The Dutch "Polder Model" - An answer to the German crisis?

by Christian Steffen

1. Introduction:

A comparison between the Dutch macroeconomic data of the years 1982 and 1998 makes a good beginning of an analysis dealing with the reform program implemented in the Netherlands. To fully understand the magnitude of the change that took place during this time frame, a few core numbers will suffice. The year 1982 marked the low point of a sustained socio-economic crisis triggered by the world wide recession following the oil crisis in 1972/73. Afterwards, for about a decade, the economic decline accelerated and lead to a state of economic and financial turmoil threatening to destabilize the entire political and societal system. Unemployment figures had soared to 15% (according to the OECD standard measurement procedure), public spending had rose to over 60% of the GDP, the national debt and the budget deficit reached record highs year after year and the intensive as well as extensive social security and health care system not only aggravated the situation in regard to funding problems but also further intensified the labor market crisis due to high contributions. In one word, in 1983 the Netherlands found themselves in a fundamental socio-economic crisis that demanded immediate action.

1998 the country seems to have recovered. According to OECD statistics the unemployment rate has dropped to 3.7% (Germany 9.5%) despite the fact that the overall employment quota has drastically risen since the 80’s (which means actual job creation was and still is very strong), the national debt and the budget deficit lie well within the Maastricht criteria, public spending is reduced to under 50% of the GDP and the social security and health care system has been closely screened for possible mistakes and was reformed without questioning or denying the very principles of a social system based on solidarity. It seems that the Netherlands have delivered the proof that a modern social market economy with a strong emphasis on social justice can thrive and survive in the face of stiff international competition; the advocates of the ostensible omnipotence of the Anglo-American supply side economics are at least challenged by these findings. In any case, it is worth looking at the "Polder Model" in greater detail. In the following I will try to reconstruct the Dutch "success story", point out and stress corner stones of the reform project and finally raise the interesting question whether or not there is something to be learned from our neighbor and, if so, under which conditions similar reforms can be launched in Germany.

2. Main Part:

In order to understand the Dutch reform process one has to keep in mind that at no point something like a masterplan, which was universally approved off by all relevant actors, did exist. On the contrary, the reforms were implemented in an erratic way, were quite often subject of intense political debate and can be seen as single steps dealing with one specific problem rather than being part of a grand scheme or strategy that aimed at solving the entire crisis all at once. In retrospect one can say that many adopted single measures created, with a considerable time lag, the critical mass sufficient to trigger the positive developments mentioned above. These single steps will now be addressed in greater detail.

2.1 Wage negotiations and the Wassenaar pact:

An agreement between the unions and the employers organization, that cannot be underestimated in its importance, is generally regarded as the starting point of the reform process. In 1982 the wage negotiation partners meet in Wassenaar to discuss the current misery of the labor market which in itself was nothing unusual. What really is noteworthy though is the pact that was hammered out during the forum - the unions officially declared that they would refrain from pushing for higher wages over an indefinite period of time while, at the same time, the employers granted a reduction in weekly working hours. The purpose of the Wassenaar agreement was to cut labor costs, a goal that was accomplished in the following years.

Up to today the wage increases stayed below the inflation rate which means that the actual income, when measured in purchasing power, shrank.

Consequently the cost of labor per unit in the Netherlands and in Germany began to drift apart; since 1983 there has been a 40% shift according to OECD figures. From 1983 till 1997 the cost of labor per unit has dropped in the Netherlands by a margin of 12% while, at the same time, the same costs have risen in Germany by 28%. These numbers make the self proclaimed politics of modesty by the German unions, which seems to have been terminated in current wage negotiations anyway, appear in a different light. The Dutch central planing bureau for labor affairs claims that about 50% of the newly created jobs are a direct result of low wage settlements; granted that this number is by nature based on estimates it still becomes quite obvious that a responsible wage policy was and still is a huge contributor to the impressive job creation performance. (also, I would like to add that such a clear cut policy puts pressure on the employers to reward the restraint of the unions; they cannot hide behind the claim any longer that the high labor costs tie their hands in regard to hiring new personal). At this point it remains to be said that the method of centrally organized wage settlements stayed in place (it remained virtually untouched) and that, in sharp contrast to the US, not the wage differences were broadened but rather the overall wage level slightly lowered. A "working poor" class like in the US did not (yet) emerge due to the fact that the minimum wage is currently fixed at 70% of the average wage and is thereby almost 50% higher than the minimum wage in the US. In summary low wage settlements build the foundation for the successful crisis management but cannot explain the entire turnaround.

2.2. The reorganization of working-time through flexibilisation:

An almost equally important development that took place were efforts to introduce more flexibility to the labor market. The overall goal of this approach was twofold, firstly there was a growing consensus that the total demand for labor had to be distributed more fairly among the population and secondly the employers varying demand for personal (for example during an export boom) was to be taken into account. In this context it needs to be stressed that profitability has always been a basic constant of the "Polder Model"; the envisioned flexibility therefore had to be achieved without causing additional costs. In the case of the Netherlands new forms of employment came into existence that are nowhere near as common in Germany; of special interest are flextime and part-time jobs. The redistribution of labor quickly proved to offer benefits such as an increase in productivity and less people on the sick roll while possible extra costs were offset by moderate wage rises and the benefits mentioned above.

In short one can say that the Dutch labor market experienced a boost in flexibility and is nowadays among the most flexible ones within the EU.

This is not to say though that the Netherlands are on the way of becoming a hire and fire country; a comparison between all the EU states conducted in 1996 clearly indicates that out of 9 flexibility categories the Netherlands ranked first only in regard to organization of working time. But what are the advantages of flexible hours or part-time contracts?

In addition to the already mentioned possibility to redistribute labor (the average working hours per year vary from 1951 hours in the US, to 1508 hours in Germany and 1372 hours in the Netherlands) a business climate has been created that is more friendly towards new employment. Due to part-time or flextime agreements a company finds itself in a position where it can react swiftly in case of economic up- and downswings; for example many companies in Germany shy away from hiring additional staff even if the economic prospects are currently very promising (and rely on overtime instead) for the rigid laws do not allow for adjustment in employment levels. In case a major customer is lost the company cannot adjust its employment level due to rigid laws, a risk that often seems not worth taking in the employers eyes.

According to the insider/outsider labor market theory this rigidity, which makes a short term reaction in the face of changing business prospects almost impossible, constitutes a major reason for sustained unemployment in continental Europe. The Dutch unions and the employers learned a lesson from this and introduced the concept of flexible contracts. In the following years two trends connected to the reorganization of labor could be observed - firstly an increasing number of people learned to enjoy the benefits of more spare time and secondly more than 30% of all part-time jobs lead to a permanent position after some time.

Again, at this point it needs to be stressed that the described flexibility does not refer to wages but to the organization of working time, a very different approach from the Anglo-American one.

2.3 Attempts to make part time work more attractive:

Still, the question remains whether or not flextime or part time jobs are a real alternative to permanent employment; the argument, that restricted contracts inevitably bring along disadvantages has to be closely scrutinized. Soon one finds out though that in reality the overall picture is quite opposed to the fear addressed above.

One of the most important reasons why the flexibilisation of the labor market did bear fruits in such an impressive manner is that discrimination against part time workers was abolished to a great extend which made part time jobs much more attractive.

In regard to worker’s and social rights (sickpay, health insurance...) people working part time enjoy the same benefits as permanently employed; it is safe to say that the only difference between part time and permanent jobs is the time restriction of the former. This "equality" and therefore the attractiveness of part time work is further reinforced by the retirement payment system. Since 1965 the entire population over the age of 65 is entitled to a basic retirement plan which currently pays 1325 DM per head (the retirement system is modeled after the so called Cappuccino idea); the problem of the old poor is consequently less pressing. In a system like the German one where the calculation of the individual retirement payment is purely based on contributions made during the years of full time employment, part time, flextime or even periods of no employment soon became a threat in regard to financial security at old age. A so called "disrupted" work biography during which periods of employment and non-employment alternate is therefore much easier to accept for the Dutch worker than for his German counterpart.

2.4 The reform of the social insurance system:

The third pillar the "Polder Model" rests on is the transformation of the social insurance system which dates back to the year 1987. Before these changes are explored the reader needs to be reminded that the key word in this context is reform, and not demolition. When looked at the social quota of all EU members the Netherlands rank third with 32.3% followed by Germany with 30.8% (in 1996); on the level of social expenditures per head the Netherlands again are among the first (12.605 DM per person; Germany 12.550 DM per person).

The initiated reforms did therefore not aim at overhauling the entire social insurance system but rather at the implementation of a better incentive structure.

Most of the ratified reforms brought about alterations and different accentuations within the employment insurance. In detail the following steps were taken - eligibility was tightened, benefits reduced and the duration of assistance was shortened. In addition people receiving social welfare were urged (by the policy of withholding a certain percentage of the transfer payment in case of non-cooperation) to accept a suitable job offer even in case of overqualification, an approach that seems more radical than it actually is for the number of jobs available is significantly greater in Germany and the minimum wage is much higher than in the US. In regard to the problem of youth unemployment the pressure applied is stronger; this group receives unemployment compensation for six months only, a strategy supposed to ensure sincere efforts to hunt for a job opening. Other measures taken were the privatization of sickpay, diminishing eligibility for invalidity and establishing an independent agency for monitoring the reform process. In sum one can say that the social insurance system was relieved of the enormous financial pressures of the 1980’s for the vicious circle of high unemployment and unemployment related costs (which again fostered unemployment) was put to a halt.

2.5 Accompanying reform measures and initiatives:

Lastly, a few remarks concerning the overall scope of the "Polder Model" need to be made.

The Dutch success story only became possible because measures on different policy levels were taken. Not only the fields mentioned above (social and labor market policy) became subject of change but also the macroeconomic- and fiscal policy.

Especially noteworthy are the budget and deficit cuts and the pursuit of a "soft" deregulation (for instance the liberalization of business hours and the abolishment of unnecessary bureaucratic obstacles). Also more money is allocated to create a so called "second labor market" that is needed to reintegrate long time unemployed persons, unskilled workers and other problem groups back into the first labor market. In order to achieve maximum placing results private unemployment offices were commissioned; a development that went hand in hand with the growing impact of part time job agencies that serve as a link between the individual seeking employment and the business or cooperation.

3. Critical remarks:

The overall performance of the "Polder Model", especially in regard to reducing unemployment figures, is quite astonishing. Nevertheless, as appealing as the numbers may be, the success story has its dark spots which need to be addressed when trying to deliver a safe assessment of the Dutch way.

Most important of all it needs to be highlighted that about 3/4 of the jobs created since the early 80’s were part time jobs while, at the same time, full time employment stagnated. Despite the fact that the working poor scenario, due to structural causes, is not very likely, there is a certain danger of a dualisation of the work force.

Instead of an insider/outsider society, where the latter group is comparatively small, the Netherlands may be heading towards a insider/semi-outsider society, where the latter group is growing at a fast pace.

All efforts to narrow the different status of full time and part time jobs are somewhat undermined by the simple fact that the vast majority of the highly qualified positions (which have not grown in number) belong to the former category. My next point of skepticism is closely connected to the portrayed dualism.

The overwhelming share of the new jobs has been created in the service sector (which is largely sheltered from international competition); the growth rate over the last few years acted accordingly.

A further stimulus for the entire economy due to significant growth rates cannot take place under such circumstances. Concerning the Dutch industry the "Polder Model" could, in the years to come, prove to be a boomerang.

Since labor is comparatively cheap there is less pressure to modernize and streamline production than for instance in Germany; in the long run this could result in technological backwardness and a loss of competitiveness on the world market. For the open, export oriented Dutch economy this would be a disastrous development.

Another interesting point, that cannot be dealt with in this paper, is the question of a possible downward spiral.

If all countries adopt the same cost reducing measures, the effects may neutralize themselves to a great extend. Maybe the Dutch "Polder Model" could only deliver the results it has because nobody else pursued a similar strategy.

4. Conclusion:

Considering the Dutch experience in its entirety I am of the firm conviction that the "Polder Model" can very well be something as an answer to the German crisis.

The Netherlands proved to the world that the core values and mechanisms of a social market economy can be upheld when anachronistic and obsolete structures are disposed off.

Today the Netherlands present themselves as a country in which flexibility and security, macro- and microeconomic policies, profit orientation and solidarity are combined in a unique manner which culminated in a viable economy with a strong emphasis on social justice.

In retrospect one can say that the entire reform project can best be understood as an attempt to rescue the traditional system without questioning its core assumptions; a strategy that made the alterations possible in the first place.

Looking back the real breakthrough occurred due to a growing sense of consensus and coporatism among all relevant actors which was nourished by the shared perception of a fundamental crisis that demanded a concerted action.

The "Polder Model" is therefore not only a complex mixture of pooled policies but also, maybe even more important, an unspoken agreement that only a combined effort, paid for by the vast majority, can stop the disintegration of the socio-economic system.

4.1 An answer to the German crisis?

When one looks at the chances for Germany to follow the Dutch example one has to distinguish between two possible restraints - structural and political-cultural ones. In regard to the former it needs to be pointed out that the industry (such as cars, tools ...) plays a much more important role in the German economy than it does in the Dutch; the fixation on the producing sector may very well be a huge obstacle on the way towards a service oriented society that could provide the number of jobs needed. In addition I am not entirely convinced that there is a sufficient demand for services in Germany; so far I tend to think that a service culture is not yet rooted in the population. The question of the relation between the overall political structure (such as the decentralized, federal system and/or the system of proportional representation) and the ability to push through reforms cannot be answered in this paper.

Concerning the political-cultural aspect of the ability to adopt the "Polder Model" the following needs to be stressed. Up to today I cannot discern an emerging consensus or even a corporatistic attitude among the relevant groups and actors in Germany. The much needed grand coalition between all political parties, the unions, the employers’ organization and the majority of the population in not yet in sight or, at best, too weak to get things started. Maybe the pressure has still to mount till decisive steps are taken. It seems to me that the often heard statements about the inability to compromise and the image of a congested reform process are overestimated in their actual strength or even abused as an excuse to refrain from action. Maybe the new government can utilize the momentum of the sweeping electoral victory; the beginning of a new legislative period seems to be the best time to push through some reforms that, even if they initially encounter heavy resistance, will find a strong supporter group the moment things turn for the better. The "Polder Model" and its core mechanisms can serve as something like a blueprint for Germany which means that the Dutch way does not necessarily have to be copied but at least comprehended. Our neighbor seems to have embarked on the "third way" and I think we should follow. After all, the great advantage of learning from somebody else’s experience is that many mistakes can be avoided.

selected sources:

1. Lothar Funk and Albrecht Winkler: Konsensmodell Niederlande: Ein sozial- und beschäftigugspolitisches Vorbild für die Bundesrepublik Deutschland? in Sozialstaat im Umbruch, Campus Verlag 1997.

2. Martin R. Textor: Sozialpolitik. Westdeutscher Verlag 1997.

3. Ralf Kleinfeld: Was können wir Deutschen vom niederländischen "Poldermodell" lernen?

in Wohlfahrtsstaat: Krise und Reform im Vergleich, Marburg 1998.

4. Uwe Becker: Beschäftigungswunderland Niederlande? in APuZ B11/98.

5. Manuel Musterman: Beschäftigungspolitisch erfolgreiche Länder. APuZ 34-35/98.

6. Eckhard Knappe and Norbert Berthold (Hrsg.): Ökonomische Theorie der Sozialpolitik. Physica Verlag 1998.

7. Heiz Lampert: Lehrbuch der Sozialpolitk. Springer 1998.

8. Bundesministerium für Arbeit und Sozialordnung: Euro Atlas - Soziale Sicherheit im Vergleich. 1996.