Crisis of the Early 1980s
In the late 1970s and early 1980s the economic situation in the Netherlands deteriorated dramatically, leaving the economy, by 1982, in a state of crisis. In 1982, real GDP had declined for the second year in succession, with GDP per capita falling below the level of 1978. The profitability of firms was close to zero: the capital income share in value added in 1982 was less than 5 percent—leaving no profits after interest payments. Registered unemployment had risen sharply—from 3½ percent in 1979 to 8½ percent in 1982. Also, the fiscal deficit was increasing rapidly, reaching 9½ percent of GDP on a broad definition including on-lending (6½ percent on a Maastricht definition) in 1982.
From Slowdown to Recession
During the period 1970–82, the growth rates of GDP and GDP per capita were well below that of other European economies, and the gap increased progressively. GDP per capita rose 7 percent less than in Germany and 15 percentage points less than in Belgium and France. The underperformance was especially pronounced from 1979 onward.
Wage developments were an important cause of the weak performance.1 In the 1960s, when the economy overheated, wage growth accelerated. With wages indexed to prices, the large terms of trade deterioration in the nonenergy economy in 1974 and 1979 did not lead to any compensating decline in real wages: profits instead suffered. In addition, rapid increases in taxes and social security contributions augmented wage pressures; the brunt of the increase was, again, borne by profits. Finally, the replacement ratio increased significantly, reducing the financial burden of being without a job, thereby adding to wage pressures.
By the early 1980s the share of labor in firms’ value added had reached unprecedented levels; at 95 percent, it was 12 points higher than a decade earlier.2 The income share of capital declined from 17 percent in 1970 to less than 6 percent in 1980. The profit share declined even more sharply as firms, which had increased their indebtedness in the 1970s, faced high interest rates. By the early 1980s, the enterprise sector had virtually ceased to make profits. Thus, during this period of rapid wage growth, profitability declined sharply, with negative effects on the overall level of investment: during the 1970–82 period private investment was essentially flat. Wage increases did stimulate consumption, but from the mid-1970s onward this was mostly reflected in a deteriorating current account, rather than stronger output growth.
On top of the wage predicament lay the impact of developments in international energy prices, which gained particular attention in accounts of the so-called “Dutch disease.” With higher energy prices, the natural gas revenues of the government rose from under 1 percent of GDP in 1973 to 5 percent in 1981; the additional revenues financed higher transfers to households. They likely also exerted upward pressure on the exchange rate, which, without these windfalls, would probably have adjusted earlier. However, the overall increase in public spending was significantly greater than the counterpart of the additional energy receipts; and the crisis that triggered economic reform in the Netherlands in the early 1980s preceded, by several years, the decline of world energy prices in 1986.3
A strong cycle in the housing market initially masked the weakening of economic performance after 1975 (Figure 2.1). Several factors appear to have caused the sharp increase in house prices in 1975–78. With very low, and at times negative, real long-term interest rates, mortgage borrowing was very attractive—and interest payments were fully deductible, including in higher tax brackets. Moreover, high consumer price inflation led households to use real estate as a hedge. The rapid relative increase in house prices led to large wealth gains, which in part were made liquid through a rapid increase in mortgages, and thus stimulated consumption.
Housing Market Developments
Sources: De Nederlandsche Bank; the Dutch authorities; and IMF staff calculations.The collapse of the housing market after 1978 contributed to the severity of the recession. Real house prices declined steeply, and by 1982 were 70 percent below the level of 1978. The collapse of the housing market led, symmetrically, to large wealth losses, and a sharp drop in consumption, as house-holds tried to improve their balance sheets in the face of declining housing prices and an increasingly heavy debt-service burden. A vicious circle of declining expectations arose, as weak consumption fed recession; this in turn exacerbated the housing market crisis. Overall, private consumption was flat in 1980, and declined in both 1981 and 1982.
The Decline in Employment
Rapid wage growth affected employment in several ways: first, through its immediate impact on profitability, and thus new investment and firm closures and, second, through longer-run pressure on firms to change existing production processes so as to substitute capital for labor. While productivity increased, the balance between capital and labor, given the state of technology, moved substantially out of equilibrium. During the early 1970s, employment stopped growing, and by the early 1980s started to decline. Moreover the pattern of employment shifted away from the private sector. Government employment increased by more than one-fourth in the 1970s, but private sector employment declined—and by 1982 was 5 percent lower than in 1970 (Figure 2.2). As a result, overall employment, measured in full-time equivalents, was about 2 percent lower in 1982 than in 1970. In terms of persons, the picture was slightly less somber, as part-time employment increased.
Employment Indicators
Source: Data provided by the Dutch authorities.Initially, the stagnation of employment growth was not reflected in a large rise in unemployment, as the participation rate of men declined from 87 percent in 1970 to 80 percent in 1979. The participation rate of women remained virtually flat, at 34 percent—a relatively low level compared with that in neighboring countries. The decrease in the male participation rate was in part associated with a sharp increase in the number of disability recipients,4 which rose from less than 4 percent of the working age population in 1970 to some 7½ percent (Box 2.1).5 At the same time, school enrollment rates increased from 8 percent of the working age population in 1970 to almost 12 percent in 1982.
Assessing the Participation and Employment Rates
For the Netherlands, a bewildering variety of participation and employment rate statistics exist and have been quoted to show that participation is higher, similar to, or lower than in neighboring countries. These indicators differ essentially in how they take part-time jobs into account (in all the participation and employment rates presented here, the denominator is the population between 15 and 64 years of age):
-
According to the standardized employment rate, which takes into account all persons employed in jobs of over one hour a week, and is featured in, for instance, the OECD’s Employment Outlook, the employment rate in 1997 was 68 percent (up from 56 percent in 1984), compared with an average of 60 percent in the European Union.
-
If only jobs of at least 12 hours a week are taken into account, the employment rate is only 60 percent (1984: 51 percent). This ratio is used both in the OECD’s Economic Outlook and by the Dutch Central Planning Bureau. For other countries, no data on the number of persons working between 1 and 12 hours exist, but given the preponderance of part-time work, this number is likely to be higher in the Netherlands than elsewhere.
-
If the employment rate is converted into full-time equivalents, it drops to 53 percent (compared with a trough of 47 percent in 1984), 5 points below Germany, and 19 points below the United States.
Across these measures, the trend recovery in employment is evident; but, equally clearly, the underlying level of employment remains low by the standards of other advanced economies.
In the early 1980s, the decline in employment accelerated. During 1980–82, it fell by 4 percent, as the steep downturn in economic activity forced firms to shed labor. At the same time, the labor force increased annually by 1 percent, as the decline in the participation rate of men no longer offset the increase in the working age population and the rising participation rate of women. Unemployment thus began to rise sharply.
The Policy Context
The sources of the deterioration in the economy up to 1982 can be traced to a constellation of macro-economic and structural policies that damaged the growth of economic activity and employment in the private sector.
During 1970–82, the fiscal situation deteriorated dramatically (Figure 2.3). Public expenditure rose sharply, mainly as a result of an increase in transfers to households. In 12 years, the expenditure-to-GDP ratio rose by nearly one-half—from 45 percent in 1970 to 66 percent in 1982. While almost all categories of spending increased relative to GDP, the growth in transfers to households was the most pronounced. Important to these rising transfers was the rapid increase in the number of social security recipients: the number of unemployment, disability, sick leave, and welfare recipients more than doubled, from 8 percent of the working age population in 1970 to 18 percent in 1982.
Fiscal Policy
(General government, in percent of GDP)
Sources: Netherlands Ministry of Finance, Miljoenennota, 1997; Central Planning Bureau, Macroeconomic Outlook, 1999.Initially, the increase in public expenditure did not lead to a sharp increase in the fiscal deficit, since it was matched by a substantial rise in taxes and social security contributions. In 1978, the deficit, including on-lending, at 4 percent of GDP, was not far above the 2½ percent level of 1970. Over the period, however, the revenue-to-GDP ratio rose by 11 percentage points, fueled by an increase in both taxes and social security contributions. After 1978, when growth slowed, budget projections initially continued to assume rather strong growth, leading to deficits that were much higher than had been targeted: the fiscal deficit increased sharply, reaching an unsustainable level by 1982: in four years, the deficit, including on-lending, rose by 5½ percentage points to 9½ percent of GDP. Excluding on-lending (i.e., on a Maastricht definition) the deficit rose by a similar amount, albeit to a somewhat lower level of 6½ percent of GDP. The sharp widening of the fiscal deficit took place in spite of a substantial increase in natural gas revenues, which rose from ½ percent of GDP in 1973, to 2½ percent in 1977, and 5 percent in 1981, as natural gas prices increased in line with petroleum prices.
Following the breakdown of the Bretton Woods system of fixed exchange rates in 1973, monetary policy was based on a link between the guilder and the deutsche mark (Figure 2.4). Until 1979, the guilder participated in the “snake” arrangement in Europe; thereafter it was a member of the European Monetary System (EMS). However, the linkage to the deutsche mark was only partial, as at times the deutsche mark was revalued by more than the guilder. Inflation performance in the Netherlands was weaker than in Germany: from 1973 to 1982 prices rose by a cumulative 40 percentage points more than in Germany. The inflation differential largely reflected a more rapid increase of unit labor costs. It was in part offset by the de facto devaluation of the guilder against the mark, but the real exchange rate based on unit labor cost vis-à-vis Germany nonetheless appreciated by 34 percentage points during this period.
Exchange and Interest Rate Developments
Source: IMF, International Financial Statistics.Overall, the exchange rate anchor clearly was not fully credible from 1973 to 1982. It was, indeed, subjected to speculative attacks.6 In December 1973, the brief oil boycott inflicted on the Netherlands caused a short but sharp flight from the guilder. Similar pressure arose in August 1976, after the Netherlands had declared the guilder would not follow suit in the event of a revaluation of the mark—which underscored the implications of the notable excess of Dutch inflation over German inflation. In October 1978, the guilder again came under pressure as a result of the planned introduction of the EMS: given the rapidly increasing current account deficit, concern arose that the guilder would need to be devalued on entry.
Together with weak fiscal policy and a less-than-credible exchange rate anchor, labor market policies clearly contributed to the deteriorating economic performance, including the erosion of employment in the private sector. Problems in the labor market were exacerbated by increases in minimum wages, the introduction of minimum wages for young people—for whom no minimum wages had existed previously, and the elimination of the difference between the minimum benefit and the minimum wage.7 In 1971–78, the minimum wage increased much faster than the average wage—which itself was rising sharply. In 1974, a minimum wage for workers below 23 years was introduced; it was calculated as a percentage of the minimum wage for adults and varied from 40 percent for a 15-year-old, to 92½ percent for a 22-year-old. The minimum benefit was raised to, and subsequently linked with the minimum wage. This sharply reduced incentives for the low-skilled to seek employment. More generally, the environment of sharply rising social benefits sent signals to the population that are likely to have discouraged labor-force participation and eventually resulted in an increase in the tax wedge on labor income.
Economic policy was characterized by a number of linkages, which resulted in a vicious circle. Increased social benefits worsened labor market incentives and damaged the fiscal position. Excessive wage increases and declining participation were associated with slower economic growth and lower employment, aggravating the fiscal situation. When the worsening structural fiscal problem was addressed, action was initially on the revenue side: the resulting increase in the collective burden of taxes and social security contributions in turn exacerbated wage pressures, and was translated largely into a lower profit share. In this setting, the nominal link of the guilder to the deutsche mark, rather than protecting the economy from inflation, was associated with a substantial real exchange rate appreciation vis-à-vis Germany—thus serving as a transmission channel for deflationary effects on the economy.
Recovery After 1982
Since the early 1980s, the performance of the Dutch economy has improved substantially:
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Economic growth recovered, and since the early 1990s has far exceeded that in neighboring countries (Table 2.1). Growth became increasingly domestically fed, was most pronounced in the services sector, and became increasingly more labor intensive.
-
Employment grew strongly, at a rate similar to that in the United States. With a rapid increase in part-time employment, employment growth in terms of full-time equivalents was somewhat less than in terms of persons, but on both measures it was substantial. The rise in employment allowed a simultaneous increase in the participation rate of women and a reduction in the unemployment rate.
-
Inflation levels converged with, and then sank, for a while, below, German levels. With low inflation and a tight link with the deutsche mark, interest rates were for a time the lowest within the EMS.
-
Competitiveness recovered, and the current account rebounded. Most of the improvement in competitiveness took place in the early 1980s; since 1984, competitiveness has not changed substantially.
GDP, Employment, and Productivity
(Average annual growth rate, in percent)
Refers to 1997.
GDP, Employment, and Productivity
(Average annual growth rate, in percent)
1970–82 | 1983–89 | 1990–98 | 1983–98 | |
---|---|---|---|---|
(Real GDP) | ||||
Netherlands | 2.5 | 2.8 | 2.8 | 2.8 |
United States | 2.4 | 4.0 | 2.4 | 3.1 |
Belgium | 3.0 | 2.2 | 1.9 | 2.0 |
France | 3.3 | 2.5 | 1.7 | 2.0 |
United Kingdom | 1.7 | 3.7 | 1.9 | 2.7 |
Western Germany1 | 2.4 | 2.5 | 1.5 | 2.0 |
Italy | 3.2 | 2.8 | 1.3 | 1.9 |
(Employment (persons)) | ||||
Netherlands | 0.1 | 1.2 | 2.1 | 1.7 |
United States | 1.9 | 2.4 | 1.3 | 1.7 |
Belgium | −0.1 | 0.5 | 0.2 | 0.3 |
France | 0.5 | 0.3 | 0.2 | 0.2 |
United Kingdom | −0.3 | 1.8 | 0.0 | 0.8 |
Western Germany1 | 0.1 | 0.5 | 0.5 | 0.5 |
Italy | 0.5 | 0.2 | −0.3 | −0.1 |
(Productivity (persons)) | ||||
Netherlands | 2.4 | 1.5 | 0.7 | 1.1 |
United States | 0.5 | 1.5 | 1.2 | 1.3 |
Belgium | 3.1 | 1.7 | 1.6 | 1.7 |
France | 2.8 | 2.2 | 1.5 | 1.8 |
United Kingdom | 2.0 | 1.9 | 1.9 | 1.9 |
Western Germany1 | 2.3 | 2.0 | 1.0 | 1.5 |
Italy | 2.7 | 2.6 | 1.6 | 2.0 |
Refers to 1997.
GDP, Employment, and Productivity
(Average annual growth rate, in percent)
1970–82 | 1983–89 | 1990–98 | 1983–98 | |
---|---|---|---|---|
(Real GDP) | ||||
Netherlands | 2.5 | 2.8 | 2.8 | 2.8 |
United States | 2.4 | 4.0 | 2.4 | 3.1 |
Belgium | 3.0 | 2.2 | 1.9 | 2.0 |
France | 3.3 | 2.5 | 1.7 | 2.0 |
United Kingdom | 1.7 | 3.7 | 1.9 | 2.7 |
Western Germany1 | 2.4 | 2.5 | 1.5 | 2.0 |
Italy | 3.2 | 2.8 | 1.3 | 1.9 |
(Employment (persons)) | ||||
Netherlands | 0.1 | 1.2 | 2.1 | 1.7 |
United States | 1.9 | 2.4 | 1.3 | 1.7 |
Belgium | −0.1 | 0.5 | 0.2 | 0.3 |
France | 0.5 | 0.3 | 0.2 | 0.2 |
United Kingdom | −0.3 | 1.8 | 0.0 | 0.8 |
Western Germany1 | 0.1 | 0.5 | 0.5 | 0.5 |
Italy | 0.5 | 0.2 | −0.3 | −0.1 |
(Productivity (persons)) | ||||
Netherlands | 2.4 | 1.5 | 0.7 | 1.1 |
United States | 0.5 | 1.5 | 1.2 | 1.3 |
Belgium | 3.1 | 1.7 | 1.6 | 1.7 |
France | 2.8 | 2.2 | 1.5 | 1.8 |
United Kingdom | 2.0 | 1.9 | 1.9 | 1.9 |
Western Germany1 | 2.3 | 2.0 | 1.0 | 1.5 |
Italy | 2.7 | 2.6 | 1.6 | 2.0 |
Refers to 1997.
Economic Growth
GDP per capita growth since the late 1980s has been above the average of the European Union (Figure 2.5) and the economy has suffered less than other European economies from the recessions of 1992–93 and 1995. A n important reason for the improved economic performance appears to have been the recovery of profitability in firms, which by the late 1980s had returned to the level of the early 1970s. This recovery, which was associated with the impact of wage moderation, led to a strong increase in corporate saving and investment.
International Comprisons: GDP Per Capita
(1982 = 100)
Source: IMF, World Economic Outlook.During the mid-1980s, growth was mainly based on exports and investment, while consumption crept along. In 1988, private consumption was only 10 percent higher than in 1980, while private fixed investment was 45 percent higher. Both the slow growth of consumption and the rapid growth of investment were associated with a substantial decline in the share of labor income in the value added of firms.
Since the late 1980s, economic growth has become more balanced, with consumption an important contributor to growth. Indeed, the rise in consumption has been stronger than in many other European countries, despite very moderate increases in real wages. Strong consumption appears in part to have reflected a virtuous circle of rapid employment creation and strengthening consumer confidence. That real wages did not increase strongly, was to a large extent offset by a rapid increase in employment and a reduced fear of becoming unemployed—a factor restraining consumer confidence in some other European countries.
The increase in housing prices may also have played a role in sustaining consumption. Following their steep decline, real house prices started to edge up from the mid-1980s onward and increased strongly in the 1990s. Several factors may account for this. First, the low level of long-term interest rates made it possible to finance substantially more expensive houses than in the early 1980s. Second, in 1993 there was a change in the way banks calculated borrowing limits: both incomes in a dual-income household were now included fully in credit assessments for mortgages. Third, rent increases in the 1980s and 1990s were well above inflation, which made the purchasing of houses more attractive. The sizable rise in house prices in the 1990s was associated with a rapid increase in mortgage borrowing, which in part was used to finance consumption. A fuller discussion of the boom in the mid-1990s is provided in Section V.
As regards the sectoral pattern of output growth, the sheltered sector has expanded more strongly than the exposed sector since 1982; whereas in the 1970s, both sectors had grown at the same rate (Figure 2.6).8 While the reasons for the shift are not entirely clear, an important factor may have been the lower pace of wage growth. As the sheltered sector is much more labor intensive than the exposed sector, rapid wage increases lead to an increase in the relative price of nontradables, thereby discouraging output growth in this sector. The slowdown of wage growth may thus have exercised a stronger positive impact on the sheltered than on the exposed sector.
Volume of Value Added in Exposed and Sheltered Sectors
(1970 = 100)
Sources: Data provided by the Dutch authorities.Overall, GDP growth since the early 1980s has been much more labor-intensive than before, and labor productivity increases have been low, especially in the 1990s (Figure 2.7).9 Several factors may have lain behind the sluggish productivity growth. First, in the 1970s there may have been excessive substitution of capital for labor; with the decline in wage growth, this excessive substitution came to a halt. Second, a large number of jobs were created at the lower end of the wage spectrum (albeit, they were frequently filled by individuals with medium-to-high skills): a rapid increase in jobs at the lower end will depress aggregate labor productivity growth, even when the productivity growth of the various individual workers does not change. Third, as noted above, output growth was most pronounced in the sheltered sector (i.e., services), which has far lower productivity increases than the open sector. However, it should be noted that the productivity slowdown also occurred in the open sector. Finally, the rapid increase in total factor productivity in the 1970s may have reflected unusually strong incentives provided by the very high real wages to maximize the efficiency of the production process.
Labor Productivity
(Per full-time equivalent)
Source: Data provided by the Dutch authorities.Low labor productivity growth in the services sector was not reflected in low GDP growth. On the contrary, whereas in the 1970s high labor productivity growth was associated with poor output growth performance, the decline in labor productivity growth has been associated with a better growth performance. Moreover, with more employment generated for the same output growth, there were fewer new social benefits recipients, contributing to a decline in the collective burden of taxes and social security contributions. The rise in employment benefited the public finances.
Labor Market
The number of persons employed has grown rapidly since the mid-1980s; with an expansion of 32 percent in the 1984–98 period, the rate of increase was similar to that in the United States (Figure 2.8).10 This experience thus differs strikingly from that in many other European countries, where employment growth was only very modest. The difference with European countries became especially pronounced in the 1990s, when many other countries experienced a decline in employment, while in the Netherlands it continued its upward trend. Employment growth in full-time equivalents was less than in persons. The incidence of part-time employment in the Netherlands is high and increasing: 29 percent of employees in the Netherlands work part-time, far more than elsewhere in Europe. However, even in full-time equivalents employment grew rapidly—by 25 percent over the 1984–98 period. Survey data suggests that part-time work generally corresponds to the preference of those employed on this basis. The number of hours associated with a full-time equivalent has decreased slightly over the past decade, but much less so than in countries such as France and Germany. Indeed, in Germany, the average “full-time” working week decreased so strongly that the average number of hours per worker (i.e., including part-time workers) declined by more in Germany than in the Netherlands, despite the higher incidence of part-time work in the Netherlands (Table 2.2).
Labor Market Indicators
Source: OECD, Economic Outlook.Average Hours Worked Per Person in Dependent Employment
Refers to 1994.
Average Hours Worked Per Person in Dependent Employment
Average Annual Decline in Percent | ||||||
---|---|---|---|---|---|---|
1983 | 1990 | 1995 | 1983–90 | 1990–95 | 1983–95 | |
Western Germany | 1,686 | 1,557 | 1,506 | −1.1 | −0.7 | −0.9 |
Netherlands | 1,530 | 1,433 | 1,397 | −0.9 | −0.5 | −0.8 |
Italy1 | 1,724 | 1,694 | 1,682 | −0.3 | −0.2 | −0.2 |
France | 1,558 | 1,539 | 1,523 | −0.2 | −0.2 | −0.2 |
United States | 1,866 | 1,936 | 1,953 | 0.5 | 0.2 | 0.4 |
Refers to 1994.
Average Hours Worked Per Person in Dependent Employment
Average Annual Decline in Percent | ||||||
---|---|---|---|---|---|---|
1983 | 1990 | 1995 | 1983–90 | 1990–95 | 1983–95 | |
Western Germany | 1,686 | 1,557 | 1,506 | −1.1 | −0.7 | −0.9 |
Netherlands | 1,530 | 1,433 | 1,397 | −0.9 | −0.5 | −0.8 |
Italy1 | 1,724 | 1,694 | 1,682 | −0.3 | −0.2 | −0.2 |
France | 1,558 | 1,539 | 1,523 | −0.2 | −0.2 | −0.2 |
United States | 1,866 | 1,936 | 1,953 | 0.5 | 0.2 | 0.4 |
Refers to 1994.
Employment growth was solely the result of job creation in the private sector, as government employment decreased. Employment (in full-time equivalents) in the private sector increased by 30 percent over the same 14 years, while employment in the government sector decreased by 5 percent. These developments are very different from those in the 1970s, when private sector employment declined, and government employment rose by one-fourth (Figure 2.9). Within the private sector, employment creation was concentrated in the sheltered sector, but at the same time the sizable decline in employment that previously took place in the exposed sector came to an end. As noted above, during the 1970–82 period, output in the sheltered and the exposed sector grew at virtually the same rate, but in the 1982–98 period output in the sheltered sector grew substantially faster, suggesting that the rapid employment creation experienced in the Netherlands was not solely the result of improved competitiveness.
Employment
(In full-time equivalents, 1982 = 100)
Source: Data provided by the Dutch authorities.Labor supply also grew rapidly in the period, fueled by an increase in the participation rate of women, natural population growth, and immigration; it was also encouraged by rapid employment growth. The participation rate of women increased strongly, from 39 percent in 1982 to 53 percent in 1997, while that of men remained unchanged, at 79 percent.
As a result of rapid employment creation, measured unemployment dropped significantly. Registered unemployment declined from 11 percent in 1983 to 5.4 percent in 1992 (Figure 2.10). In 1993 and 1994, as a result of the economic downturn, unemployment rose, to 7.6 percent in 1994, but since 1995, it has resumed its downward trend, to 4.1 percent in 1998. The unemployed labor force, which includes people seeking a job whether or not they are registered, showed a similar decline, from 9.7 percent in 1983 to 5¼ percent in 1998. The number of unemployment benefit recipients, however, declined less, and the gap between official unemployment and the number of unemployment benefit recipients widened progressively. By 1997, the unemployment rate was 3½ percentage points lower than the unemployment benefits recipients rate11 and only slightly below its level in the early 1980s (Figure 2.11). A n important reason behind the large difference between registered unemployment and the number of unemployment benefit recipients is absence of job search requirements for unemployed persons aged over 58.
Labor Market Indicators
Source: Data provided by the Dutch authorities.Alternative Indicators of Unemployment
Source: Data provided by the Dutch authorities.The decline in the level of nonemployment was even less, however, if the rise of the number of disability benefits recipients is taken into account. The number of disability benefits kept rising until 1994, declined somewhat between 1994 and 1997, and resumed rising in 1998. The percentage of the working age population that is on either unemployment or disability benefits kept rising throughout the 1980s and reached an all-time high in 1994. Thus, employment creation mainly served to absorb the growth in the population of working age and increased participation by women; it contributed little to reducing the number of working age population who were on benefits.
An important reason for the continuing high level of benefit recipients may have been the failure of the low skilled to find jobs. Employment creation, even in low-wage jobs, was concentrated among the high skilled, while employment of the unskilled decreased further—although not as rapidly as in the 1970s.
Registered youth unemployment declined sharply between 1983 and 1998, from 24½ percent in 1983 to 4.8 percent in 1998. Such a low rate partly reflects nonregistering by young people: when unemployment is measured as people actively looking for a job, the unemployment rate is about twice as high. However, even on this basis, the youth unemployment rate is very low by international standards (Table 2.3). The decline in the youth unemployment rate partly reflects decrease in participation: the percentage of the population between 15 and 24 that was in school increased from 44 percent in 1983 to 54 percent in 1996, but the employment rate increased as well.
Youth Employment and Unemployment Rates, 1997
(In percent)
Youth Employment and Unemployment Rates, 1997
(In percent)
Unemployment | Participation | Employment Rate | |
---|---|---|---|
Netherlands | 9.7 | 56.9 | 63.1 |
Germany | 10.0 | 46.9 | 52.4 |
United States | 11.3 | 58.0 | 65.4 |
United Kingdom | 13.5 | 61.0 | 70.5 |
European Union | 20.4 | 37.1 | 46.6 |
Belgium | 21.3 | 25.2 | 32.0 |
France | 28.1 | 20.1 | 28.1 |
Italy | 33.6 | 25.2 | 38.0 |
Spain | 39.0 | 27.0 | 44.3 |
Youth Employment and Unemployment Rates, 1997
(In percent)
Unemployment | Participation | Employment Rate | |
---|---|---|---|
Netherlands | 9.7 | 56.9 | 63.1 |
Germany | 10.0 | 46.9 | 52.4 |
United States | 11.3 | 58.0 | 65.4 |
United Kingdom | 13.5 | 61.0 | 70.5 |
European Union | 20.4 | 37.1 | 46.6 |
Belgium | 21.3 | 25.2 | 32.0 |
France | 28.1 | 20.1 | 28.1 |
Italy | 33.6 | 25.2 | 38.0 |
Spain | 39.0 | 27.0 | 44.3 |
The Current Account
Since the early 1980s, the current account has swung from a deficit of ½ of 1 percent of GDP in 1980, to a surplus of about 6 percent in 1997. The current account surplus is now one of the highest in the world relative to GDP—although statistical problems may result in an overestimation of the surplus.
There are two reasons why official balance of payments statistics may overestimate the current account surplus:
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First, a substantial difference exists between the current account on a cash basis and on a transactions basis. In 1996, for instance, the current account on a transactions basis amounted to 5.7 percent of GDP, while the current account on a cash basis was only 3.1 percent of GDP. The discrepancy is mainly due to the trade balance, with goods imports on a cash basis far higher than goods imports on a transaction basis.
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Second, the current account does not capture revaluations of foreign investments. In the past 15 years, revaluation losses on Dutch investment abroad have been substantial, and 15 years of current account surpluses have been associated with a decline in the net foreign investment position.
In addition, it is important to note that the current account measure captures the retained earnings of foreign subsidiaries of Dutch multinationals. These earnings are booked on the current account as investment income, and then registered on the financial account as an outflow of direct investment. Thus, while they enter the Dutch current account surplus, they are not generated in the Dutch economy. In 1995, reinvested earnings amounted to some 1.3 percent of GDP. Technically, this is accepted internationally as the correct classification of such flows, but it reflects developments outside the geographic confines of the Dutch economy.
While these factors may affect the level of the current account surplus, they are less likely to affect trends—although the discrepancy between the trade balance on a cash basis and a transactions basis has been growing over time.
The improvement in the current account can be attributed mainly to the improvement of the trade balance, which has improved by about 5½ percent of GDP. This improvement came in two phases. First, between 1980 and 1982, the balance switched from a deficit of 0.1 percent to a surplus of 4½ percent of GDP. Having fluctuated around this level for about a decade, the trade surplus then increased further to about 5½ percent of GDP in 1993. The contribution of other components of the current account was not as important.
Between the mid-1970s and the mid-1980s, Dutch competitiveness improved considerably. Measured by the real effective exchange rate based on unit labor costs, the real effective exchange rate declined by 25 percent between 1977 and 1984. This improvement (which reversed, but not fully, a deterioration of competitiveness in the 1960s and 1970s) resulted from an impressive performance of unit labor costs; the trade-weighted nominal effective exchange rate continued to appreciate.
Between 1985 and 1995, the real effective exchange rate did not change much, as a favorable performance in unit labor costs was offset by an appreciation of the nominal effective exchange rate. Since 1995, however, there has been a renewed depreciation of the real effective exchange rate. This was mainly due to a change in the nominal effective exchange rate—resulting from a depreciation of the guilder against the U.S. dollar, the pound sterling, and the lira.
For a formal analysis of developments in wages since 1970, see Section III.
The labor income share mentioned here is for enterprises, excluding mining and quarrying, operation of real estate, and medical and noncommercial services. Including these sectors, the labor income share rose from 75 percent in 1970 to 80 percent in 1980.
Some authors have argued that the evidence of the existence of a Dutch disease is not very strong, as the real exchange rate did not appreciate after 1974 (van Ark, de Haan, and de Jong 1996). However, it should be noted that in 1974 the real exchange rate was about 30 percent higher than in 1960; it is very likely that in the absence of the increase in gas revenues the real exchange rate would have depreciated from this level.
The disability scheme cushioned unemployment; in other European countries, different social security schemes, such as early retirement, had served as cushions. One of the main attractions of the disability scheme in the past was that benefits, at 70 percent of the last-earned wage lasted until age 65, whereas unemployment benefits tapered off after a few years.
Currently, the Netherlands uses two unemployment definitions: registered unemployment, defined as those without a job or with a job of less than 12 hours a week but who are directly available for a job of more than 12 hours a week and are registered with the employment offices; and the unemployed labor force, defined as those without a job or with a job of less than 12 hours a week who are actively looking for a job of more than 12 hours a week. Thus, the differences between the two definitions are whether people are registered at the employment offices, and whether they are actively looking for a job.
See Den Dunnen (1985).
This linkage led to very high replacement rates. While the unemployment benefit was equal to only 80 percent of the previously earned wage in the early 1980s, it could never be lower than the minimum wage, leading to a net replacement rate of close to 100 percent at the minimum wage level.
The exposed sector is the sector that is most exposed to foreign competition; it includes manufacturing, public utilities, transport, storage and communication, agriculture, hunting, forestry, and fishing. The sheltered sector consists of wholesale and retail trade, banking, finance and insurance, and other non-commercial services.
Between 1990 and 1995, average hours worked per person in dependent employment decreased by 0.5 percent annually, compared with 0.7 percent in western Germany, 0.2 percent in France and Italy, and an increase of 0.2 percent in the United States. Assuming the same changes took place between 1995 and 1998, productivity per hour in the Netherlands increased by 1¼ percent a year during the 1990s, compared with 1 percent in the United States, and 1¾ percent in Italy, France, and western Germany.
The labor market data in Figure 2.13 differ slightly from those in the other figures. In Figure 2.13, OECD data are used, whereas in the other figures national data are used
The unemployment benefit recipients rate is defined here as number of unemployment benefit recipients divided by the sum of the employed and those receiving unemployment benefits.