It is official: The Netherlands is identified as a West-European low wage country, by foreign investors. IBM consultancy said so…

During the more than three years that I publish this blog, I have had a few pet subjects.

One of these pet subjects is the continuous Dutch ‘affection’ for wage restraint as a means to rejuvenate the Dutch economy. 

While wage restraint is a very good way of keeping the costs of labour low and consequently keeping the exports up, the consequences of this policy in the long run can be devastating for the Dutch economy.

Large groups of people – especially those in the lower (middle) wage classes – who go through long years of wage restraint and sometimes even wage reduction, will slowly, but surely lose their purchase power. In order words: they become impoverished in the long run.

The consequence is that these groups of people start to consume less eventually. They spend their available money exclusively on food, daily necessities, healthcare items and durables that they can’t live without, like refrigerators and washing machines. 

As people in the lower (middle) classes are traditionally large groups in every country, this has an undeniable effect on the retail industry and also on small and medium-sized enterprises (SME), with a strong connection to domestic consumption (business-to-consumption and small business-to-business companies), especially in times of economic decline. 

After a while these retailers and SME companies start to feel the consequences of the wage restraint, as their sales revenues start to decline; sometimes this development brings these retailers even to the brink of defaulting.

And there is one more thing… When there is a time of deep economic slump and wage restraint is deployed again as the favorite weapon-of-choice, it starts to act like Hotel California of the Eagles: You can checkout any time you like..., but you can never leave!

In other words: once you started with deploying wage restraint in difficult economic times, it is almost impossible to stop with it. This is due to the following vicious circle:

• Large groups of people, who go through long-term wage restraint, start to consume less and less;
  
• Due to the diminished consumption, the sales revenues of retailers and SME-companies start to deteriorate eventually;
  
• Due to their deteriorated revenues, these retailers and SME companies have to fire some of their personnel or keep their personnel under wage restraint, as there is no money available for wage increases;

In my opinion, this is one of the reasons that the growth figures of the Dutch economy are among the poorest in the whole European Union. And this, in spite of the fact that The Netherlands is the export champion of Europe (in euros of exports per capita) and, on top of that, a very wealthy and highly productive country.

Although the objective reader could argue that I am biased on this topic, I received some kind of confirmation from an unsuspicious source today: IBM consultancy.

The Dutch business news radiostation BNR broadcasted an interview with Roel Spee of IBM consultancy, about the record numbers of foreign companies that are using the Netherlands as the establishment area for their European subsidiaries. 

One of the main reasons was: the relatively low wage costs overhere.

Here are the pertinent snips of the written version of this interview. People, who master Dutch can find the whole interview in the article behind the link:

Record numbers of foreign companies come to The Netherlands

In 2013, The Netherlands has attracted a record number of 370 subsidiaries of foreign companies. This was an increase of 18% year on year. 

An analysis of consultancy company IBM, in which the global investment climate has been mapped, disclosed that this yielded many new jobs for The Netherlands.

Roel Spee of IBM: "The favourable geographical position or the infrastructure. Both are circumstances that Dutch people take for granted, but which are very important in an international context". 

Among the foreign newcomers are Action and Huawei, which open respectively a distribution center and a main office.

The subsidiaries, which were announced last year, will eventually yield 9,200 new jobs in The Netherlands, according to the investigation. Most jobs will be ICT jobs, commercial services and in the food industry. This is more than 50% above the 6,000 jobs that were yielded by the projects of 2012.

“The Netherlands only received a minor shock from the crisis, when it comes to foreign investments”, according to Roel Spee. “In the area of loan costs, the current situation in The Netherlands is more favourable than in other West-European countries, like Belgium and Germany”.

Also other factors, like the attractive fiscal facilities and the excellent infrastructure, play an important role in the choice for The Netherlands as a country to open a subsidiary, according to Spee.

There you have it in the red and bold text. It is almost as if The Netherlands received an ‘official confirmation’ of being a low wage country. Of course you can argue that 9,200 new jobs are a very good development, which could help the Dutch economy recover. 

However, the damage done by the wage restraint is larger than the positive effects of the additional jobs.

To prove my point, I have collected data from the excellent Eurostat database, in order to create a chart about this topic. 

This chart contains the indexed development of the GDP per capita since the year 2000, versus the average wage and salary development within this period.  

I collected the data from the three mentioned countries Belgium, Germany and The Netherlands, as well as from non-Eurozone country United Kingdom.

Indexed development of nominal GDP per capita
vs average wages and salaries
Chart created by: Ernst's Economy for You
Data courtesy of: Eurostat
Click to enlarge

This chart brought me to some very disturbing conclusions:

• Until 2008, The Netherlands had by far the largest difference between the indexed development of the nominal GDP and the indexed development of wages and salaries. In other words: where the Dutch productivity soared in those years, the wages and salaries lagged enormously;
  
• The same was – to a lesser degree – true for Belgium;
  
• However, since the economic crisis started in 2008, The Netherlands had the worst development of the GDP per capita of all these countries. Where the nominal GDP of Belgium, the UK and Germany is already miles above pre-crisis levels, the GDP of The Netherlands is still at the level of 2007; 
  
• In my opinion this could be the result of exaggerated wage restraint: it diminishes the necessity of innovation and productivity increases. In other words: companies might become lazy and self-satisfied! This could explain the poor development of GDP in The Netherlands since the start of the crisis, although I can’t proof it;
  
• Also here the same conclusions seem more or less applicable to Belgium;
  
• In spite of the very moderate wage development in The Netherlands since the beginning of the economic crisis, the development of the Dutch GDP has been so poor that the indexed wages currently exceed the indexed GDP per capita after all;
  
• Is it coincidence, that the countries with the least wage restraint during this 13 year period – Germany and the United Kingdom – enjoyed the quickest recovery since the end of the crisis?! I dare stating that it isn’t! 

Looking at this chart, I dare to say that the wage restraint during the last 15 years is one of the causes for the enduring crisis and the lagging development of GDP in The Netherlands and also Belgium. Wage restraint is in my opinion a failed policy, which should be left behind as soon as possible. 

Unfortunately, however, the economic situation in The Netherlands has deteriorated so quickly since 2008 (the year in which the crisis started) that – as in the Eagles song – “we can check out from the wage restraint any time we like, but we can never leave”!