WAGE-PRICE TURMOIL IN THE NETHERLANDS: A MAJOR ELECTION ISSUE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700010016-2
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 14
• Document Creation Date: December 22, 2016
• Document Release Date: January 28, 2010
• Sequence Number: 16
• Publication Date: April 1, 1971
• Content Type: IM

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Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Wage-Price Turmoil In The Netherlands.'
A Major Election Issue
Confidential
ER IM 71-65
April 1971
Copy N
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WARNING
This document contains information affecting the natioiinl
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP 1
Excluded from automatic
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
April 1971
INTELLIGENCE MEMORANDUM
Wage-Price Turmoil In The Netherlands:
A Major Election Issue
Introduction
1. The governing center-right coalition enters
.the lists for parliamentary elections on 28 April
harassed by overheating of the economy. Inflation
is a major campaign issue. Moreover, skyrocketing
construction costs have contributed to the govern-
ment's failure to meet its goal for new housing
completions, adding to discontent. The government
has used price controls for some time and more
recently has added wage controls. But opposition
from labor promises to limit the effectiveness of
these counterinflationary policies, and a worsening
wage price spiral is likely. This memorandum ex-
amines the causes and likely course of wage-price
inflation in the Netherlands and the impact on the
economy and on labor relations. .
Discussion
Background
2. During most of the 1950s and early 1960s,
the Netherlands enjoyed relative price stability
(from 1952 to 1963 the average annual increase in
the consumer price was 2.4%). The price trend
steepened in 1964, however, and from 1964 to 1970
the average annual increase of the consumer price
index -- based on annual averages of monthly
Note: This memorandum was prepared by the Office
of Economic Research and coordinated within the
Directorate of In'teZZigence.
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data -- was 5%, one of the highest recorded in the
Industrial West. Inflation became a major head-
ache for the De Jong government by 1969, when there
was an alarming 7.5% rise in consumer prices --
the sharpest increase since the Korean War boom
in 1951. Although GNP rose 11.3% in 1969, more
than half of the increase reflected price infla-
tion (see Figure 1). Inflationary pressures were
GROWTH OF GNP
(Annual percentage Increases
In GNP at c.. rrent market prices)
PRICE
INFLATION
REAL
GROWTH
1971
FORECAST
still strong in 1970, but the increase in consumer
prices (4.4%) was less than in the previous year,
and a smaller proportion of the total rise in GNP
represented price inflation.
3. The rise in consumer prices in the Nether-
lands during 1969 and 1970 was more rapid than in
West Germany and Belgium -- countries that account
for nearly half of the Netherlands' external trade.
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More serious is the prospect for 1971 that infla-
tion will accelerate in tl.a Netherlands, while it
will probably ease in German; and many other Euro-
pean countries. With imports and exports each
equivalent to roughly 40% of its GNP, the Nether-
lands cannot for long tolerate inflation substan-
tially greater than that experienced by its major
trading partners.
4. Overheating of the economy has proved to
be a major obstacle to eradicating the housing
shortage. Despite the completion of an average of
101,000 dwellings annually in 1960-68, a shortage
persisted --- estimated at some 93,000 units early
in 1969 and concentrated in the heavily populated
West. Rising costs in residential construction
along with a tight capital market, continuously
rising interest rates, and shortages of skilled
labor in the construction industry contributed to
the government's failure to meet its goal for com-
pletion of 125,000 units a year. In 1969 the
shortfall was 2,000 units; last year the program
fell further behind, with the shortfall rising to
nearly 8,000 units.
Inflationary Pressures
5. A number of factors have contributed to
the strong surge in prices since 1968. The most
notable has been a strong expansion in overall
demand (particularly export demand) together with
the switchover from a turnover (or "cascade")
system of indirect taxation to a value-added tax
system in accordance with the Netherlands' commit-
ments to the European Community. Rapidly rising
wage rates, especially in 1970, have also con-
tributed substantially to price pressures.
6. An unprecedented boom in foreign demand has
been the major cause for the growth of overall de-
mand. After rising an average 8.5% in 1961-68, the
volume of exports increased by 16.9% in 1969 and
13% in 1970. In value terms, export growth has
been even more rapid -- 19.4% in 1969 (a postwar
growth record) and 18.2% in 1970. The trend is
shown in Figure 2. Revaluation of the Deutsche-
mark in late 1969 exacerbated extreme demand pres-
sures. The value of exports to West Germany, the
Netherlands' chief trading partner, increased 25%
in 1970.
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FOREIGN TRADE DEVELOPMENTS
Million US $
14,000
EXPORTS F.O.B.
1960 61 62 63 64 65
66 67
Figure2
7. Booming foreign demand has been accompanied
by a steady increase in domestic demand. Real con-
sumer spending rose 7.4% and capital investment by
enterprises about 10% in 1970, compared with averages
of 5.8% and 7.5%, respectively, in 1961-68. In-
creases in domestic demand were also reflected in
a sharply rising volume of imports -- 14.8% in 1969
and an estimated 13% in 1970, compared with 8.6%
per year in 1961-68 -- in spite of a nearly 8% rise
in import prices. The resulting import bill led to
a $600 million increase in the trade deficit in 1970
and contributed to the first large current account
deficit since 1966.
8. As overall demand rose, there was an in-
'creasing strain in the labor market. Unemployment,
which averaged a low 2.1% of the labor force in
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1968, by 1970 had shrunk to only 1.4%; job vacan-
cies approached a record level (see. Figure. 3).
Moreover, as demand caught up with production
capacity, industrial growth began to slow --
after an increase of 11.9% in 1969, output rose
by 9.4% last year.
9. The pressure on prices was aggravated sub-
stantially when the tax on value-added replaced
the turnover (or "cascade") tax on 1 January 1969.
According to government computations, this tax
revision accounted for less than 20% of the total
cost of living increase during 1969, as shown
below:
Sources of
Increase in
Cost of Living
Impact on Overall
Cost of Living
(Percent Increase)
Share of Total
Increase in Cost
of Living
(Percent)
All sources
7.5
100.0
Indirect taxes
Of which:
1.5
20.0
Value-added tax
1.4
18.7
Labor costs
I
t
1.5
20.0
mpor
prices
R
t
1.2
16.0
en
costs
0.5
6
7
Other
2.8
.
37.3
The actual impact on prices, however, was probably
greater than estimated by the government. Antici-
pating that additional price and wage increases
would follow implementation of the tax revision,
many producers raised selected prices more than
necessary to compensate for the new tax. In the
four months following implementation of the value-
added tax, there was a rise of more than 6% in,
consumer prices, certainly indicative of a strong
link between the two events.
10. By 1970, pressures on prices resulting
from booming, demand and the value-added tax were
5
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EMPLOYMENT TRENDS
Thousands
120
JOBS
VACANT
E
40
0
REGISTERED
UNEMPLOYED
1960 61 62 63 64 65 66 67 68 69 70
W
being aggravated by strong increases in wage rates
(see the table). A 9.3% rise in hourly earnings
in 1969 was..followed by a 10.7% increase in 1970 -
the largest wage jump since 1964. Wage pressure;
increased markedly late in 1970 following the
wildcat dock strike in September. Resolution of
the conflict resulted in the granting of a bonus
of 400 guilders ($110) to dockworkers. Echoes of
this settlement quickly reverberated throughout
the country, resulting in comparable wage increases
in most sectors of the economy.
Counterinflationary Policies: 1969-70
11. Government steps to check inflation were
generally ineffective, mainly because'of a break-
down in government-labor cooperation -- at one
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Annual Growth of Consumer Prices and Wages
Year
Consumer Prices
Hourly Earnings
in Industry
(Males)
1960-68
3.7
9.1
1967
3.8
6.4
1968
3.7
8.0
1969
7.5
9.3
1970
4.4
10.7
time a uniquely harmonious relationship which had
contributed substantially to price stability. As
a result of unions' increasingly independent temper
in a full employment situation, the government in
effect lost the ability to negotiate wage restraints
and had to rely on price controls and monetary and
fiscal restraints.
12. The government-labor consultative system,
which provided for government participation and
guidance in wage negotiations, had progressively
broken down during the 1960s.and was nearly in-
operative by 1969. Although the government had
resorted to wage controls sporadically in the
decade, it nevertheless was attempting to achieve
progressive reduction in its interference in labor
relations. Finally in 1967 it relinquished its
right of giving prior approval of collective wage
agreements through the semiofficial Board of
National Mediators. The government retained its
power to invalidate individual wage contracts and
to impose wage pauses of up to six months as pro-
vided in a wage bill introduced in 1968 and legis -
lated in 1970. Labor leaders, however, were
jealous of their new freedom and power, feared
their control of the unions could be challenged
by militants, and balked at any enforcement of
government restraints. Indeed, objections to the
wage bill were so strong that in September 1969
a major labor confederation (Nederlands Verbond
van Vakerenigingen -- NVV) refused to take part
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in any consultation with the Social-Economic
Council (an important advisory body to the govern-
ment) as a protest against the state's authority
to veto individual wage contracts. Thus the
government -- threatened with a serious breach in
labor relations and with the 1971 elections in
mind -- exercised little real control over wages
from 1968 through 1970.
13. The heart of the government's counter-
inflationary policy was a price freeze. In April
1969, all prices were frozen by decree, and price
increases since 1. October 1968 that could not be
justified by cost increases were to be rolled back.
This policy resulted in a slight decline of 0.5%
in the consumer price index from April to August
1969. Price controls were loosened in September
1969, permitting firms -- after obtaining approval
.from the Ministry of Economic Affairs to raise
prices to cover external cost'increases (such as
materials, freight, repairs, and publicity cost
increases as well as higher taxes and duties)
occurring since 14 March. Prices again began to
move up'sharply, rising 0.9% from August to
December, underlining the restraining but non
curative nature of price controls. The price
control policy was again modified in August 1970;
ministry, approval was no longer required but price
increases had to be reported one month before
their introduction.
14. Accompanying the price freeze in early
1969 was a restrictive monetary policy. The''re-
strictive monetary measures included the reintro-
duction of ceilings for short-term bank credit
and of guidelines for types of lending as well
as an increase in the discount rate. Later in
the year, because of the Netherland's close trade
ties with West Germany it was widely believed that
a revaluation of the Deutschemark would be fol-
lowed by revaluation of the guilder. Speculation
was rife. A speculative inflow of capital sub-
stantially increased the liquidity of the banking
system, reducing the effectiveness of the restric
tive measures. The overall impact of public
finance has at best been neutral, as the overall
budget deficit rose from $641 million in 1969 to
$789 million in 1970.
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Deflationary Policies for 1971
15. Seriously concerned about inflation, a
deterioration in the trade balance and shrinking
business profits, the government last September
proposed a tough deflationary program for 1971.
Among the principal fiscal measures proposed were:
a. The freezing of 140 million
guilders ($39 million), 0.4% of the
original 1970 government budget,
through postponing outlays for a wide
variety of projects. in fields such as
transportation, waterways, science,
education, housing, and defense;
b. A 3% surcharge.on income, wage,
corporate, gasoline, and automobile
taxes effective 1 January 1971;
c. An increase in the value-added
tax from 12% to 14%;
Together these fiscal measures are
expected to reduce the budget deficit
from 2,856 miZZion guilders ($789 mil
Zion) in 1970 to 2,062 miZZion guilders
($570, million) in, 1971.
d. Restrictions on consumer credit
and state guaranteeing of loans outside
the house-building sector;
e. A surcharge and permit system
on new industrial construction in cer-
tain areas;
f. Continuation of existing price
controls, and
A. Contingent on agreement of the
social and economic , council, there will
be a temporary wage freeze.
The government has altered its attack recently
with two major revs ions regarding wage and price
controls
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a. Stricter price controls were:im-..
plemented specifying which external costs
may be passed on in prices effective from
'.5 November 1970 to 16 March 1971.
b. Facing strong opposition from
labor, the government was forced to water
down its initial proposed w.'ge freeze
and accept a modified version. As col-
lective labor agreement-s, expire in 19.71,
they will be subject to a si-month
"control period." During the period,
wages may be increased by a maximum of
4% (3% at the beginning of the period
and 1% after three months). After the
six-month control period, new labor.agree-
ments may be concluded.
Outlook
16. The Dutch, economy will grow at a less
rapid rate in 1971 .-- perhaps around 4% compared
with 5.9% in 1970 -- in response to the govern-
ment's restrictive economic policies and a probable
easing of export demand.
the government' after, the 28 April election. It is
unlikely-that price and wage increases can be held
significantly below the 1970 gains. The wage-price
spiral will continue with businesses feeling
impelled to raise prices in order to combat
shrinkage, of profits resulting from increased
labor costs and labor unions demanding higher
wages in order to prevent their real incomes from
shrinking. In fact, price and wage inflation may
accelerate if controls (scheduled to expire at
mid-year) are lifted. Consumer price increases
of 5.5%-6% are forecast for 1971, compared with
4.4% in 1970.
Dutch.voters and will remain the key problem facing
likely to continue. This is a sore spot with
17'. Nevertheless, inflationary pressures are
pand housing construction has excluded housing .
from, the government's deflationary measures (spe-
cifically from the construction surcharge and
limitations on construction loans), the outlook
18. Although strong political pressure to ex
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for housebuilding is not encouraging. Because of
the inflationary pressures anticipated this year,
the government is unlikely to attain its announced
goal of 127,000 housing completions, and housing
will continue to be a major problem area for. chG
next government.
19. The government, or a new coalition emerging
from the April election's, will have to cope with an
increasingly recalcitrant labor force. As demon-
strated by the unsanctioned dock strike in Sep-
tember 1970, the unions no longer have close con-
trol over their rank and file. Thus, even if the
unions become more cooperative, it is unlikely
that the old harmonious wage-setting arrangement
between government and labor could be reestablished.
Indeed, a major labor confrontation may await the
next government. Inflationary pressures are ex-
pected to be strongest in the first half of the
yea;,, a time wheiii workers' real income will prob-
ably be showing no significant gains. Hence, when
the wage pause lapses in July (70 labor contracts
coma up for ngntiation at that time), the unions
will probably bargain hard and a major wage explo-
sion could occur. This would upset current fore-
casts for 10% wage gains and augur further ice
increases. If the government evokes its poi, r to
invalidate these contracts in the "public interest,"
labor's response could be long and costly strikes.
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