Productivity V: The Economic Value of Labour Scarcity

The Netherlands are well prepared for future challenges, ranking high on competitiveness, social progress, and human development. The Dutch population is highly educated, has high living standards, and values a good work-life balance, which puts further pressure on working hours. To pursue high ambitions on living standards and work-life balance on the one hand, and housing, healthcare, education and the environment on the other hand, political and business leaders need to urgently define productivity improving policies to mitigate the impact of labour scarcity on the economy.

1. Introduction

In the previous article Productivity IV: Labour Productivity by Sector, several labour productivity indicators were scrutinized that help leaders to define productivity improving policies.

Political and business leaders have high ?ambitions on living standards, housing, healthcare, education and the environment. To pursue these ambitions, they need to urgently define those productivity improving policies that enable them to manage and effectively allocate limited resources to mitigate the impact of labour scarcity on the economy. ?

The problem of labour scarcity is likely to worsen in the coming decade when more than two million persons in the labour force will retire (see Productivity III: The Dutch Labour Market, figure III.3).

Figure V.1 shows the total number of unfilled vacancies and the share of the unfilled vacancies by economic activity (or aggregate). Since the 2nd quarter of 2022, the labour market situation has more or less stabilized.

The recent McKinsey report Netherlands advanced: Building a future labor market that works estimates that, if no actions are taken, the number of unfilled vacancies may increase from about 420 thousand in the 2nd quarter of 2024 to some 1.4 million in the year 2030. In that case, the number of unfilled vacancies per hundred unemployed persons might increase from 115 now to 300 in 2030.

Knowing the number of unfilled vacancies per economic activity and the value added per job in that sector, one can calculate the value of opportunities lost in that sector. In section 2, we will do the exercise for the year 2023. In section 3 we will give the result for all quarters since 2021.

2. The Cost of Labour Scarcity in 2023

In table V.1 we show all the ingredients necessary to calculate the economic value of the unfilled vacancies per economic activity (or aggregate) in the year 2023.

The economic value (EV) of unfilled vacancies (EV_UV) is calculated by taking the gross value added per job and multiply it with the number of unfilled vacancies. We also show the (relative) labour productivity per job or unfilled vacancy (LP_UV and RLP_UV) and the share of the economic value on the total economy ([A-U] All economic activities).

If one adds the contributions of all economic activities or aggregates, i.e., sum the contributions of [A], [B-E], [F], [G-I], [J], [K], [L], [M-N],[O], [P], [Q], [R-U], one obtains the total value of economic activities. Divided through the number of jobs, one obtains the average labour productivity per unfilled vacancy, which was €86,832, against an average labour €83,464 per job in 2023.

Above implies that the average relative labour productivity per unfilled vacancy (RLP_UV) was 104 percent, implying that, on average, vacancies remained especially open in the more productive jobs. This means that, despite the highly educated Dutch population, employers seem to have difficulty in fulfilling job openings for the more productive jobs.

The economic value of the unfilled vacancies in 2023 was roughly €36.8 billion, being 3.8 percent of the total economy. The highest cost of lost opportunities is found in [J] Information and communication (5.3 percent), [G-I] Trade, transport, hotels, catering (4.9 percent), [K] Financial institutions (4.7 percent), and B-E Industry (no construction), energy (4.4 percent).

3. The Economic Value of Labour Scarcity

Figure V.2 shows the results of the calculations performed in section 2 from the first quarter of 2021 till the 2nd quarter of 2024 for both filled and unfilled jobs. The situation concerning labour scarcity has relaxed slightly since the 2nd quarter of 2022, when the economic value of unfilled vacancies peaked to 4.6 percent of the total economy ([A-U] All economic activities).

The relative labour productivity per unfilled vacancy (RLP_UV) was also, with 107.6 percent, relatively high in the 2nd quarter of 2022. Since then, it decreased to around 103 percent, but the economic value of unfilled jobs still represents about 3.7 percent of the economy.

Fortunately, figure V.2 confirms that employers were able to more easily fill vacancies with lower labour productivity. Yet, these vacancies still had a higher labour productivity than the average economy (RLP > 100%). The economic value of filled vacancies (per quarter) was consistently (about 0.5 percent) lower than the one of unfilled vacancies, and represented 3.2 percent of the economy in the 2nd quarter of 2024.

In 2023, about 1.5 million vacancies were filled, which is 13 percent of the 11.5 million existing jobs. The relative labour productivity per filled vacancy (RLPFV) was 102.6 percent in that year. This implies that the economic value as share of the total economy over the whole year also was about 13 percent. Such indicates that the Dutch labour market (and economy) is able to renew itself in about seven to eight years.

Renewal of the labour market is certainly needed if the estimates of McKinsey, mentioned in the introduction, turn real, and the number of unfilled vacancies will increase from 420 thousand now to 1.4 million in 2030. In that case, the economic value of labour scarcity can be valued in more than 12 percent of the total economy.

The latter is about the amount of vacancies that the Dutch economy is able to create and absorb per year, as above shows.

4. Conclusion

Since the Covid-19 crisis ended, employers have had more challenges in filling the relatively more productive vacancies. The direct economic value of labour scarcity has been between 3 and 5 percent of the total economy since 2021, and was valued in about €36.8 billion in 2023. This estimate does not include the cost of lost opportunities because (foreign) companies avoid to invest in the Netherlands due to the labour scarcity.

Unfilled vacancies consistently had an economic value that was about half a percent higher than filled vacancies. The relative labour productivity of unfilled vacancies was about 2 percent higher than the one of filled vacancies. Yet, from 2021 till now, both filled and unfilled vacancies had an above average labour productivity (RLP_FV ≈ 103.6%, RLP_UV ≈ 105.4%) as compared to existing jobs in those years. This shows that the labour market slowly shifts towards higher labour productivities.

This higher productivity is certainly needed to pursue the Dutch ambitions, on the one hand, on living standards and work-life balance, and, on the other hand, on housing, healthcare, education and the environment. In a recent report, McKinsey estimated that, if no urgent actions are taken, the number of unfilled vacancies may increase from about 420 thousand now to some 1.4 million in the year 2030.

The latter is presently about the amount of jobs that the Dutch economy is able to create and absorb per year, representing about 13 percent of existing jobs, and a similar share in gross value added. To successfully absorb the newly created jobs with higher productivities in the economy in the decade to come, the labour force will need to acquire new skill bases.

As a consequence, political and business leaders need to urgently define productivity improving policies, including educational plans to prevent congestion on the road towards a more productive future.