Dutch Minister Lodewijk Asscher pleads for the longawaited end to wage restraint?! Seeing is believing, but we need to be cautious with him.

At this blog, I have written my share of posts on the subject of wage restraint (here is another link and you will find many more posts via the search engine on top of my blog) and wage reduction in The Netherlands.

Wage restraint and its more destructive sister wage reduction are often useless and unnecessary. They diminish innovation in companies, as these don’t have to invest so much money in research and development and information technology anymore. 

Instead of putting money in R&D and ICT in order to improve their productivity and efficiency, these companies use wage restraint to artificially reduce production costs and thus the cost price of their products. Therefore wage restraint is often the easy way to go for dull, poorly led and uninnovative companies and for lazy managers to keep their expenses low and their margins up.

Wage restraint and reduction are also killing for general consumption and a fair distribution of wealth in a country: workers in a country with wage restraint eventually become poorer as their wages don’t compensate price inflation anymore. Besides that, people feel undervalued and unappreciated by their employers, which has a bad influence on their general mood. Both factors have a (strongly) negative influence on consumption.

The flipside is that companies, its large shareholders and executive managers enjoy much higher profits, due to the reduced wages of their personnel. The result is that the top-layer (“the richest 5%”) of a country becomes more and more rich, while the rest of the country becomes poorer over the years. This is disruptive for the stability, prosperity and general well-being in such a country.

Not only on a national level, but also on the international markets wage restraint and reduction are disruptive forces. Wage restraint in a country enables companies to produce goods and agricultural produce for unnaturally low prices. When these goods are exported to other countries, the local producers of competing goods and produce suffer from the false competition, as they are outpriced by it. 

Therefore wage restraint is often a fixed part of a ‘beggar thy neighbour’ policy, just like devaluation of the national currency.

The most obvious examples of countries with a (long) history of wage restraints are The Netherlands and Germany: the export champions of the European Union.

The Netherlands used wage restraint successfully in the eighties to make an end to the price /wage spiral that was eating the Dutch Guilder in those days: in this special case, there was a justified reason for wage restraint. However, after those days the wage restraint-bazooka has been fired a number of times again: in the beginning of the nineties, at the end of the dotcom-bubble in 2002 and also nowadays.

The results have been that:

• consumption in The Netherlands is currently at a much lower level than it should logically be, considering the amount of wealth in this country;
• industrial innovation and the industry itself is in an anemic state nowadays;
• exports on the other hand - especially of agricultural produce - have been booming over the last two decades.

Germany – under Chancellor Gerhard Schröder – used wage restraint to repay the costs of the Wende (‘the exiting days after the Berlin Wall had been torn down’) and the unification of West- and East-Germany in the beginning of the nineties. Initially, this had also been a justified reason for wage restraint.

(The eastern part of) Germany was in an economic slump at the end of the nineties and there seemed to be no way out of the misery caused by widespread unemployment and faltering exports. The German economic clockwork had broken down in the nineties. 

Under these circumstances Schröder successfully used wage restraint to fire up the German economy again and this led to a revival of Germany as Europe's economic engine. However, the German wage restraint has ended in false competition for the other countries in the Euro-zone and abroad, as the German products have been artificially low-priced in the end. To illustrate this, I show here an old chart from my article on the German economic miracle from July 25, 2011:

Income development in The Netherlands and Germany from 1995 - 2006
Chart copyright of ernstseconomyforyou.blogspot.com
Click to enlarge

My conclusion: Unless a country suffers either from a clearly visible wage/price spiral and skyrocketing inflation or from a deep economic slump with no light at the end of the tunnel, due to excessive wages and harsh competition from other countries, my opinion on wage restraint is: “Don’t do it!”. The negative side-effects from wage restraint are often much clearer than the positive ones.

Unfortunately, this opinion is not shared by some of the powers-that-be in The Netherlands:

• clueless politicians like PM Mark Rutte and Minister Henk Kamp of Economic Affairs;
• employer’s representatives-without-imagination, like Bernard Wientjes (chairman of employer’s organization VNO/NCW) and Hans Biesheuvel (chairman of employer’s organization MKB Nederland);
• CEO’s of companies-in-trouble like Capgemini and SNS Reaal;

These powerful and influential people still think that wage restraint is the answer to all economic questions and advocate this policy at every good and bad occasion. As the enduring economic crisis in The Netherlands has put a lot of smaller and larger companies in dire straits, there are more and more employers that (would like to) endorse such a policy. The effects on Dutch consumption and the Dutch economy in the coming years will be even more devastating than already today.

However, a few days ago there was suddenly a dimly shining light in a sea of liberal-conservative darkness, concerning wage restraint: Lodewijk Asscher, Vice-PM, Minister of Social Affairs and member of the Dutch labour party PvdA.

In an article in the Dutch newspaper Het Financieele Dagblad (www.fd.nl) , this freshman minister advocated a considerable wage demand by the labour unions in The Netherlands:

It would be good when the Dutch consumers would get more money to spend through a wage increase. This would help to spur the weak economy in The Netherlands. This was stated by vice-PM Lodewijk Asscher in a conversation with the FD on Friday, January 18.

”It is not up to me to formulate wage demands, but it would definitely help when the Dutch would get some more purchasing power again. This could be achieved through wage development. We know that an increase in purchasing power in most cases either comes from higher wages or economic growth. It  cannot come solely from improved policy in The Hague.”

With these remarks, Asscher affirms the stance of the IMF and a number of economic pundits, like Lex Hoogduin (former crown-prince at De Nederlandsche Bank (Dutch national bank)) and Wim Boonstra, who both already stated during a longer period that wage restraint puts a brake on the Dutch economy.

The liberal-conservative section of this VVD/PvdA cabinet and ‘the other usual suspects’ were “not amused” to say the least.

While PM Rutte and Minister Kamp bit their tongue and did their very best to show that they were not surprised by Vice-PM Asscher’s remarks, VNO/NCW chairman Wientjes was much more negative.

Henk Kamp:

Henk Kamp stated that he thinks that the labour unions will lay down wage demands when there is room for this. ‘If this would lead to a wage increase, this would be good for the economy after all’.

And after this statement Kamp forced a tired smile on his face…

Bernard Wientjes:

Wage increases are not a solution for the bad economic situation in The Netherlands. This was stated by chairman Wientjes of employer’s association VNO-NCW. 

According to Wientjes, the faltering economy is not caused by the low wages, but by unclarity on the policy in The Netherlands. The employer association’s chairman warns that the Dutch exports might become under jeopardy, due to deteriorating competitiveness as a consequence of increasing wages.

This is Wientjes in his natural comfort-zone. The man has been, is and will always be totally clueless and for him it is the Dutch beggar-thy-neighbour policy that counts for his beloved exports. 

That innovation and industrial competitiveness in The Netherlands is deteriorating under this lazy policy and that the small and medium enterprises (SME) – especially retail – are suffering from it nowadays, due to a large drop in demand, he doesn’t care.

And Lodewijk Asscher himself? After a fire-and-brimstone sermon (?) from PM Mark Rutte, he had his hand on the chicken-switch and denied that he had said what he had said during the interview! This becomes clear from the following statement by the FD editors:

Minister Lodewijk Asscher of Social Affairs denies in the media that he pleaded for wage increases in a conversation with the Financieele Dagblad. The FD states that the quotes from this conversation have been printed correctly and that the article is carried by these quotes.

In this case I don’t have any reason whatsoever to doubt the integrity of the FD. I am not so sure about the integrity of the Minister in this case.

Still, I am very glad that Asscher did what he did and reopened the discussion on the sense and especially nonsense of wage restraint. It was about time that this happened.