It seems we finally have a new government in the Netherlands (more on that later). With the economy doing as poorly as it is, the new government has its work cut out. Trying to revive economic growth is going to have to be the main task for the new coalition. But some of the ideas being floated make very little sense. The minister-designate of Social Affairs and Jobs spoke at a gathering of his Christian Democrat party, and said that high wage growth would be inadvisable. So far, so good. The Dutch competitive position in international markets has been hurt very seriously by the strength of the euro, as the Netherlands has one of the most open economies in Europe. So high wage growth indeed would add to the problems of the Dutch economy. This is not a particularly controversial thing to say. But he then went on to issue a threat: the government would consider legislative measures to cap wage growth. In other words, the government would dictate the rate of increase in wages, negotiated by employers and employees (sometimes in the form of central bargaining with employer organizations and labor unions, sometimes on a company-by-company basis).

This is a horrible idea. It's applying a very blunt instrument to heterogenous problem. Not all companies or industries are equally affected by the loss of international competitiveness. A simple ceiling on negotiated wage growth removes the case-by-case finetuning that would be possible otherwise. It does not guarantee optimal results in every case, as unions may be able to extract more than the companies can afford to pay. Interfering in the economy in this way would set a very bad precedent for the rest of the 4-year term of this government. The last time a government used wage-restraint legislation is 30 years ago. We really don't want to go back to those days.