Tight labour market calls for broad public debate

Labour is and will remain in short supply

Despite the economic headwinds in 2023, the Dutch labour market remains tight, with more vacancies than unemployed people. Labour will remain in short supply in the future as well: CPB Netherlands Bureau for Economic Policy Analysis expects that labour supply growth will be near zero between 2026 and 2040. Stagnating labour supply growth slows economic growth, puts pressure on the sustainability of social services and affects our overall well-being. The quality of public services deteriorates, for instance, or these services become less accessible. In addition, when economic growth slows, policymakers will find it more difficult to address distributional challenges.

Combination of solutions is needed

Major steps will need to be taken to ensure that our economy and prosperity continue to grow in the coming decades, as revealed by a DNB Analysis published today. Assuming projected labour supply trends and a continuation of current productivity growth, the growth rate of the economy would slow to 0.6% per year on average between 2026 and 2040 in the absence of adjustments. That is well below the one and a half percent average since the turn of the century. In this baseline scenario, growth in gross domestic product per capita, an indicator of prosperity, even comes to a virtual standstill.

In very simplified terms, there are four factors that can contribute to economic growth: the labour force increases, we become more productive, more people start working, or workers start working more hours. For each of these factors, Figure 1 shows what would be needed to keep economic growth at the one and a half percent level we are accustomed to. The effort required would indeed be significant, and several solutions would have to be pursued simultaneously.

We could maintain our economic growth if the labour force were to grow by about 110,000 workers every year. This figure is much higher than the 10,000 workers per year projected for the period 2026-2040, and it is even higher than in recent decades (see Panel A in Figure 1). In theory, this labour force growth could be achieved through targeted labour migration, but finding suitable migrant workers is no easy task. Moreover, migration comes with societal challenges.

Economic growth could also be maintained through higher labour productivity growth. However, this productivity growth would have to increase to 1.4% per year, whereas it has actually declined to an average of 0.5% in recent decades (see Panel B). Barring major technological breakthroughs, such a sharp increase seems unlikely. As artificial intelligence develops, it has the potential to generate productivity gains, but the magnitude of such gains is highly uncertain.

Other potential avenues to maintain growth also involve challenges: the labour force participation rate among 15-75-year-olds would have to increase even further to 88% (currently 75%, see Panel C), or every worker (part-time and full-time) would have to work an additional five hours per week by 2040 (see Panel D). Neither of these is easy, however, as the Netherlands already has a high labour participation rate, especially measured in individuals, partly due to raising the retirement age and greater labour force participation among women. This also makes the average number of hours worked relative to the labour force relatively high (despite a high percentage of part-time workers).

Figure 1 - Four factors that can contribute to economic growth

Source: Years 2023-2025 MLT-raming (CEP CPB 2023)

What needs to happen?

The economy is clearly moving into different territory. It is not jobs, but workers that are becoming scarce. It is also clear that there is no silver bullet for maintaining the growth of our economy and prosperity in these changing circumstances. Our calculations show, for instance, that it is not realistic to hope to sustain growth solely through higher productivity or higher labour supply. This is why we must look at all avenues for relieving labour market tightness, including reducing labour demand and improving the match between supply and demand (see Figure 2). This means that the public debate needs to be broadened to address potentially difficult issues. For example, what should be the focus of our activities in the Netherlands in a future where labour is in even shorter supply? And do the existing laws and regulations that currently influence labour supply and demand, and the match between the two, have the potential to make this future possible?

A debate among all stakeholders (government, employers and employees) will enable us to arrive at a common understanding of the magnitude of the societal challenges facing us and the potential solutions. Without such an approach, the alternative is to allow the economy to adapt naturally to the new reality. In practice, however, this takes a long time and can lead to socially undesirable outcomes.

Figure 2 - Schematic representation of balance between labour market supply and demand