## WP/20/155 — Productivity in the Netherlands (Section 1 & Section 2)

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### Introduction and overview
- Annual real GDP growth:
  - Netherlands (2016–2018): on average 2.5 percent.
  - Euro area (2016–2018): on average 2.2 percent.
  - G7 countries (2016–2018): on average 2.0 percent.
- Contribution to real GDP growth:
  - More than 60 percent attributed to the labor input.
  - ICT and non-ICT capital combined account for only 15 percent.
- Labor productivity growth (real GDP per hour worked):
  - Netherlands: on average 0.4 percent.
  - Euro area: on average 0.9 percent.
  - G7 countries: on average 0.8 percent.
- Alternative productivity measure:
  - GDP per person employed shows the same qualitative result (slower productivity growth).
- Literature perspectives mentioned:
  - Return to normal after the ICT boom (Grabska et al. (2017)).
  - Increase in self-employed persons (Bondt (2019)).
  - Increase in total hours worked despite aging (Jonkers (2019)).
  - Increasing capital misallocation from small productive and large unproductive firms (Bun and Winter (2019)).
- Chapter objective:
  - Explore culprits of the productivity slowdown by analyzing labor, capital, MFP, and policy implications.

### Labor: patterns, drivers, and interpretations
- Decomposition approach:
  - Aggregate labor productivity growth = within-sector productivity growth weighted by sector labor shares + structural change from shifts in sector labor shares.
- Aggregate labor productivity growth:
  - 2015–2018: on average 0.9 percent.
  - Before 2014 (excluding 2009 and 2010): on average 1.4 percent.
- Aggregate structural change:
  - 2015–2018: -0.6 percent.
  - Before 2014 (excluding 2009 and 2010): -0.1 percent.
- Significant negative structural change sectors:
  - Financial service activities except insurance and pension funds: employment declined on average 4.5 percent annually since 2013.
  - Mining and quarrying: employment decline was 20 percent in 2017; influenced by oil price decline since 2014 and planned closure of the Groningen gas field (decision after the 2018 earthquake).
  - Administrative support (placement, temporary staffing, human resource services): average annual employment growth rate since 2013 was 7.8 percent (total economy average 1.4 percent).
- Labor supply and participation:
  - Labor participation rate rose from 72.4 in 2014Q1 to 78.4 percent in 2019Q3.
  - Employees from abroad rose by 20 percent from 2013 to 2017.
- Staff shortages and skill mismatches:
  - As of 2018, nearly 40 percent of entrepreneurs in construction report staff shortage (highest among sectors; corresponding number across sectors is 25 percent).
  - Skill mismatches reported in some high productivity sectors.
- Flexible work arrangements (FWA) and self-employment:
  - More than 50 percent of the Netherlands’ labor force is part-time (working less than 35 hours per week).
  - Under OECD definition (working less than 30 hours per week), the Netherlands exhibits the highest part-time employment rate in the world.
  - Share of self-employment is high compared to peer countries.
- Empirical relationships:
  - Sectors with a higher share of part-time workers tend to exhibit lower productivity levels and growth.
  - Similar negative pattern for self-employment.
- Interpretation and implications:
  - Firms with lower productivity may access cost-competitive workers in FWA more than higher-productivity firms.
  - Availability of cost-competitive FWA workers contributes to employment but may reduce firms’ incentives to enhance productivity.

### Capital: investment composition, trends, and correlations
- Contribution of capital (ICT + non-ICT) to GDP growth:
  - Between 2016 and 2018: 15 percent.
  - Before 2015 (excluding 2009 and 2010): 43 percent.
  - If 2009 and 2010 are included, the contribution becomes 55 percent.
- Composition and observed weaknesses:
  - For 2017, nearly 85 percent of the Netherlands ICT capital investment was through computer software and databases.
  - Contribution of R&D, other intellectual properties, and other machinery to non-ICT capital investment was all negative.
- Time-series patterns suggesting structural decline:
  - Decline in computer hardware follows a decreasing trend.
  - R&D weaker since 2008 except for a 2015 jump caused by a transaction by a multinational firm in the administrative support sector.
  - Weak investment in other machinery and equipment and weapons systems since the Global Financial Crisis.
- Correlations:
  - Sectors with lower investment tend to exhibit lower productivity levels and growth in the long run (direction of causality indeterminate).
  - Sectors with a higher share of workers in FWA tend to exhibit lower investment in capital.

### Multifactor productivity (MFP), measurement issues, and policy drivers
- Nature of MFP:
  - MFP is the residual of GDP growth not explained by measured labor and capital; it is affected by unmeasured labor input (e.g., effort intensity) and unmeasured capital input (e.g., utilization rates).
- MFP and skills:
  - In 2018, 13 percent of firms in the Netherlands tried to recruit ICT talent vs 9 percent in the euro area.
  - Netherlands had 69 percent of firms with hard-to-fill ICT vacancies vs 53 percent in the euro area.
  - Share of workers with tertiary level ICT education: 58 percent in the Netherlands vs 73 percent in the euro area.
- MFP and omitted asset categories:
  - Dwellings and cultivated biological resources are not included in OECD capital measures; changes in these can affect measured MFP.
  - Example: gross fixed capital formation of livestock fell from 346 million euros in 2016 to 31 million euros in 2018 due to the phosphate reduction plan agreed with the EU.
- Policy as a driver of MFP:
  - December 2019 Supreme Court decision ordering government to cut greenhouse gas emissions by 25 percent from 1990 levels by the end of 2020 can potentially have a large impact on MFP depending on implementation.
  - In 2017, total greenhouse gas emissions were 12.6 percent below the emissions in the base year 1990.

### Policy areas and recommendations to support long-term productivity
- Education expenditure:
  - General government expenditure on education was 5.1 percent of GDP in 2018.
  - Expenditure growth slower than GDP in primary and “other” education; flat in secondary and tertiary education.
  - Recommendation implication: a more balanced education system that supplies needed human capital (including ICT skills via early-stage immersion and vocational training) will contribute to long-term productivity through reduced skill mismatches and human capital accumulation.
- Public expenditure on R&D:
  - General government expenditure on R&D in 2017 was 1.5 percent of GDP.
  - This is lower than Denmark (2 percent) and Sweden (1.8 percent).
  - Public R&D expenditure concentrates on health and economic affairs; public expenditure on basic research is one-third of Denmark and Sweden in percent of GDP.
  - Recommendation implication: more balanced R&D support, including basic research, can sustain innovation and contribute to long-term productivity through knowledge and technology spillovers.
- Labor regulations and labor market duality:
  - As of 2013, regulations on regular workers are stricter than peers in areas including notification procedures for individual dismissal and length of the trial period.
  - Regulations on temporary workers are less strict in areas including unlimited maximum cumulated duration of temporary work agency assignments and no requirement on authorization/reporting for setting up a temporary work agency.
  - Divergence in regulations may contribute to high share of workers in FWA and labor market duality.
  - Labor market duality can lead to longer recovery and shorter expansion periods after negative shocks, contributing to lower MFP.
  - Policy option: establish a structural safety net for all workers including those in FWA to reduce duality and allow automatic stabilizers to work properly in economic shocks (including the COVID-19 pandemic).

### Sectoral shrinkage, resource constraints, and targeted policy options (Section 2)
- Drivers of sectoral shrinkage:
  - Exogenous shocks such as the earthquakes and specific policy decisions have contributed to the shrinkage of high-productivity mining and finance sectors.
- Core structural problems identified:
  - Duality of the labor market.
  - Skill mismatch.
  - Weak investment.
- Policy options for sustainable productivity growth:
  - Targeted government support to:
    - education: for sustaining the supply of needed human capital.
    - R&D including basic research: for retaining the position as an innovation leader.
    - capital: for facilitating productivity-enhancing investment.
  - Reforms to reduce labor market duality:
    - lessening the regulations on regular workers to maintain inclusive and resilient growth.
    - adjusting the regulations on flexible work arrangements to incentivize both firms and workers to “invest” in raising productivity.
- Resource constraints in labor and capital inputs:
  - Sectors with higher productivity growth, including manufacturing and construction, tend to face the shortage of staff with needed skills.
  - The unemployment rate as of January 2020 was as low as 3 percent.
  - Capital accumulation has been weaker over the last decades, especially in sectors with lower productivity growth.
  - Policy implication: further policies to boost labor supply and capital accumulation will benefit the growth of the Netherlands.

### Appendix I — Sector labels
- agff A Agriculture, forestry and fishing
- mine B Mining and quarrying
- manu C Manufacturing
- enrg D Energy supply
- watw E Water supply and waste management
- cons F Construction
- trad G Wholesale and retail trade
- tran H Transportation and storage
- acfo I Accommodation and food serving
- info J Information and communication
- fina K Financial institutions
- real L Renting, buying, selling real estate
- obus M Other specialised business services
- adsu N Renting and other business support
- publ O Public administration and services
- educ P Education
- heal Q Health and social work activities
- cult R Culture, sports and recreation
- oser S Other service activities
- hh T Activities of households
- extr U Extraterritorial organisations

*WP/20/155 — Productivity in the Netherlands, Sections 1 and 2 (IMF Working Paper)*

### Section 1

### WP/20/155 — Productivity in the Netherlands (Section 1)

### Introduction
- Annual real GDP growth in the Netherlands from 2016 to 2018 was on average 2.5 percent, while the average in the euro area was 2.2 percent and for G7 countries was 2.0 percent.
- More than 60 percent of real GDP growth can be attributed to the labor input, while ICT and non-ICT capital combined account for only 15 percent.
- Annual growth rate of real GDP per hour worked was on average 0.4 percent in the Netherlands, 0.9 percent for the euro area, and 0.8 percent for G7 countries.
- If productivity is measured by GDP per person employed, the qualitative result (slower productivity growth) remains the same.
- Literature perspectives cited include: return to normal after the ICT boom (Grabska et al. (2017)); increase in self-employed persons (Bondt (2019)); increase in total hours worked despite aging (Jonkers (2019)); increasing capital misallocation from small productive and large unproductive firms (Bun and Winter (2019)).
- Chapter objective: explore culprits of the productivity slowdown by analyzing labor, capital, MFP, and policy implications.

### Labor
- Decomposition approach: aggregate labor productivity growth = within-sector productivity growth weighted by sector labor shares + structural change from shifts in sector labor shares.
- Aggregate labor productivity growth:
  - From 2015 to 2018: on average 0.9 percent.
  - Before 2014 (excluding 2009 and 2010): on average 1.4 percent.
- Aggregate structural change:
  - For 2015–2018: -0.6 percent.
  - Before 2014 (excluding 2009 and 2010): -0.1 percent.
- Significant negative structural change occurred in finance, mining, and administrative support sectors:
  - Financial service activities except insurance and pension funds: employment declined on average 4.5 percent annually since 2013.
  - Mining and quarrying: employment decline was 20 percent in 2017; oil price decline since 2014 and planned closure of the Groningen gas field (decision after the 2018 earthquake) contributed.
  - Administrative support (placement, temporary staffing, human resource services): average annual employment growth rate since 2013 was 7.8 percent (total economy average 1.4 percent).
- Labor supply and participation:
  - Labor participation rate rose from 72.4 in 2014Q1 to 78.4 percent in 2019Q3.
  - Employees from abroad rose by 20 percent from 2013 to 2017.
- Staff shortages and skill mismatches:
  - As of 2018, nearly 40 percent of entrepreneurs in construction report staff shortage (highest among sectors; corresponding number across sectors is 25 percent).
  - Skill mismatches reported in some high productivity sectors.
- Flexible work arrangements (FWA) prevalence:
  - More than 50 percent of the Netherlands’ labor force is part-time (working less than 35 hours per week).
  - Under OECD definition (working less than 30 hours per week), the Netherlands exhibits the highest part-time employment rate in the world.
  - Share of self-employment is high compared to peer countries.
- Empirical relationships:
  - Sectors with a higher share of part-time workers tend to exhibit lower productivity levels and growth.
  - Similar negative pattern for self-employment.
- Interpretation:
  - Firms with lower productivity may access cost-competitive workers in FWA more than higher-productivity firms.
  - Availability of cost-competitive FWA workers contributes to employment but may reduce firms’ incentives to enhance productivity.

### Capital
- Contribution of capital (ICT + non-ICT) to GDP growth:
  - Between 2016 and 2018: 15 percent.
  - Before 2015 (excluding 2009 and 2010): 43 percent.
  - If 2009 and 2010 are included, the contribution becomes 55 percent.
- Composition and weaknesses:
  - For 2017, nearly 85 percent of the Netherlands ICT capital investment was through computer software and databases.
  - Contribution of R&D, other intellectual properties, and other machinery to non-ICT capital investment was all negative.
- Time-series patterns suggest structural decline:
  - Decline in computer hardware follows a decreasing trend.
  - R&D weaker since 2008 except for a 2015 jump caused by a transaction by a multinational firm in the administrative support sector.
  - Weak investment in other machinery and equipment and weapons systems since the Global Financial Crisis.
- Correlations:
  - Sectors with lower investment tend to exhibit lower productivity levels and growth in the long run (direction of causality indeterminate).
  - Sectors with a higher share of workers in FWA tend to exhibit lower investment in capital.

### MFP and Policy Actions
- MFP is the residual of GDP growth not explained by measured labor and capital; it is affected by unmeasured labor input (e.g., effort intensity) and unmeasured capital input (e.g., utilization rates).
- MFP can reflect:
  - Skill mismatches and education attainment:
    - In 2018, 13 percent of firms in the Netherlands tried to recruit ICT talent vs 9 percent in the euro area.
    - Netherlands had 69 percent of firms with hard-to-fill ICT vacancies vs 53 percent in the euro area.
    - Share of workers with tertiary level ICT education: 58 percent in the Netherlands vs 73 percent in the euro area.
  - Dwellings and cultivated biological resources: not included in OECD capital measures; changes in these can affect measured MFP (example: gross fixed capital formation of livestock fell from 346 million euros in 2016 to 31 million euros in 2018 due to the phosphate reduction plan agreed with the EU).
- Policy as a driver of MFP:
  - December 2019 Supreme Court decision ordering government to cut greenhouse gas emissions by 25 percent from 1990 levels by the end of 2020 can potentially have a large impact on MFP depending on implementation.
  - In 2017, total greenhouse gas emissions were 12.6 percent below the emissions in the base year 1990.
- Three policy areas affecting long-term productivity growth:
  1. Education expenditure:
     - General government expenditure on education was 5.1 percent of GDP in 2018.
     - Expenditure growth slower than GDP in primary and “other” education; flat in secondary and tertiary education.
     - Recommendation implication: a more balanced education system that supplies needed human capital (including ICT skills via early-stage immersion and vocational training) will contribute to long-term productivity through reduced skill mismatches and human capital accumulation.
  2. Public expenditure on R&D:
     - General government expenditure on R&D in 2017 was 1.5 percent of GDP.
     - This is lower than Denmark (2 percent) and Sweden (1.8 percent).
     - Public R&D expenditure concentrates on health and economic affairs; public expenditure on basic research is one-third of Denmark and Sweden in percent of GDP.
     - Recommendation implication: more balanced R&D support, including basic research, can sustain innovation and contribute to long-term productivity through knowledge and technology spillovers.
  3. Labor regulations and labor market duality:
     - As of 2013, factors making regulations on regular workers stricter than peers include notification procedures for individual dismissal and length of the trial period.
     - Factors making regulations on temporary workers less strict include unlimited maximum cumulated duration of temporary work agency assignments and no requirement on authorization/reporting for setting up a temporary work agency.
     - Divergence in regulations may contribute to high share of workers in FWA and labor market duality.
     - Labor market duality can lead to longer recovery and shorter expansion periods after negative shocks, contributing to lower MFP.
     - Policy option: establish a structural safety net for all workers including those in FWA to reduce duality and allow automatic stabilizers to work properly in economic shocks (including the COVID-19 pandemic).

### Conclusion
- The productivity slowdown in the Netherlands is likely driven by both exogenous shocks and structural problems (labor market composition and duality, weak and skewed capital investment, skill mismatches, and policy settings in education and R&D).

*WP/20/155 — Productivity in the Netherlands, Section 1 (IMF Working Paper)*

### Section 2

### wpiea2020155-print-pdf - Section 2

### Key drivers of sectoral shrinkage and structural problems
- Exogenous shocks, such as the earthquakes and specific policy decisions, have contributed to the shrinkage of high-productivity mining and finance sectors.
- Structural problems identified:
  - duality of the labor market;
  - skill mismatch;
  - weak investment.
- These structural problems can be addressed, at least in part, by appropriate policy instruments.

### Policy options for sustainable productivity growth
- Targeted government support to:
  - education: for sustaining the supply of needed human capital;
  - R&D including basic research: for retaining the position as an innovation leader;
  - capital: for facilitating productivity-enhancing investment.
- Reforms to reduce labor market duality:
  - lessening the regulations on regular workers: to maintain inclusive and resilient growth; and
  - adjusting the regulations on flexible work arrangements: to incentivize both firms and workers to “invest” in raising productivity.

### Resource constraints in labor and capital inputs
- Sectors with higher productivity growth, including manufacturing and construction, tend to face the shortage of staff with needed skills.
- The unemployment rate as of January 2020 was as low as 3 percent.
- Capital accumulation has been weaker over the last decades, especially in sectors with lower productivity growth.
- Policy implication: Further policies to boost labor supply and capital accumulation will benefit the growth of the Netherlands.

### Appendix I. Description of Sector Labels
- agff A Agriculture, forestry and fishing
- mine B Mining and quarrying
- manu C Manufacturing
- enrg D Energy supply
- watw E Water supply and waste management
- cons F Construction
- trad G Wholesale and retail trade
- tran H Transportation and storage
- acfo I Accommodation and food serving
- info J Information and communication
- fina K Financial institutions
- real L Renting, buying, selling real estate
- obus M Other specialised business services
- adsu N Renting and other business support
- publ O Public administration and services
- educ P Education
- heal Q Health and social work activities
- cult R Culture, sports and recreation
- oser S Other service activities
- hh T Activities of households
- extr U Extraterritorial organisations

*Source: wpiea2020155-print-pdf — Section 2.*

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_Source: https://www.imf.org/-/media/files/publications/wp/2020/english/wpiea2020155-print-pdf.pdf_