Roads to recovery, chapter 5: Labour market responses to the Great Recession

• Dutch unemployment has shown an unusual pattern, rising slowly in the first phase of the Great Recession but quickly from 2012 onwards.
• When aggregate demand recovers, employment follows suit and the unemployment rate returns to the natural rate of about 4%.
• The Great Recession does not permanently affect labour supply, but may have affected the human capital of the long-term unemployed.

Unemployment in the Netherlands has followed a striking pattern in the Great Recession, with moderate inertia in the first phase of the crisis followed by rapid increases from 2012. Restoring economic growth will lead to recovery of the labour market and unemployment will fall towards the equilibrium value of 4%.

Just as the crisis was accompanied by decreasing employment, the recovery of economic growth will lead to an increase in employment. The decline in employment in the early years of the crisis was gradual. This was partly because companies were keeping hold of their staff despite disappointing production figures (labour hoarding). Employment growth in the recovery may be slow if economic growth remains weak or if companies are very careful when hiring new staff.

The crisis has also led to job seekers becoming discouraged and withdrawing from the labour market, whist other potential employees have postponed searching for a job. In contrast, there are also people who started looking for a job to compensate for the loss of income in their household. On balance, labour supply is currently 1% below the level it would have been at without the crisis. These people will be looking for a job when employment recovers and unemployment starts falling.

There is little evidence that the current high unemployment is permanent and that people currently without work will have no chance of finding work in future. Only if economic growth remains low for a very long time, and employment does not recover, will unemployment remain high. High and persistent unemployment may have lasting effects on the productivity of unemployed people who cannot maintain their knowledge and skills.

Read also CPB Background Document 'The Dutch labour market during the Great Recession'.