Is a full-time bonus having the desired effect?

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: chief economist Thijs Knaap on whether the full-time bonus will lead to more people working full-time. “You should always encourage a trial.”

Last year, 9.3 million people between the ages of 15 and 75 were employed in the Netherlands, Central Bureau of Statistics (CBS) figures show. Of that total labor force, 48 percent worked part-time, a percentage that has barely changed in recent years. Part-time is defined as a workweek of less than 35 hours. At 70 percent, the percentage of part-time workers among women is significantly higher than among men, 28 percent of whom work part-time. Health care, education and service professions have the highest rates of part-time workers. Because of the significant shortages in education, the government is starting a trial by introducing a full-time bonus in 10 schools. This means that teachers who want to work more will receive a bonus. But does such a financial incentive make sense?

Wedge

The Netherlands’ progressive tax system plays an important role in this question, Knaap explains. "The more you earn, the more tax you pay and the fewer allowances you get. That is fine in and of itself, but it means that the last day of the work week, whether you work three, four or five days, is taxed the most; on that day you earn the least, comparatively.” The economic term for this is the wedge, which represents the difference between the employer’s labor costs and the employee’s take-home pay. “That wedge can be as high as 70 percent for some people, which means that out of every euro you earn, you only get paid 30 cents. That’s because you are paying payroll taxes and, in addition, possibly losing benefits.”

The question is whether the full-time bonus is the right solution to solve the current labor shortage now. “This is being debated in the House of Representatives and the biggest ambiguity is the size of the wedge.” It is different for everyone and depends on several factors, Knaap explains. For example, on your marital status, whether you have a family and which municipality you live in. “A lot of people also don’t know themselves what their wedge is, some go to a tax consultant to ask what an extra day’s work will get them. So, it’s hard for me to imagine someone deciding to work more hours based on a full-time bonus, when most people don’t know exactly what kind of financial difference that will make for them.”

Homo economicus
This idea stems from the worldview that man is a rational homo economicus (economic man) who calculates the exact costs and benefits of every action. But other aspects besides the financial picture often come into play, Knaap emphasizes. “There are plenty of people who do not have the opportunity to work full-time, even if they wanted to. For example, because they provide informal care for someone close to them, they cannot find child care or an employer cannot offer them more hours. So how are you going to solve that with such a financial measure? It can be done, but I don’t see it as a very effective tool.” Moreover, there is a major drawback to the full-time bonus, the economist said. “It makes our tax system, which we already have little insight into and for which you have to go to a consultant to know what your wedge is, even more complicated.”

Even so, the fact remains that there is an acute labor shortage. “As a macroeconomist, I simply think: if we are all screaming for labor, wages have to go up. That happens naturally, because when there is a shortage in the labor market, wages naturally rise." In the third quarter of this year, collective bargaining wages rose 3.5 percent, according to CBS. Knaap: “And wages may still be raised more than that. We’ve had years when wages didn’t rise much at all. The wage share has certainly not increased in recent decades, so an increase in wages is not that surprising. And it has the advantage of not making the tax system even more complicated and fragile, whereas the full-time bonus does create that risk.”

Trial

Despite his impression that a measure like the full-time bonus will have little effect and complicate things further, Knaap welcomes the trial. “If it turns out to be hugely successful, I can adjust my opinion. But if such a trial is tested at your school with a lot of fanfare, you're more likely to have heard of it than if it constitutes yet another measure on your income tax. So it's hard to draw a conclusion based on one trial. Still, it's good that they are trying it first, because too many measures like this just get implemented. Trials like this should therefore always be encouraged.”