In the 1980s Dutch unemployment and particularly long-term unemployment has been higher than in any other post-war period and in most OECD countries. The ruling centre-right coalition viewed this as a problem of the labour market and focused on reducing the substantial budget deficit at the expense of other policy objectives. Given the generous benefit system, this led to the growth of long-term unemployment. The deficit declined as a result of increased world trade, the sale of national assets and the reduction of government investment.

In Discussion Paper No. 438, Hugo Keuzenkamp and Research Fellow Frederick van der Ploeg argue that long-term unemployment exerts less downward wage pressure than short-term unemployment, since the long-term unemployed become alienated and drop out of the labour market. The government's `passive' policy therefore undermined the market's ability to `solve' the unemployment problem. Government intervention in the form of schooling or on- the-job training programmes may temporarily increase budget deficits but will pay off in the long run. The `sound government finance' of the 1980s led both to a deterioration of long-term government finance and to a reduction in the effectiveness of the labour market.

Keuzenkamp and van der Ploeg note the low degree of participation in the Dutch labour market, particularly for women. Despite the extraordinary growth in employment during recent years, labour supply of women has also increased, leaving unemployment more or less unaffected. The hard core of long-term unemployed remains, composed mainly of ethnic minorities and low-skilled male employees. Self-imposed financial constraints have prevented the only available remedy: the provision of compulsory training for the long-term unemployed.

Social insurance contributions are high relative to the OECD average, but average tax rates are comparable, although marginal tax rates are very much higher than abroad. Keuzenkamp and van der Ploeg argue that these are bad incentives to work and that Dutch governments have lived under the self- imposed strait-jacket of gradually reducing the financial deficit at the expense of almost everything else. The public finances do not distinguish between capital and current accounts, so current transfers remained high while public investment as a percentage of GNP halved during the 1980s, as a result of political pressures.

Turning to the external constraint, Keuzenkamp and van der Ploeg note that the guilder has been firmly anchored to the Deutschmark and that inflation has been even even lower than in Germany. There have been no problems of speculative attacks or balance-of- payments crises, despite the high public debt problem and the liberalization of capital markets. Saving by private agents has outweighed government borrowing, leading to substantial current account surpluses and an export-led boom. Wage moderation has considerably improved Dutch competitiveness and increased both the share of profits in national income and the overall level of private investment.

Perceived Constraints for Dutch Unemployment Policy
Hugo A Keuzenkamp and Frederick van der Ploeg

Discussion Paper No. 438, August 1990 (IM)