • 20 years on 44K? Severance pay of 80K
  • 30 years on 44K? Severance pay of 100K
  • 20 years on 65K? Severance pay of 115K
  • 30 years on 65K? Severance pay of 140K
  • 20 years on 100K? Severance pay of 165K
  • 30 years on 100K? Severance pay of 210K
  • 20 years on 150K? Severance pay of 250K
  • 30 years on 150K? Severance pay of 310K

I'm taking these long terms because here in NL, after the war, you would get married twice: once to your wife or husband, and another time to your work. We are not used to job hopping - the Boomer generation that is. Even thought pension is kicking in for the early Boomers, there are a lot left that even hopped more than once, but working for a company for 20 to 30 years is certainly no exception

The severance pays are huge in some cases, hefty in most, for those. 40 years of service at a gross income of 65K? A severance pay of 230K is all yours.
Would you like that, as an employer? Of course you wouldn't. You'd try to change someone like that into an asset again, for his / her and your own sake.
If that would fail, you'd try to scare or bully him away. But that would usually result in the person himself being unhappy, thus treating his environment in an unhappy way

The effects of the current system would usually be that collateral damage would occur at several points in time and space, which would fall under OPEX, not CAPEX. A company would not notice this at first, but overall suffer from it anyway. High attrition rates, short-term customers, failing projects and many other manifestations would be obvious to an outsider, but not the company itself

The agreement reached by our new government will be a very unpleasant surprise to a few, unpleasant to some, but welcomed by most, if not all, companies. I'm willing to state that it will bring back common sense and reward and punishment. And we all need reward and punishment, because that's how we got domesticated raised. We often wonder why business and professional events occur as they do, because they sometimes are so contradictory to what we would expect

The Dutch government is bringing back common sense into doing business. And on the side, it will greatly fuel entrepreneurship, or at least self-employment. Because where else will these people go?

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