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The Revival of Dutch Wage Growth

Albert Rutten
Albert Rutten is currently a first year research master student at Tilburg University. He is particularly interested in the fields of banking supervision, labor economics, and macroeconomics.

The last couple of years, a number of institutions spoke out on the low wage level in the Netherlands. The Dutch Central bank already indicated a number of times that companies have room to increase wages. This claim is confirmed by the Central Planning Bureau. Even the IMF points out that labor wages are relatively low in the Netherlands.

There is strong evidence that the claim of these organizations is justified. Labor productivity growth over the last ten years has been higher than wage growth. Next to this, the Netherlands has a current account surplus of approximately 7% of GDP, indicating that the Dutch people save more than they spend. This could mean that the central government has a too large surplus or that private savings are much higher than private investments. In the Netherlands, the latter is the case. As a result, the private sector should take up the gauntlet.

So why does the private sector fail in doing so? First of all, wage bargaining at a central level does not take place anymore. Back in the Ninetees, The “Stichting van de Arbeid” played an important role in this process. They had an important signaling function towards all sectors in the Dutch economy. Hence, in this way it was much easier to smoothen wage increases in the entire country. Nowadays, most of the wage bargaining takes place at sector level and sometimes even at the company level. This decentralized bargaining causes a coordination problem. It is unattractive for an individual sector or company to increase wages, although an increase in wages would be beneficial for the whole economy if all sectors would do it. From this perspective, the call for higher wages from the Central Planning Bureau and the Dutch central bank seems to have an element of despair; “We would love to see wage increases, but we do not have the toolbox to get the engine running.”

The above is only one side of the coin. The other reason is that the bargaining position of labor has severely weakened over the course of the last decades. After the great recession of 2008, the share of flexible employees increased substantially. Of the 7 million Dutch labor market participants, approximately 1 million of them are self-employed (in Dutch: ZZP’ers). This group has very little bargaining power over their wage. Since they compete with regular employees, self-employed drag down the overall wage growth in the Netherlands.

So when combining the coordination problem and the fragmentation of the labor market, it is quite difficult to foster wage growth. A further tightening of the labor market looks like the best instrument for this to happen. This, however, may take a while since most self-employed would like to work more hours than they currently do.

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