The Netherlands: Failure of a neo-classical policy agenda

Abstract

The neo-classical plea for flexibilizing European labour markets is strong and convincing within a static general equilibrium framework, but it is counter-productive for dynamic Schumpeterian efficiency. Taking the example of the US and the Netherlands, we argue that more flexible labour relations and reduction of wage-cost pressure did indeed unleash high job growth, but gave negative incentives to labour productivity growth and innovation. Our illustration with macro figures is supported by evidence from micro data. Firms in the Netherlands that realized substantial wage savings due to flexible labour relations do not realize above-average sales growth; and there are indications that they realized lower labour productivity growth. Anglo-Saxon “hire and fire” labour relations can be favourable for “entrepreneurial” innovation regimes, but they may be harmful for “routinized” innovation regimes that are dependent on a continuous historical accumulation of knowledge.

Notes

1. We shall argue that achieving full employment had to do with low productivity growth, but there are two other factors that also account for high job growth. First, it has frequently been documented that full employment was also achieved by creating large numbers of part-time jobs (see recently Salverda, 2005). Second, during the 1990s, rapidly rising housing prices, combined with favourable tax incentives, lead to a strong growth of private mortgage debt. This is also referred to as the Dutch “Mortgage Keynesianism”. Simulations with the Morkmon model of the Dutch Central Bank (2002) suggest that private credit expansion caused about 1% extra gross domestic product (GDP) growth per year around the turn of the century. Nonetheless, long-run growth in the Netherlands hardly differs from the EU average (see Table 2).

2. The demand-pull argument (formulated with respect to patenting and innovation) has an obvious parallel with earlier work on Verdoorn's Law (see Verdoorn, 1946; Kaldor, 1966, 1967 or McCombie et al., 2002).