Competitive Disadvantage? the Dutch Wage Bargaining Model Under the Single Currency

In the current discussion on the economic fallout from the Sovereign Debt Crisis and the competitive divergence between the Union’s members, a consistent theme is that Southern European economies should look more Northern.  This paper considers wage-setting practices, which have been seen as a driver of economic competitiveness in Northern economies, but a significant hindrance to Southern ones.  Specifically, this paper employs a neoinstitutionalist framework to evaluate the performance of the Dutch model under EMU.  Indeed, its transformation from an economic laggard, with a rigid labour market and a social insurance system rife with perverse incentives, into a model Eurozone member would seem to suggest that its transition would contain lessons for those euro members currently struggling.

This paper argues that institutionally the Dutch system has proven extraordinarily resilient in the face of new pressures and constraints under the single currency.  Indeed, while EMU has accelerated some pre-existing trends in the Dutch labour market, most of the structural shifts in the Dutch system of wage-setting occurred well before EMU.  In a number of respects, these changes to the Dutch system left it ideally suited to the task of adjusting for macroeconomic shocks and redressing short term competitiveness problems. 

However, not all of these existing trends accelerated by the euro have been benign, and EMU has also accentuated some of the Dutch model’s inbuilt pathologies.  Particularly pronounced under the single currency has been its pre-existing obsession with cost, to the exclusion of other sources of competitiveness.  This has led to an over-reliance upon low-skill, low-wage growth.  This suggests limits to its ability to sustainably promote growth in employment, as this specialization leaves them vulnerable to competition from dynamic economies in Central and Eastern Europe and to emerging economies outside the EU.  Paradoxically, then, one of the greatest competitive assets of the Dutch model to date is likely to be one of its greatest liabilities going forward.  In any event, the corporatist microfoundations that underpin the system are very difficult to replicate elsewhere. 

All of this means that while the current policy debate demands that peripheral countries look more Northern, this is not to say that they should look more Dutch.