Collectively agreed wages in the Netherlands increased by 5 percent in the first three months of 2023, reports Statistics Netherlands. Wage growth has not been this high in 40 years. Good for the employee, but we still need to be careful, warns ING chief economist Marieke Blom.

According to Statistics Netherlands, the high wage increase is partly due to the numerous strikes in recent months. Employers were forced by the actions to further increase wages. But that’s not without its risks, says Blom: “Wage increases are now going so fast that it’s almost inevitable that we’re going to see it in prices.”

Strike for salary increase

Everyone has noticed something in the numerous strikes in recent months: trains and buses did not work, garbage was not collected for days in several cities, and operations in dozens of hospitals had to be postponed. Work was paralyzed in various sectors to demand higher wages due to high inflation.

A good thing, Blom emphasizes. “We come from a very turbulent time. The balance in which labor and capital are reasonably remunerated has recently been upset, and now little by little it is rebalancing”, says the economist. “But the higher salary costs, of course, have to be paid.”

Increase prices or decrease profits?

And that will happen in different ways, she says. For example, there are employers who will focus on efficiency in order to save more money on salaries, for example by better organizing the administration. But that’s harder in the public sector, and that’s where the government will ultimately have to step in, Blom thinks.

In addition, there are also companies in which working more efficiently is not so easy. They must raise prices or be satisfied with less profit, he explains. But that is a difficult decision for many companies.

‘Hard times for the polder model’

“That will have to be done sector by sector, company by company,” says Blom. “They will have to look for what is reasonable for employees and also achievable for employers and ultimately consumers.” In the Netherlands we are used to doing this in consultation, the well-known polder model.

But these are difficult times for the polder model, because important factors in the economy are unpredictable at the moment, she sees: “Turnover is unpredictable, inflation is unpredictable and then we are also coming out of the economically turbulent corona years. That makes the negotiations particularly difficult.”

Purchasing power has fallen

Despite the biggest pay increase in 40 years, employees still suffered an average decline in the past quarter, according to CBS figures. Here’s the thing: Although contractual wages rose an average of 5 percent, because inflation was around 6.6 percent between January and March, average purchasing power fell about 1.5 percent.

Therefore, ING chief economist Blom expects wages to continue to rise for a while, though she believes there is a danger in this too. “If you raise wages too much for too long, you can become less competitive. Then employers will move their activities abroad and you will lose your job.”

The dreaded wage-price spiral

Furthermore, higher wages can also ensure that high inflation persists longer than necessary, Blom warns. “If wages go up, costs to the employer go up and with it prices. This can create a vicious cycle where wages and prices are constantly pushed up.” The dreaded wage-price spiral.

And prices keep rising in the meantime, but that’s a good sign for now, says the economist. “The fact that prices are going up is because most people are still doing well enough, most people can still afford it. So the fact that prices are going up is a sign of that the economy is doing well.

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The last quarter saw the biggest pay rise in 40 years, but who will ultimately pay those higher wages?