Currently, there is a focus on the productivity of large, innovative companies: the ‘leaders’. However, it is equally important that the ‘peloton’, or the majority of medium-sized enterprises, can keep up. This way, economic growth can increase, and more companies and individuals can benefit. Additionally, this reduces the risk of people relying on a complex system of taxes and subsidies for income support.
The Gap Between Leaders and the Peloton
Productive leaders continue to gain productivity, but medium-sized enterprises have lagged behind in recent years. The gap between large and medium-sized enterprises is widening, contributing to the overall decline in productivity growth. It appears that the majority of medium-sized enterprises struggle to adopt innovations from the leaders. This can be explained by three factors:
- Increased Intangible Capital
Companies are increasingly utilizing software and artificial intelligence (AI) to improve processes and save money. These technologies and innovations are harder to replicate than physical capital goods like machinery. Moreover, many medium-sized enterprises lack the financial means or the right knowledge to implement new technologies. - Duality in the Labor Market
The Dutch labor market has a dual structure of securities. There are many temporary workers and self-employed individuals who have less opportunity to collaborate and learn from others. Simultaneously, strict rules regarding the dismissal of permanent employees make it risky for companies to experiment with new technologies. In the face of setbacks, they cannot easily part ways with their staff. - Insufficient Lifelong Development
Technology is changing rapidly. Employees must continually upgrade their skills to work with new technologies. However, opportunities for training are often lacking. Employers are unsure if they will recoup their investment, as employees may leave.
A Vicious Circle is Threatening
Due to stagnating productivity growth in medium-sized enterprises, income inequality is increasing. Highly productive companies can pay higher wages, while less productive companies cannot.
Although the distribution of disposable income has been relatively stable for 30 years, more subsidies are needed to ensure low incomes keep pace. This comes at the expense of investments that can enhance productivity, such as education or innovations. Additionally, a loss of prosperity arises - working becomes less rewarding - and the subsidy system becomes increasingly complex.
Three Recommendations
To break this vicious circle, Gaastra proposes three solutions:
- Investing in Lifelong Development (LLD) during the working life
Introduce learning rights and obligations so that employees continue to develop. This makes technology easier to apply, increases productivity, and allows wages to rise. - Reform of the Labor Market
Provide more security for temporary workers and make permanent contracts more flexible. This promotes knowledge sharing and innovation. - Revision of Fiscal Business Regulations
Phase out inefficient business regulations, such as the self-employed tax deduction. Use those resources to stimulate innovation and productivity in medium-sized enterprises.
By increasing the productivity of medium-sized enterprises, prosperity improves, and households become less dependent on subsidies. With these measures, the Netherlands can break the vicious circle of stagnation and work towards a ‘virtuous’ (positive) circle of growth, equality, and broad prosperity.