Prepared by Bas Bakker.
Another way that wage growth might affect employment, is through its effect on output growth. The impact of wages on growth is, however, ambiguous. On the one hand, wage increases raise labor costs, and thereby make production less profitable; on the other hand, wage increases raise aggregate demand, which might stimulate output. In a cross section analysis for eight industrial countries in 1983-1993, no correlation between wage and output growth could be found.
The agreement was not binding, but rather advocated that the collective bargaining at the level of sectors of industry and individual enterprises should be aimed both at a recovery of profitability and a redistribution of existing jobs. Still, in the collective bargaining that followed the agreement between employers’ and employees’ organizations, final agreement was reached for 1.65 million employees (71 percent of the employees involved, and about a third of all employees in the private sector), about moderation of wage growth and reduction of working hours.
The difference in labor productivity growth between the Netherlands and other countries is smaller than is suggested by Chart 4, as no adjustment is made for the change in number of hours worked per employee. However, even is such an adjustment is made, productivity growth in Holland was comparatively low.
There may also be another link from wage growth to labor productivity growth. Rapid wage increases erode profits, and may induce firms to increase efficiency. With eroding profits, firms might be keener on increasing efficiency, than when profits are high and stable.
An increase in labor productivity due to technical progress, on the other hand, need not be detrimental to employment. Technical progress decreases costs, and thus provides the opportunity to lower prices and, hence, raise output.
There may of course also be a link from productivity growth to wage growth. If productivity grows fast, profits will increase, which will induce labor to claim higher wages. This mechanism may be especially relevant when firms are able to increase their productivity, by catching up with foreign technology. The two mechanisms might also interact: high wage growth leads to high productivity growth, which in turn leads to fast wage growth.
Results presented here do not hinge on the exact type of production function used. For instance, if the production function is C.E.S. instead of Cobb Douglas, the capital-labor ratio will depend on relative factor prices as well.
The source of these data is the IMF’s Competitiveness Indicators Database.
For each country, we tried several lags for both real wage growth, and output growth; we only reported the final specification.
These figures can be derived by adding the coefficients for both current and lagged real wage increases.
In the cross section analysis it is implicitly assumed that the rate of technical progress is the same in each country. If the rate of technical progress is not the same across countries, but instead linked to, for instance, the rate of output growth, then the coefficients in the cross section analysis will be biased.
The positive link between productivity and output growth that is suggested in the second row of the Table, no longer is significant once Japan is excluded.
Although productivity in Dutch manufacturing grew relatively slowly in the 1980s, its level by some calculations is still the highest in the world (Maddison and van Ark (1994). Thus, productivity growth might be expected to be slower than elsewhere.
Prepared by Frank Lakwijk.
This chapter concentrates on the minimum wage for workers 23 years of age or older. For younger workers, the minimum wage is an age-dependent fraction of the statutory minimum wage for workers age 23 and older (Chart 7).
Between 1983 and 1993, lowest wage scales rose nearly as much as average contract wages (by 19.8 and 21.6 percent, respectively).
The deductible is equal to about one half of the statutory minimum wage and would lower labor costs for a (half-time) worker earning half the statutory minimum by about 5 percent of the wage. However, for a full-time worker earning around the actual minimum (about 20 percent above the statutory minimum, as explained above) the reduction is only 1 percent of the wage because the marginal contribution rate has been raised.
For family breadwinners, the minimum benefit is equal to 100 percent of the statutory minimum wage. For single persons, the ratio is generally 70 percent.
See “Kingdom of the Netherlands - Netherlands - Recent Economic Developments” (SM/93/43, 2/24/93), page 23.
Prepared by Frank Lakwijk.
For a more detailed overview of recent reform efforts, see “Kingdom of the Netherlands - Netherlands - Selected Background Issues” (SM/94/100, 4/22/94).
The number of full-year equivalent claimants is only about 14 percent lower than the total number of claimants, indicating that most disabled receive full benefits.
Disability commences after one year of sickness.
Sick leave and disability benefits were lowered by the government from 80 to 70 percent of the last earned wage. However, collective bargaining agreements continued to include the stipulation that a sick employee receive 100 percent of his or her net wage, while about half of the reduction in disability benefits was compensated through supplementary payments mandated in the various collective bargaining agreements.
Court challenges to the system by employers are ongoing.
These payments have been insured with pension funds and private insurers.
However, the severe reduction in publicly mandated benefits for new workers has created more differentiation. For example, for workers not covered by collective bargaining agreements, supplementary payments would only be available through disability insurance taken out individually. Such workers are likely to face substantially higher premium payments and lower benefits in case of disability.
More than 40 percent of reexaminations (using the new eligibility criteria) currently result in a loss of benefits for the worker. However, the first group that is being reexamined is that of young workers, which is not representative of the total population of disabled.
From the beginning of 1995, firms will already be allowed to opt out of their arrangements with the sectoral insurance boards (after three months notice) and either self-insure of obtain private insurance. Firms with sickness incidence lower than the lowest incidence category used by sectoral insurance boards in the setting of premiums would be most likely to switch soon (some boards use three, others five, incidence categories).
In order to preserve a degree of solidarity in the system, it is intended to only partly reflect past disability experience in contribution rates by sector.
Prepared by Ioannis Halikias.
The concept of the current account used for the purposes of this study (defined on a balance of payments basis) is not exactly equal to the difference between saving and investment (defined on a national accounts basis), due to small data discrepancies.
This is not inconsistent with the fact that household and business saving remained roughly constant between 1970 and 1982. In fact, one should have expected a substantial improvement in these two categories of saving, precisely in view of the fiscal deterioration. Empirical evidence for the Netherlands suggests that, while Ricardian equivalence in its extreme form is rejected, private saving typically offsets over 50 percent of a change in public saving; see, for example, den Broeder and Winder (1992).
In net terms, the private saving rate also fell during this period.
Note that the increase in government saving fell short of the magnitude of deficit reduction attained, as public investment bore part of the burden of fiscal consolidation.
The decline in both saving and investment in the early 1990s is attributable to cyclical factors.
Based on the 1991 tax laws in various countries, Gardner (1992) has estimated that the after-tax proportion of distributed profits reaching the shareholder is a mere 26 percent in the Netherlands, compared to 58 percent in Germany and 60 percent in the U.K.
Evidence that the saving aspect of mortgages has also recently increased provides an additional indication that the extent of “over”-saving by households may be rather limited. It should also be noted that use of mortgage lending as a means to finance consumption had also been observed in the mid-1970s.
For a detailed discussion of the principal stylized features of the “Dutch disease,” see Kremers (1986).
A positive response of total saving to increased capital mobility, presumably reflecting a higher rate of return would strengthen this effect. However, empirical evidence for a number of countries has tended to suggest that the interest elasticity of saving is rather low.
A detailed discussion of wage developments since the early 1980s is provided in Chapter I.
At this stage of the argument, it is not very important to determine the sources of the change in relative factor prices. In particular, the relevant linkages would be virtually identical whether the factor price changes can be best characterized as exogenous, or whether they themselves have been caused by underlying factor supply developments. This point will be addressed briefly below.
The impact on total private saving would be higher to the extent that, in the short-run, low wage growth lowers the household consumption to GDP ratio, thus increasing the household saving rate as well.
The employment figures are expressed in terms of full-time equivalents; the increase in the number of persons employed was substantially higher.
Estimations using the real hourly wage in manufacturing as the wage variable produced essentially identical results.
For both variables, a Chow test failed to reject stability across sub-samples.
In order to further test the robustness of the postulated effect, the labor income share in total value added was also considered as a potential explanatory variable. While this variable is in some ways a less reliable indicator of relative factor prices since it compounds changes in factor prices and changes in factor proportions, it should capture any bias caused by the assumption that the real price of capital has fluctuated much more moderately than the price of labor over the estimation period. The estimation results, while entailing lower explanatory power and lower significance levels were entirely consistent with the results presented above, suggesting that any mis-specification with regard to the relative factor price variable is not likely to be important.
Strictly speaking, this is not entirely correct. The solution would depend on what form technical progress takes, i.e., whether it is “labor-saving” or “capital-saving.”
This effect is only partially offset by the reduction in the relative demand for nontradables (given their higher income elasticity) deriving from the reduction in household disposable income resulting from the government’s increased financing needs.
In fact, the CPB’s medium-term macroeconometric model FKSEC imposes the assumption that in the sheltered sector labor constitutes the only factor of production.
It could be argued that the effect on the investment-saving ratio would be reinforced by a distortion on the saving side. To the extent that monopoly rents are important in the sheltered sector, a relative demand shift toward nontradables could bias overall business profitability, and hence business saving upward.
Obviously, the relative output of the two sectors will depend on both supply and demand conditions.
It should be pointed out that the authors’ finding that the impact of a (permanent) demand shift towards nontradable goods on relative prices is lower in the long-run would imply that their impact on relative quantities should be higher in the long-run. The underlying mechanism is one in which entry of new firms into the sheltered sector over the long-run tends to return relative prices to their initial level, while resulting in further increases in the relative output of the sheltered sector.
The authors based the distinction on the actual degree of tradability (defined as the share of value added that is exported) of different categories of goods and services. They found that, while all categories of goods qualified as tradables, all service categories, with the exception of transportation, qualified as nontradables.
The inflation variable turned out to be insignificant under all specifications, and was consequently dropped.
To the extent that capital-saving technical progress is embodied in the more recent vintages, this could be a partial explanation of the higher rate of capital depreciation since the late 1970s.
The use of real wage growth as the relevant wage variable resulted in somewhat lower significance levels (especially with regard to the coefficient of DRW itself), but otherwise yielded virtually identical results.
The relative productivity variable would predict a 1.8 percentage point reduction in the investment-saving ratio.
Note, however, that to the extent that the increase in government spending is financed by non-lump sum taxes, it would entail distortions even if it socially desirable.