Our analysis will use the distinction between the ‘exposed’ and the ‘sheltered’ sectors of the economy - a distinction that originates from Swedish analysis in the 1950s (Meidner c.s.).
The Dutch policy reaction - though with some lag - was a general restraint of wage growth. This reaction was motivated by reference to the so-called Vintaf model developed by Den Hartog and Tjan at the Central Planning Bureau - see Driehuis & Van der Zwan eds. (1978) and Driehuis, Fase & Den Hartog eds. (1988). [101] The direct assumption was that high wage costs cause the scrap of old vintages of the capital stock, resulting in an irreversible loss of capacity. The indirect presumption was that a relative reduction of production costs could compensate for the rise in the exchange rate, restoring competitiveness and employment. [102]
However, in a quite brilliant exposition that up to now has been neglected to the shame of the Dutch economics profession, Marein van Schaaijk (1983) of the same Bureau showed that a general wage restraint neglects the fact that the exposed and sheltered sectors have a different composition of their labour force, with important effects. He noted that the exposed sector is industrial and has the larger share of well educated, highly productive or high value added labour; while the sheltered sector concerns services and has the larger share of lowly educated, lowly productive or low value added labour. A uniform wage restraint - targetted at reducing unemployment rather than balance on the external account - is too high for the exposed sector and thus subsidises exports; and the restraint is too low for the sheltered sector and thus generates unemployment. The restraint of incomes also means a restraint of imports, aggravating the situation. So Van Schaaijk noted in fact both the internal and the external imbalance, recognised that these mirrored each other, and that these were prolongued, now not by the original energy price hike but instead by policy.
Indeed, Holland since then has a strong external position - exporting unemployment to Europe - and a high internal unemployment - where the unemployment is hidden in ‘disability’ (and hence registered by dull statisticians as ‘low participation’). Some surplus of the external account is reasonable given the natural resource, and the capital flows for foreign investments are useful for when the resource is depleted. But the Dutch external surplus is excessive.
Van Schaaijk’s suggested remedy was standard and sound. It was and is to let wages develop in line with productivity. Since Dutch policy is oriented to maintaining a more equal distribution of income - which explains part of the policy drive to see a uniform development in wages - Van Schaaijk advised to use tax policy to correct the differential development of gross wages for its effect on net incomes.
However, as said, Van Schaaijk’s analysis has been neglected to this day, and Holland now suffers from a long period of unemployment and a trade surplus and a general restraint of wages and net incomes. There is a curious ‘consistency’ in the delusion with policy makers, that incomes restraint is required to maintain employment by generating a trade surplus, since, by restraining the home market, most Dutch employment growth seems dependent upon trade indeed. Strangely, economic developments caused the Central Planning Bureau to drop the Den Hartog & Tjan model in the mid 1980s, but the policy of wage restraint remained.
In the 1982-1991 period I worked at the Central Planning Bureau too, and had the opportunity to get acquinted - albeit around 1986 only - with Van Schaaijk’s analysis. Apart from being enlightening by it itself, it opened my eyes - even while it was standard - to the importance of tax policy for unemployment, and thereby led to my papers (Colignatus (1989-1996)) and this present book, on the solution to the current mass unemployment in the OECD countries in general.
In my papers I have always referred to Van Schaaijk’s 1983 article whenever it was proper. However, in this chapter I have occasion to more specifically combine his analysis with my own. This chapter improves on Colignatus (1996g), and as I wrote there: this combination of our analyses has been in my mind for a long time, but there was no time to develop it, as, in fact, this chapter suffers from some time constraints too.
We shall use a general equilibrium model where the exposed and sheltered sectors have different combinations of labour as in the Van Schaaijk observation. But now we take my analysis on the minimum wage, and let the minimum wage have the differential impact. This is more relevant for the OECD in general. Note, though, that I do not want to imply that all OECD countries have a trade surplus; other conditions are relevant here too, of course.
Due to lack of time we use a closed model. Thus we cannot reproduce the external imbalance. But we can reproduce the difference in reactions of the two sectors. We may study situations with full employment (1950-1970) and without this (1970-2005). Below, we give a model, tables and graphs.