Is the Dutch economy too big for our country?

Published on: 12 December 2024

The impact of an aging population on labor shortages is greatly overestimated, and the Dutch economy is too large for our country. That’s the claim made by emeritus professor Paul de Beer of the University of Amsterdam in an interview with Trouw, discussing his recently published book, The Labour Market Myth. Do De Beer’s striking statements hold any truth? We asked Thijs Knaap, Chief Economist at APG, for his insights.


In Trouw, De Beer acknowledges that the effects of aging on the economy will increase but argues that the current labor shortages are unrelated to this phenomenon. Knaap offers a different perspective, backing his position with data. “Over the past twenty years, unemployment in the Netherlands averaged about 5.7 percent. In the last decade, this figure dropped to 3.7 percent. More people are entering the labor market because there’s more work to be done”, Knaap explains. There’s a clear logic behind this trend. “Those now reaching retirement age often have sufficient income from their pensions to continue buying goods, services, or traveling. While aging means more people are leaving the workforce, robust pension schemes ensure spending levels remain stable. The result? The labor market needs to produce more with fewer workers. In this sense, aging does indeed contribute to labor shortages.”


Immigration as a factor

Knaap also highlights another critical factor: international trade. “Baby boomers’ pension contributions were invested over several decades in foreign stocks and bonds, yielding significant returns. This created a scenario where the Netherlands exported a lot while importing relatively little. Now the situation is reversing: as many Dutch retirees start spending their pensions, the country should ideally export less and import more”, Knaap explains.


This system allows foreign markets to act as a kind of pressure valve for the Dutch economy. When Dutch people save en masse, foreign investments absorb the surplus. When there’s a need for goods and services, these are imported. “The problem is, not everything can be imported. Think of the services provided by a hairdresser, doctor, or waiter. These roles must be filled locally, which ties back to Paul de Beer’s point: we need more workers here for services that can’t be outsourced abroad.”


This dynamic partly explains the sharp increase in immigration over the past decade. In 2014, Statistics Netherlands (CBS) projected that the country would have 9.9 million residents aged 20 to 65 by 2024. The actual figure turned out to be 650,000 higher. “This influx has helped meet the rising demand for labor but also created challenges, such as the housing market crisis. Moreover, immigrants will eventually age too, necessitating a continuous flow of newcomers. Given the limited capacity of our relatively small country to accommodate tens of millions of people, we must find ways to use existing labor more effectively.”

It’s particularly important for the Netherlands to become more productive in sectors we can’t import

A trading nation or an industrial one?
This leads to another of De Beer’s claims: that the Dutch economy is too large for our country. According to De Beer, the Netherlands has historically been more of a trading nation than an industrial one, and the importance of large industrial companies is often overstated. “De Beer rightly points out that we could easily import tomatoes instead of growing them domestically. The labor currently used for tomato harvesting could then shift to sectors that align better with our needs. But it’s particularly important for the Netherlands to become more productive in areas we can’t import, such as healthcare and education”, Knaap says.


Innovation plays a crucial role in this shift. “How can we care for the elderly and sick as effectively as possible with the fewest possible workers? It’s not quite as flashy as launching a rocket to the moon, but I’m convinced we can do many things better and more productively. Since retirees often have the financial means, healthcare can offer more tailored services. In education, too, I foresee a significant role for innovation: artificial intelligence offers many opportunities to boost productivity in teaching.”


Becoming a global leader

Of course, these changes won’t happen overnight, and increased productivity must also be reflected in prices, Knaap acknowledges. “Wages in healthcare and education will need to rise, while the prices of subsidized agricultural products should better reflect their actual costs. Achieving this requires two things: labor in the Netherlands should primarily focus on work that must be done locally, and productivity must improve. This way, the Netherlands could become a global leader in innovation in sectors like healthcare and education. If we succeed, the labor market tightness exacerbated by aging could eventually ease.”