Despite strong economic performance, we’re experiencing no income growth.
The Netherlands and income
A report by McKinsey (a consultancy) found that in the period of 2005-2014 around 70% of citizens living in OECD Countries (a club of rich countries of which the Netherlands forms part of) experienced no income growth. Misfortunes varied significantly among countries. In Italy for example, only 2% of the population experienced income growth during this period, enduring far worse than the Dutch, of whom 37% of saw their income grow. This year marks four years from the last year analyzed in the report and not much has changed for the Dutch. This is troubling for the Netherlands and income.
Not quite the situation right now.
A legacy from the Global Crisis
Slow income growth followed the global crisis of 2009, prior to which, the Netherlands experienced annual income growth of 3.4%, double the amount experienced in the country in 2017. As the country fell into financial troubles in the early portion of this decade, businesses stopped raising wages to cut costs.
The Netherlands has recovered economically
Since then, however, the economy has for the most part recovered. The Netherlands experienced in 2017 the fastest economic growth in the last decade. In April of 2018, the Dutch unemployment rate (the proportion of those looking for a job and not being able to find one) hit 3.9%, close to its pre-crisis historic low of 3.6%.
But economic theory is not in concordance with reality
The strong economic activity of the country paired with the absence of a corresponding income growth is puzzling for many economists. Economic theory suggests that as an economy recovers, companies find it harder to find new employees, which puts them in need of raising wages to attract the best candidates. However, this has not been the case.
As the graph above (produced by The Economist) depicts, income growth (light blue) in the Netherlands has fallen since 2009, while the unemployment rate (dark blue) has fallen to historic lows. This suggests that employers are not experiencing any pressure to raise wages, despite the fall of people looking for a job.
Why is this happening?
The Economist Intelligence Unit (a research center) concludes that the lack of wage growth in the Netherlands could be attributed to three different causes.
- The new workforce structure. Since 2003, the share of flexible contract employees has increased significantly, almost doubling 2003’s figure in 2017. Flexible contracts are short-term period work arrangements that provide greater freedom to employers during the staffing process. While this labor structure allows for a more vivid labor market, it may also lead to poorer training quality, greater job insecurity and lower productivity, all factors that reduce an employee’s negotiating power.
- The role of work unions. Weakening of union memberships in the Netherlands, as these represent employee’s interests against employers.
- Low inflation. Finally, while the economy’s GDP has been increasing for the last couple of years, inflation has remained partially flat. A non-raising cost of living does not create an incentive for employees to negotiate higher wages.
So what is next?
If that is the case, then the wage stagnation should see an end as inflation picks up. According to OECD data, the Netherlands should experience a healthy inflation rate of 2% in 2019, double the amount experienced in 2016. If such is the case, there may be no reason to trouble after.
What do you think of this news and the Netherlands and income? Let us know in the comments! Don’t forget to join our DutchReview group too!