News item | 23-01-2025 | 08:15
Dutch labor productivity is growing increasingly slowly. That means economic progress is slowing down. This is a concern for the future of our economy, for the distribution of incomes and for the prosperity of our country. In his annual New Year’s article, Secretary General Sandor Gaastra (EZ) advocates measures that increase the productivity of medium-sized businesses.
Attention is now mainly paid to the productivity of large, innovative companies: the ‘frontrunners’. But it is just as important that the ‘peloton’, or the large mass of medium-sized companies, can keep up. This way, economic growth can increase and more companies and people benefit from this. Moreover, this reduces the risk of people becoming dependent on a complicated system of taxes and allowances for income support.
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Gap between the leaders and the peloton
The productive leaders continue to make productivity gains, but medium-sized companies have lagged behind in recent years. The gap between large and medium-sized businesses is widening, contributing to the decline in overall productivity growth. It seems that the large mass of medium-sized companies are having difficulty adopting innovations from the frontrunners. That has 3 explanations:
- More intangible capital
Companies are increasingly using software and artificial intelligence (AI) to improve processes and save money. These technologies and innovations are more difficult to copy than physical capital goods such as machines. In addition, many medium-sized companies lack the financial resources or the right knowledge to apply new technologies. - Division in the labor market
The Dutch labor market has a division of certainties. There are many flexible workers and self-employed people who have less opportunity to work with others and learn from them. At the same time, the strict rules for dismissing permanent employees make it risky for companies to experiment with new technology. In the event of adversity, they cannot simply say goodbye to their staff. - Insufficient lifelong development
Technology changes quickly. Employees must continuously train to be able to work with new technology. Yet there is often a lack of opportunities for training. Employers are not sure whether they will recoup the investment, because employees may leave.
A vicious circle threatens
Income inequality is growing due to stagnant productivity growth among medium-sized companies. Highly productive firms can pay higher wages, while less productive firms cannot.
Although the distribution of disposable income has been relatively stable for 30 years, more and more allowances are needed to allow low incomes to grow. This is at the expense of investments that can increase productivity, such as education or innovations. In addition, there is a loss of prosperity – work pays less – and the benefits system is becoming increasingly complicated.
3 recommendations
To break this vicious circle, Gaastra proposes 3 solutions:
- Investing in Lifelong Development (LLO) during your working life
Introduce learning rights and obligations so that employees continue to develop. This makes technology easier to apply, increases productivity and increases wages. - Labor market reform
Give flexible workers more security and make permanent contracts more flexible. This promotes knowledge sharing and innovation. - Review of corporate tax regulations
Phase out ineffective business schemes, such as the self-employed person’s deduction. Use those resources to stimulate innovation and productivity of medium-sized businesses.
By increasing the productivity of medium-sized businesses, prosperity improves and households become less dependent on benefits. With these measures, the Netherlands can break the vicious circle of stagnation and work towards a ‘virtuous’ (positive) circle of growth, equality and broad prosperity.