The Netherlands: Failure of a neo-classical policy agenda

Abstract

The neo-classical plea for flexibilizing European labour markets is strong and convincing within a static general equilibrium framework, but it is counter-productive for dynamic Schumpeterian efficiency. Taking the example of the US and the Netherlands, we argue that more flexible labour relations and reduction of wage-cost pressure did indeed unleash high job growth, but gave negative incentives to labour productivity growth and innovation. Our illustration with macro figures is supported by evidence from micro data. Firms in the Netherlands that realized substantial wage savings due to flexible labour relations do not realize above-average sales growth; and there are indications that they realized lower labour productivity growth. Anglo-Saxon “hire and fire” labour relations can be favourable for “entrepreneurial” innovation regimes, but they may be harmful for “routinized” innovation regimes that are dependent on a continuous historical accumulation of knowledge.

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