Kingdom of Netherlands
Netherlands: Selected Issues and Analytical Notes
Author: International Monetary Fund
Publication Date:
21 Jun 2011
eISBN:
9781455286645
ISBN:
9781455286645
Language:
English
Keywords:
ISCR; CR; Netherlands; employment growth; unemployment length; wage coordination; unemployment outcome; unemployment level; Unemployment; Employment; Labor markets; Unemployment rate; Europe; labor force; unemployment development
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Important issues of the Netherlands are discussed. Openness to trade has benefited the Netherlands before the crisis and has supported the recent recovery process. However, both financial openness and trade linkages have also been a transmission channel for the financial crisis. Synchronized fiscal tightening across Europe has important spillover effects for GDP growth. The improvement on the supply side of credit has contributed to a normalization of the credit market. However, the recent increase in the financial stress index indicates that the situation is still fragile.

Abstract

Important issues of the Netherlands are discussed. Openness to trade has benefited the Netherlands before the crisis and has supported the recent recovery process. However, both financial openness and trade linkages have also been a transmission channel for the financial crisis. Synchronized fiscal tightening across Europe has important spillover effects for GDP growth. The improvement on the supply side of credit has contributed to a normalization of the credit market. However, the recent increase in the financial stress index indicates that the situation is still fragile.

Analytical Note 1: Unemployment in the Netherlands: A Unique Experience or a Model that can be Imitated?1

1. The Netherlands has emerged from the financial crisis as the EU member with the lowest unemployment rate. The apparent success in maintaining such a low level of unemployment raises the question about the factors that stand behind the low unemployment rate and the relatively limited increase in response to the crisis. Can the Dutch model be copied or are unique elements at play, which are not easily transferable to other countries by altering the labor market structures?

A. Developments in Unemployment

2. The current low unemployment level is to a large extent explained by the low unemployment level already preceding the crisis. Starting from a relatively high unemployment in the early 1980s, the Netherlands has experienced a nearly uninterrupted decline in unemployment since the mid-1980s. While Dutch unemployment generally evolves strongly in line with the average unemployment of other European countries, this co-movement is interrupted during the notable period from 1990 to 1997.

Figure 1-1.
Figure 1-1.

Unemployment Developments in Selected Developed Countries

Citation: IMF Staff Country Reports 2011, 143; 10.5089/9781455286645.002.A001

Source: OECD, IMF staff calculations, the counter-factual is counstructed by applying the average growth rate of Germany and Belgium to the Netherlands in the period from 1991 to 1997.

3. Explaining unemployment today thus requires explaining the unemployment developments in the early 1990s. Had the Netherlands not succeeded in reducing the unemployment rate in the 1990s, when nearly all OECD countries registered an increase in unemployment rates, the Netherlands would most likely not stand out today as the first of class. This is a direct implication of constructing a counter-factual analysis in which Dutch unemployment grows at the average unemployment rate of Germany and Belgium from 1990 to 1997, the period in which the Netherlands, unlike most other EU countries, experienced a fall in the unemployment rate and, after 1997, grows again at its own observed rate. Under this scenario, today’s unemployment rate would be comparable to the unemployment rate in other developed countries.

B. Measures to Reduce Unemployment

4. The Netherlands has experienced a drastic decline in structural unemployment in the 1990s, which has remained broadly stable in the last 10 years. Earlier work has already looked at the “miracle” in the Netherlands (See for instance IMF (1997), Bekker et al (1999), Annett (2006), and Nickell and van Ours (2000)). The authors have identified various aspects which have contributed to the reduction, including tax reform, and the benefit system.

5. The initial conditions were paving the way for a far reaching reform program which helped reduce structural unemployment. The government footprint was very large and the labor share in income relatively high (Bekker et al. 1999). The government embarked on a fiscal consolidation pattern, however, primarily driven by changing tax composition rather than reducing overall tax intake, and reduced government involvement and distortions.

Wages

6. Wage moderation has been an essential element of the reform agenda. In the late 1980s and early 1990s nominal and real wage growth (in the manufacturing sector) in the Netherlands has been one of the lowest in the developed countries. In particular, relative to Germany, real wages grew annually on average by 1.2 percent and 0.7 percent less in the Netherlands, in the 1980s and 1990s respectively.

7. Wage moderation was sustained also due to an increase in the labor force participation. Together with an increase in the labor force of skilled young workers and immigrants, this has also prevented a labor shortage which could have put more upward pressure on wages. The increase in the participation rate of women in the Netherlands has also played an important role in preventing labor skill shortage and wage pressure.

8. Unleashing the potential female labor force appeared particular relevant for reviving the labor market. Female participation had been one of the lowest in the 1980s with 43 percent. Since then, it has increased continuously to a level well above the OECD and EU average stopping only short of the Scandinavian countries and Switzerland. Policies which facilitated women to join the labor force included the phasing out of tax disincentives (for second earners for instance) and also adequate provision of child care. Women provide a large pool of often highly skilled labor, which can address skill shortages and thus contribute to increased firm profits and higher employment-generating investment. This is facilitated by enhanced productivity due to improved skills, but also by an increase in labor supply which tends to keep wage pressure relatively low. At the same time larger female participation contributes to a higher combined household income as double earner household prevalence increases (assuming that the larger fraction of inactive females are married).

9. Competitiveness increased, revitalizing external demand. Reduced labor costs combined with a de facto peg to the main export destination’s currency, the German Mark, allowed for a sustained period of real exchange rate depreciation. This led to a pronounced increase in export demand supporting employment growth further and contributing to the return from a trade deficit to a strong trade surplus.

10. Increased demand and lower wages lead to rising profits which in turn fuelled firm investment, sustaining further employment growth. Adjusted for productivity growth real wages have even increased by less allowing firms to increase profits and savings which had been heavily depressed in the early 1980s (Bekker et. al. 1999). The increased savings of firms were to a certain extent reinvested domestically, allowing for a sustained increase in employment.

Table 1-1.

Wage Growth in the Manufacturing Sector

(In percent)

article image
Source: OECD, IMF staff calculations

Part-time work and hours

11. An increase in the part-time to full-time work ratio has facilitated the fall in unemployment. Comparing the episodes of unemployment reduction in the Netherlands with similar episodes in other countries makes the particular adjustment pattern of the Netherlands visible (See Appendix). With the exception of Belgium and Italy in the 2000s, the reliance on part-time work to reduce the unemployment rate is unique. It explains a significant reduction in unemployment.

Table 1-2.

Labor Force Participation, by Gender

(In percent of population)

article image
Source: OECD; IMF staff calculation.

12. Through lower working hours per worker, the intensive margin of work was reduced while the extensive margin of work was increased. The Netherlands has always had one of the lowest working times per person and has also relied on this dimension in the reform program of the late 1980s. After a marked initial fall in the working hours per worker between 1985 and 1990, working hours have continued to decline more slowly, in line with the trend in other European countries, to the lowest level of hours per worker in the developed world.

C. The Structure of the Labor Market

13. Coordination in wage bargaining has facilitated wage moderation. While it is not necessarily guaranteed that wage coordination ensures better unemployment outcomes, several authors have argued that coordination allows internalizing the adverse effects of wage increases on the overall price level and the competitiveness of the economy (See Belot and van Ours (2001), Nickell (1997) Nickell et al (2001)).2 The relative small size of the country and a relative homogenous work force may also be helpful in enabling coordination, since a country with large productivity dispersion across regions is unlikely to generate low aggregate unemployment, when applying identical wage rates.

14. The taxes on labor have been reduced and the overall tax wedge fell, while it increased or remained unchanged in other countries. The reduction in the employment tax has been a crucial supply side component of the reform in the late 1980s (See Appendix for the evolution of the taxes and the tax wedge across countries). Together with real wage moderation, it allowed labor to become relatively cheaper for firms, facilitating a switch from capital intensive to more labor intensive production (Bakker et al. (1999)). The moderate decrease in the overall tax wedge prevented a drop in labor supply since after tax real wages could grow while pre-tax real wage remained unchanged. Today’s tax wedge is relatively low by European standards (though not from a broader international perspective) and is dominated by direct and indirect taxes as opposed to employment taxes.

15. Albeit unemployment benefits remained high, the structure of support may have incentivized search effort and work. Although benefit replacement rates in the first two years are among the highest in the world, the drop in support as unemployment length increases beyond two years is also relatively high, different to the trend in most other economies, notably Ireland, Spain, and Portugal—but also Denmark (See Appendix). Too generous unemployment benefits could delay matches to new jobs implying that skills are lost through extended unemployment duration, which in turn tends to increase the stock of long-term unemployed. Adverse unemployment benefit structures and too generous systems have frequently been cited as leading to higher unemployment in response to adverse negative shocks (See for instance Abbritti and Weber 2010). The Netherlands has also implemented reforms which tighten the eligibility criteria for unemployment benefits to increase incentives for search efforts.

16. Employment protection legislation (EPL) favors flexibility in temporary work and working time, while being stringent on permanent employment relationships. The reduction in EPL for temporary work relative to EPL for permanent work can to some extent explain the observed rise in the part-time to full-time employment ratio. This design appears particularly helpful in times of crises without the potential negative impact of strict EPL for boom periods (See also Gamberoni et al 2010, I Kadek and de Haan 2011). Notably, Spain, Greece, Italy, France and Belgium belong to the group of countries with relatively stringent temporary EPL compared to permanent EPL and Spain has even changed legislation to heighten the difference (See Figure 1-2).3 Sweden, Denmark, and Germany have made temporary work more flexible relative to permanent work in the recent decade. The Netherlands is the country which, while having a more stringent EPL on permanent compared to temporary work in the entire sample period, has become in the 1990s the country with the largest difference between legislation on permanent work relative to flexible work. While high severance pay in the case of dismissals may dampen the impact of a crisis on unemployment, flexibility of employment relationships with respect to working time is crucial to smooth the adjustment and facilitate new employment creation. However, a good design of the overall framework is warranted to avoid a dual labor market. The Netherlands has witnessed an increase in temporary work contracts in recent years. It is however unclear to which extent this is supply- or demand-driven.

Figure 1-2.
Figure 1-2.

Change in the Relative Strictness of Regular to Temporary Employment Protection Legislation, (EPL regular – EPL temporary)

Citation: IMF Staff Country Reports 2011, 143; 10.5089/9781455286645.002.A001

D. The Structure of the Economy

Economic base

17. There has been a move away from industrial production toward a service oriented economy. In particular the financial service industry has been a driver of employment growth. Employment in the Netherlands is to about 60 percent generated in the service industry, while construction and agriculture contribute only a minor part to total employment (See Appendix). The contribution of manufacturing employment to total employment is one of the lowest in the sample of EU countries and has declined steadily.

Table 1-3.

Average Employment Growth by Sector

article image
Source: OECD; IMF staff calculation.

18. Restructuring has been relatively smooth, which may have helped limit the effect on unemployment. The shift in employment across sectors has been relatively slow but continuous. Measured by the absolute average growth rate across the different sectors, the Netherlands together with Switzerland, Japan, the United States, and Denmark have one of the lowest levels.

Productivity

19. Labor productivity is one of the highest in the world. While being lower than U.S. productivity, productivity in the Netherlands is higher than in most other European countries. The higher productivity relative to other nations, allows the Netherlands to have higher wages per hours. The higher hourly wage in turn contributes to the willingness of workers to substitute out of full time work into part-time work, consistent with evidence that as income increases the working time decreases.

20. However, in recent years productivity has declined relative to the United States. Following a pickup process in the late 1980s and early 1990s, labor productivity in the Netherlands was close to identical to productivity in the U.S. in 2000. However, the slower growth of GDP in the early 2000s has reversed part of the earlier gains in productivity ranks, though, as mentioned, still leaving the Netherlands today ahead of most European countries.

E. Social Underpinnings

(In)equality in Access

21. Public investment in education is relatively high. In terms of spending per student, the Netherlands has one of the highest levels of public spending on education in the EU. The high spending is reflected in well above average scores in the PISA ranking and a relatively high skilled labor force. According to some measures of gender inequality, the Netherlands take an exemplary role, scoring higher than the Scandinavians (UNDP).

(In)equality in Outcomes

22. Inequality is of minor concern in the Netherlands and poverty is contained. The median household income is around 29,000 euro (CBS). Two-thirds of all households have a spendable income above 22,000 euro. The average household income is 33,400 euro. About 5 ½ percent of the households live on less than 10,000 euro (of which more than 80 percent are single households, including students), however only 1½ percent of multi-person households have less than 10,000 euro at their disposal. 16 percent have a disposable income of more than 50,000 euro of which 96 percent are multi-person households.

23. The social security system ensures a comfortable buffer for those who are not employed. While students have (naturally) the lowest income, pensioners have an income about 1/3 lower than employees at their disposal while persons living on unemployment benefits garner an income equivalent to about 44 percent of an employee’s average income. Over the last several years, real income has increased for all socio-economic groups.

Table 1-4.

Gini Coefficient

article image
Source: OECD.

24. Inequality has been low and relatively unchanged. Measured in income after taxes and transfers, the Netherlands ranks third (together with Finland) after Denmark and Sweden. When measured before taxes and benefits the Netherlands has even improved its relative rank against a close to universal trend of an increase in inequality. Thus, the policies of wage moderation have had no negative repercussions on income dispersion, which is probably attributable to an increase in high-skilled labor supply.

F. The Labor Market in the Context of the Crisis

25. Flexible working time arrangements have been vital in buffering the impact of the crisis, while stringent employment protection for regular workers may have prevented some dismissals. Cahuc and Carcillo (2011) provide evidence that short-time compensation programs were able to stabilize employment in recent downturns and thus are also likely to have contributed in the Netherlands to a milder rise in unemployment. However, the program in the Netherlands was relatively small and take up rates modest, thus limiting the potential beneficial effect. There is also more general evidence that higher employment protection on permanent work has contributed to a more stable employment relationship in times of crises (Gamberoni et al 2010).

26. However, structural aspects not related to the labor market are likely to play a more prominent role in the relatively mild increase in unemployment. The labor market prior to the crisis was very tight. Thus labor hording due to potential skill shortages and an expected recovery have been cited frequently as reasons for firms’ reluctance to dismiss workers. Retaining workers despite lower production was feasible since firms entered the crisis with large profits from previous years. Countries which are relatively open and competitive additionally benefit from a quick rebound in export demand. The absence of a burst of a domestic bubble in the housing market can also explain a large part of the difference in unemployment trends compared to other countries such as Spain, the U.K. and the U.S. (Gamberoni et al 2010). Thus, despite the significant contraction of output in the Netherlands, the source of the shock has primarily been external. More significant contagion to the domestic economy has also been addressed by guaranteeing the functioning of the major banks as well as the operation of automatic stabilizers and discretionary stimulus, which in turn reduced the size of the shock compared to other countries.

27. Self-employment biases the unemployment figures to some extent downward. The Netherlands has witnessed an increase of self-employed in the last ten years, the latter having attained 14 percent of civilian employment by 2009 (Coervers et al 2011). The reduction in contracts and working hours by the self employed is not reflected in the unemployment statistics but is deemed to explain the largest part of the “missing” unemployment response in the crisis. However, both the exact number of self-employed and the exact effect on them are subject to large uncertainty.

G. Which Lessons for Whom?

28. Various policy mixes can lead to a similar outcome. Countries will have to adopt the choice which is consistent with their preconditions and overall framework. For instance countries with already low tax rates will not be able to follow the Dutch policy of the 1980s since they have no room for maneuver. Similarly countries, which have low overall benefits and flexible employment arrangements for part time work, will also need to look into other aspects for reducing unemployment.

29. Initial conditions and the economic structure should inform the choice among the labor market policy alternatives. The initial conditions in the Netherlands were very particular but not unique. The Netherlands faced a very high unemployment rate, high taxes, low female participation, high benefits, a high labor share in income, low firm profits, high government debt, a high fiscal deficit, a big state with expenditure to GDP ratio above 60 percent, and maintained a peg to the German Mark. While labor market reform programs can promote a certain economic structure, the transformation toward an economic structure which is more resilient to shocks and provides for more flexible employment opportunities is not easily initiated by government-induced polices, but often only the outcome of very long-term investments of a society into specific education and knowledge.

30. Some countries are today in a comparable situation as the Netherlands in the 1980s and could implement similar labor market policies. In particular, the Dutch experience shows that within the context of a currency union orthodox policies can work and bring about a reversal of the labor market outcome. Wage restraint has helped to reinstall competitiveness and contributed to lower costs for firms which in turn were able to increase employment.

Figure 1-3.
Figure 1-3.
Figure 1-3.

Cumulative Contributions to Change in the Employment Rate (LHS) and Unemployment Rate (RHS)

Citation: IMF Staff Country Reports 2011, 143; 10.5089/9781455286645.002.A001

Source: OECD, IMF staff calculation
Figure 1-4.
Figure 1-4.
Figure 1-4.

Sectoral Contribution to Total Employment

(In percent)

Citation: IMF Staff Country Reports 2011, 143; 10.5089/9781455286645.002.A001

Source: OECD, IMF staff caclulation
Figure 1-5.
Figure 1-5.
Figure 1-5.

Evolution of the Tax Wedge and its Components

(In percent)

Citation: IMF Staff Country Reports 2011, 143; 10.5089/9781455286645.002.A001

Source: Nickell (2006)
Figure 1-6.
Figure 1-6.
Figure 1-6.

Benefit Replacement Rate by Length of Unemployment

(In percent)

Citation: IMF Staff Country Reports 2011, 143; 10.5089/9781455286645.002.A001

Source: Nickell (2006)
Figure 1-7.
Figure 1-7.

Employement Protection Legislation (Index 0-6)

Citation: IMF Staff Country Reports 2011, 143; 10.5089/9781455286645.002.A001

Source: OECD

Appendix: Decomposing Changes in the Employment Rate

The change in the employment rate can be decomposed into four main sub components: 1) the growth rate of the participation rate, 2) the change in the ratio of part time to full time employment, 3) the growth rate of the (working age) population, and 4) the growth rate of the full time employment.

EMPtLFt=EMPtPOPt(LFtPOPt)−1=(1+LPTLFT)LFTPOPt(LFtPOPt)−1(1)

Appropriate transformation and taking the first difference yields the approximation:

Δlog(EMPtLFt)Δ(LtPTLtFT)−Δlog(LFtPOPt)−Δlog(popt)+Δlog(LtFT)(2)

Policies may have varying effects on the different sub-elements which is why the decomposition may be more insightful than simply contrasting employment rates with labor market policies. Furthermore, it allows constructing counter-factuals for the sub-components to derive the development of the implied counter-factual employment rate.

Data are taken from the OECD.

Reference

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1

Prepared by Sebastian Weber

2

For the alternative hypothesis of a hump shaped relationship between unemployment and the level of bargaining see Calmfors and Driffill (1988) and Elmeskov et al (1997).

3

While Italy and Belgium have reduced EPL on temporary work significantly in the last decade, temporary work EPL is still rather stringent when compared to the respective legislation for permanent work, due to the rather flexible legislation on permanent work in both countries.

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Cover IMF Staff Country Reports
Kingdom of Netherlands: Netherlands: Selected Issues and Analytical Notes
Author: International Monetary Fund
Volume/Issue:
Volume 2011: Issue 143
Publisher:
International Monetary Fund
ISBN:
9781455286645
ISSN:
1934-7685
Pages:
144
DOI:
https://doi.org/10.5089/9781455286645.002

Unemployment Developments in Selected Developed Countries

Change in the Relative Strictness of Regular to Temporary Employment Protection Legislation, (EPL regular – EPL temporary)

Cumulative Contributions to Change in the Employment Rate (LHS) and Unemployment Rate (RHS)

Cumulative Contributions to Change in the Employment Rate (LHS) and Unemployment Rate (RHS)

Sectoral Contribution to Total Employment

(In percent)

Sectoral Contribution to Total Employment

(In percent)

Evolution of the Tax Wedge and its Components

(In percent)

Evolution of the Tax Wedge and its Components

(In percent)

Benefit Replacement Rate by Length of Unemployment

(In percent)

Benefit Replacement Rate by Length of Unemployment

(In percent)

Employement Protection Legislation (Index 0-6)