Labour supply, the natural rate, and the welfare state in The Netherlands: the wrong institutions at the wrong point in time

This paper analyses the causes of the Dutch Miracle. Low wage increases in The Netherlands compared to the rest of Europe are the main factor explaining the fast employment growth. Two factors can explain wage growth lagging behind: the 1982 Wassenaar-agreement between trade unions and employers and the realignments in the welfare state. A small macroeconomic model for the Dutch economy is estimated to analyse these issues. The residuals of wage equation do not show systematic negative residuals for the post-1982 period. The generosity of the welfare stare has a clear effect, bur data do not allow the magnitude of this to be precisely established. Furthermore, our model shows that the Dutch labour market adjusts rapidly to adverse shocks. In fact, the exceptional performance of the Dutch labour market in the early 1990s is predominantly caused by its ability to adjust to shocks compared to the rest of continental Europe.