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The issue: Macro-economic mismanagement keeps unemployment high

Unemployment always lags behind the economic cycle. Although the crisis is on the wane, this means that new jobs will not be created quickly, including for young graduates. We can carry on trying our hardest to put together the perfect CV and get three master degrees, argues economist Bas Jacobs, but there simply isn’t enough work to go round. And that is likely to remain the case for a while.

We had a crisis in the 1980s too. Are we even worse off now?

“Unemployment was higher in the 80s, but the economy started growing again much more quickly. That is definitely a big difference from the current crisis, which is rightly described as the severest since the 80s, or even since the 1930s. According to the CBS (Dutch Central Bureau for Statistics), unemployment now stands at 8.8 percent. Before the crisis erupted, it was at just under 4 percent. That means it has more than doubled. More than four hundred thousand extra people have been added to the jobless total. And some people have simply withdrawn from the job market altogether.”


Is growth likely to return?

“Economists are very poor at making predictions, so I’m certainly not going to do so. What I do expect, and what the CPB (Dutch Central Planning Office) is also saying, is that unemployment will rise even higher in the years ahead, to around 9 percent. This is very much to do with underspending. The amount of goods and services that can be produced has outstripped demand, leaving companies with excess capacity. In short, there is a macro-economic coordination problem: a balance sheet recession due to the fact that we all have less money to spend because we have to pay off our debts.”

What has that got to do with unemployment?

“The amount of work is determined in the short term by expenditure – by what we spend as consumers, businesses and governments. If we want to bring down unemployment in the short term, we need to spend more. That is the biggest bottleneck, because households have little to spend at present. They have a lot of debt, especially mortgage debt. More than a third of home-owners have negative equity: the value of their mortgage is greater than the value of their home. They are paying off their mortgage in order to get their heads back above water, and therefore spending less money. Companies are not investing because they are still operating well below capacity. And companies that do wish to invest are unable to get the money from the bank.”

And the state is also continuing to economise...

“That’s right, the government is carrying out a programme of tax increases and spending cuts without historical precedent: between 2011 and 2017, about 9 percent of gross domestic product. That is unparalleled in post-war Dutch economic history. The government is spending less, and private consumption is decreasing due to tax increases. The Netherlands is still doing relatively well in terms of benefiting from global trade. We are still growing every year in that respect, but that is really the only positive factor in the Dutch economy, and it is nowhere near enough to offset all the negatives.”

What about all those optimistic reports that the crisis is on the wane?

“The worst is now behind us. The CBS recently presented a fine report about 2013, which represented the turning point and the start of the recovery. House prices have virtually stopped falling and the number of house sales is on the increase again. The government cuts are slightly less tough now and its tax increases less drastic. Partly due to the reduction in pension premiums, households’ purchasing power is rising again somewhat. Investments are also picking up a bit. Yet the possibilities for growth in the Netherlands remain relatively limited. Home-owners still have large mortgages, and gross domestic product in 2015 is still expected to be lower than in 2008.”


Whose fault is that?

“The Dutch government has been obsessed with reducing the national debt in the last few years, despite the fact that it was not the national debt that caused the crisis or even unemployment. These things are in fact due to macroeconomic mismanagement. Precisely at a time when people are having to pay off their mortgages so as to keep their heads above water and banks and pension funds are having to restore their balance sheets, the government should not have reacted by increasing taxes and cutting spending.”

So the government’s approach is wrong?

“Yes, the Dutch government should have acted differently as both orchestrator and regulator of the economy. In America, the banks have been restructured and recapitalised – meaning that they hold more capital, for example because they have been compelled to issue new shares and stop paying out dividends. They are therefore safer and are able to both find financing and make loans more easily. The Dutch government should have forced the banks to do these things too. In addition, the US government put its foot on the gas in both its monetary and its fiscal policy during the crisis years, so that the economy continued to grow.”

Is there any hope for new graduates?

“Things don’t look particularly rosy for them in the short term. Except that they themselves don’t see it that way. The generation of students in the 1980s had an indescribably more pessimistic view of the job market than the current generation. That sense that they will never find work is something I just don’t see in students at all these days. Everyone is just busy fine-tuning their CV, with unpaid internships, three master degrees and other extras just in order to attract companies’ attention. Because things will work out fine in the end if they do that, they reason. In that respect, I think this generation of students is far more confident of its own abilities than previous generations. They believe that their destiny lies in their own hands: if I just try a little harder than the rest, I will get that job.”

What should they do differently?

“It may be an understandable reaction, but how realistic is it? The fact is that there are only a limited number of jobs right now, so there is a lot of competition. In the longer term, however, labour shortages due to population ageing will create strong demand. So you should concentrate especially on the things you find fun and interesting. And try to get really good at something. Put your time into that rather than into polishing up your CV.”


thursday 17 april 2014 (week 16)

The issue is a section in Erasmus Magazine, the opinion and information magazine of Erasmus University Rotterdam, in which an EUR-academic responds to a current-social issue.

Bas Jacobs