Is labor the new scarce resource in the Dutch economy?

The Netherlands is currently experiencing what labor market professor Ton Wilthagen describes as “light aging,” according to an article on BNR. The growth in the number of people in work has come to a halt, while the number of retirees, and therefore the total number of people not working, is rising again. After capital and energy, is labor becoming the new scarce resource in our economy? We called Thijs Knaap, Chief Economist at APG, to discuss.

Is the Netherlands really facing a labor shortage?
"In principle, everything is scarce. In that sense, we also have too few eggs and too few cars. The market exists to allocate that scarcity. And most of the time, it does a pretty good job, including when it comes to labor. The peak of labor market tightness was in 2022. At the time, there were about 140 job openings for every 100 unemployed people. Everywhere you looked, employers were struggling to find enough workers.

That extreme tightness has since eased. We are now below 100 vacancies per 100 unemployed people. One reason is that wages have risen dramatically. And that is exactly how the market is supposed to solve this problem. At the same time, you can still say that labor remains scarce, because high wages are a sign of that scarcity. The difference is that the scarcity is now priced more appropriately.

All of this is cyclical to some extent. What interests me most is what is happening structurally. That brings us to population aging. Over the longer term, the balance between people who work and people who do not work but still consume continues to shift. We often think of retirees in that context. And that trend is likely to continue for quite some time."

We have known for a long time that the Dutch population is aging. How reliable are long-term labor market forecasts?
"The funny thing is that many of the forecasts we made in the past turned out to be wrong. Fifteen years ago, for example, I wrote a piece asking whether we had already seen the maximum size of the Dutch labor force. Based on the demographic projections available at the time, it looked as though the number of people aged 20 to 65 had peaked. In hindsight, that was a significant miscalculation.

Demographic projections kept being revised upward. In fact, the latest forecast from Statistics Netherlands (CBS) shows that the number of people aged 20 to 65 will continue to grow until 2070. The feared decline in the working-age population therefore arrived much later than expected.

One reason is that, over the past fifteen years, nearly 800,000 people between the ages of 20 and 50 have migrated to the Netherlands on a net basis. They have helped absorb a large share of the labor market tightness. That is why you should never underestimate how strongly an economy can adapt when pressure builds. As a result, population aging has so far proved far less problematic than many people once expected. The projected peak of population aging is still around 2040. After that, the ratio between people in work and people not in work improves somewhat, although it does not return to previous levels."

There must be a limit to how many labor migrants a country can absorb. What are the alternatives for dealing with labor shortages?
“At some point, labor migration does indeed run into other forms of scarcity, such as housing shortages or excessive pressure on public services. One important alternative is to stop insisting on doing everything ourselves. If something can be purchased elsewhere, we probably should not be producing it ourselves anymore.

In the past, the Netherlands manufactured a great deal and sold those goods abroad. We also generated substantial income from natural gas. Together, those activities produced large export surpluses, allowing us to build up significant wealth overseas. You can see that, for example, in pension funds that own U.S. stocks, French bonds, and Asian real estate.

We can use those foreign assets to buy goods that we no longer have to produce ourselves. That frees people up to do work that cannot be imported. Workers who used to manufacture products can move into sectors where labor shortages are most severe, such as healthcare and construction. I think that is ultimately the direction we are heading in: importing more goods from abroad while deploying more people in sectors where services cannot be relocated."

Can the market ensure that workers move to the sectors where labor is most scarce?
"In practice, that is difficult. Someone who has spent an entire career working in a factory is unlikely to switch to healthcare overnight. In that respect, the market does not seem to function particularly well. People continue to come to the Netherlands, but relatively few workers move from one sector to another, even when they could earn more money elsewhere. Often, people find it difficult to make such a move voluntarily and only do so after losing their job.

A second safety valve is encouraging people to work more hours. That has led to a whole range of policy measures, from free childcare to tax incentives. It remains unclear, however, whether those measures will have the desired effect.

You also often hear that AI could solve part of the problem. But in the sectors facing the biggest shortages, such as healthcare and education, it is difficult to imagine AI actually replacing workers. At the same time, AI can certainly take over administrative tasks performed by nurses or teachers, giving them more time to focus on their core responsibilities. In that sense, AI can absolutely deliver productivity gains.

Ultimately, solutions will emerge. We have seen that over the past 25 years through immigration and, more recently, through rising wages. So the market does work. That does not mean you should leave everything entirely to market forces. Sometimes public policy needs to provide guidance. That is important for us as a society. Through our pension funds, we have built up wealth to ensure that people can enjoy a decent standard of living after retirement. But that way of life must not become unaffordable because there are no longer enough people to provide healthcare, build homes, or deliver other essential services."