Netherlands advanced: Building a future labor market that works

For many years, the Netherlands has enjoyed a robust economy and strong workforce. With a vast active workforce of 9.6 million people (out of a population of 17.6 million),¹“Beroepsbevolking” (“Working population”), Centraal Bureau voor de Statistiek (CBS), May 15, 2024. the country has one of the highest employment rates²Percentage of working-age population (aged 15 to 64) who are employed. and workforce productivity rates in the European Union.³“Employment and activity by sex and age - annual data,” Eurostat, updated May 2, 2024. Globally, it ranks fifth for competitiveness,⁴“World competitiveness ranking,” IMD - International Institute for Management Development, accessed May 31, 2024. sixth for happiness,⁵John F. Helliwell et al., “Happiness of the younger, the older, and those in between,” in World Happiness Report 2024, Wellbeing Research Centre, University of Oxford, March 2024. ninth for social progress,⁶“Global Social Progress Index,” Social Progress Imperative, accessed May 29, 2024. and tenth on the UN Human Development Index.⁷“Human Development Index (HDI),” United Nations Development Programme, accessed May 29, 2024.

However, ongoing trends are putting pressure on the labor market and could hamper the country’s ability to reach its social and economic goals. Most notably, an aging population due to low birth rates and declining productivity growth are causing tightness in the labor market.⁸“Prognose levensverwachting 65-jarigen: 20,89 jaar in 2029” (“Life expectancy forecast for 65-year-olds: 20.89 years in 2029”), CBS, November 10, 2023; “Vruchtbaarheid in de twintigste eeuw” (“Fertility in the 20th century”), CBS, 2008; “Geboorte” (“Birth”), CBS, accessed May 29, 2024. Meanwhile, increasing inequality in terms of income and labor conditions,⁹Jim Been et al., Inequality in the Netherlands: 1973-2022, lnstitute for Fiscal Studies, January 2024. signs of declining quality in education,¹⁰PISA Database, OECD, accessed May 29, 2024. and increasing prevalence of mental and physical health issues¹¹“Cijfers en trends – Werknemers” (“Figures and trends – employees”), TNO, accessed May 29, 2024. put further pressure on the market.

This report builds on numerous publications to provide an outlook on the implications of these trends for the Dutch labor market. It adds a granular forecast for 2030 and shows that to realize a 2030 labor market that works for the future of the Netherlands, two levers are essential: increasing productivity by investing in technological innovation, and realizing a “train of job transitions” through reskilling and upward development to move people to the (higher-productivity) jobs demanded. Last, it proposes priorities for an orchestrated action plan for three critical shortage areas to get the train moving.

Projections for the Dutch labor market in 2030

While demands on the workforce are rising, the supply of labor is not. The result is a growing tightness in the labor market, marked by an increased number of job openings per unemployed person.¹²“Spanning op de arbeidsmarkt” (“Tension in the labor market”), CBS, accessed May 29, 2024. The tightness in the labor market has increased in the past ten years (with the COVID-19 pandemic stalling this trend only temporarily). By 2022, 54 percent of employers were struggling to attract new employees,¹³“Werkgevers vinden het moeilijk om kandidaten met de juiste ervaring te vinden” (“Employers find it difficult to find candidates with the right experience”), HR Praktijk, August 25, 2022. and as of first quarter 2024, there were 110 vacancies per 100 unemployed people.¹⁴“Spanning op de arbeidsmarkt,” accessed May 29, 2024.

According to our projections for 2030, a modeled scenario with continuation of the demand growth coming from historic GDP growth (1.6 percent CAGR from 2010 to 2022)¹⁵“Opbouw binnenlands product (bbp); nationale rekeningen” (“Structure of GDP; national accounts”), StatLine, CBS, updated June 23, 2023. combined with the low productivity growth of the same period (0.4 percent CAGR)¹⁶McKinsey analysis based on “Arbeidsvolume; bedrijfstak, geslacht, nationale rekeningen” (“Labor volume; industry, gender, national accounts”), CBS StatLine, updated June 23, 2023; “Opbouw binnenlands product (bbp),” updated June 23, 2023. and limited increase of the working population would triple the tightness in the labor market, resulting in a labor shortage of 1.4 million people, or a demand for 390 people per 100 unemployed. This is the result of historic labor demand growth on top of the vacancies in 2022 due to economic growth (more than 940,000) and societal ambitions (more than 280,000) compared with a projected labor force increase of 250,000. If the increased demand is fulfilled, it could result in a GDP growth of slightly more than 2 percent per year. Conscious socioeconomic choices regarding sector-specific policies, investments, and subsidies could lower the labor shortage to 0.9 million or increase it to 1.8 million. These choices would not solve the structural shortage, but they are still vital. Pressure on the market is likely to force the market to settle, potentially on suboptimal scenarios that could affect multiple factors such as broad prosperity or economic growth.

Technological innovations that could decrease the pressure on the labor market could shift demand toward jobs that require more-advanced skills. In a scenario with 1.8 percent productivity growth per year, based on the slower Europe scenario from the report A new future of work: The race to deploy AI and raise skills in Europe and beyond,¹⁷“A new future of work: The race to deploy AI and raise skills in Europe and beyond,” McKinsey Global Institute, May 21, 2024. 150,000 jobs are expected to disappear in segments with declining demand and 400,000 are expected to be gained in segments with increasing demand between 2022 and 2030. Overall, jobs are projected to move from basic- and intermediate-skill work to advanced-skill work, particularly among knowledge workers (Exhibit 1).

1

Existing shortages are likely to increase, in particular in three critical areas of work: skilled manual labor, digital and tech jobs, and health and social care. The Netherlands could face shortages in these areas of work of 100,000, 105,000, and 245,000 people, respectively. New inflow will likely not fill the high demand in these specific shortage areas. This means people who are already in the market will have to fill these jobs, requiring increased mobility within the labor market. Most people will not be able to transition directly from areas with oversupply to those with shortages, because their skills will often not align with areas of work that have increasing job openings. To create a labor market that works for the future, the Netherlands needs a “train of job transitions” in which multiple people learn new skills and shift roles to fill open needs (Exhibit 2). This combines lateral reskilling and upward and continuous development to transition workers into higher-productivity jobs. The annual number of people who need to be reskilled is projected to multiply by 1.4 compared to the period from 2010 to 2020, with the average number of professions per career rising from 1.9 to 2.4.

2

In addressing the tightness in the labor market in these ways, two paradoxes arise. While shortages should give companies incentives to onboard new people, train people, improve productivity, and implement solutions and innovations, the pressure caused by tightness could propel people and organizations in the opposite direction, resulting in higher obstacles to participation, more labor market dropouts, and less mental capacity or time for technological solutions. In addition, a tight labor market could diminish the incentives for workers to up- and reskill because there are plenty of job opportunities, while according, to our analysis, the rate of up- and reskilling should actually increase. Breaking through these paradoxes needs to be a priority.

What needs to happen: Transforming the labor market

Deliberate choices are required to build a future labor market with enough people and the right skill sets to fulfill demand and realize the country’s ambitions. This will require joint action to resolve the tightness and get the train of job transitions moving. Four elements are essential to uphold the Netherlands’ societal ambitions: increasing productivity, further optimizing participation, increasing labor market mobility, and enhancing people’s fitness to work. The first two elements quantitatively reduce overall labor market tightness, and the latter two ensure that the labor force is capable of fulfilling demand.

Increasing productivity could reduce the labor shortage by 85 to 90 percent, while continued efforts to optimize workforce participation could account for the remaining 10 to 15 percent. This would reduce the projected labor shortage in 2030 from approximately 1.4 million people to 100,000 to 200,000 and reduce labor market tightness to below 50 people per 100 unemployed (Exhibit 3).

3

Increasing productivity. To reduce labor market tightness, an increase in productivity is essential. According to our calculations, accelerating the adoption of technological innovations—that is, automation, digitalization, and traditional and generative AI—can quadruple productivity growth to 1.8 percent from 0.4 percent per year, reducing the labor shortage by about 1.1 million people at an aggregate level by 2030. This is an ambitious goal, but it can be achieved with substantial investments in people, organizations, and technology. In today’s tight labor market, increasing productivity through technological innovations has multiple advantages: it helps create economic growth, it makes industry more competitive, and it relieves tightness in the market, thereby reducing pressure on the workforce. Adoption of technological innovations is relevant for all sectors. On average, 15 percent of activities across sectors in the Netherlands could be automated from 2022 to 2030 in this ambitious yet achievable automation adoption scenario. Furthermore, in addition to increasing productivity within jobs through technological innovation, overall productivity in the Netherlands will also be increased if people move from lower-productivity toward higher-productivity jobs through reskilling and upward development.

Achieving this productivity growth through technological innovations will require sizable investments. There are indications that the current stagnation in labor productivity may in part be caused by lagging investments in R&D and labor-reducing technologies.¹⁸ In 2022, Dutch investments in R&D amounted to 2.3 percent of GDP. To reach the EU ambition of 3 percent of GDP and keep up with the global playing field, the Netherlands would need to increase its investments in R&D by more than €6.7 billion annually.¹⁹“Nederland verliest economisch terrein door achterblijvende R&D-investeringen,” TNO, January 22, 2024.

Optimizing participation. Optimizing workforce participation—mainly by enabling people who are willing and able to continue working past retirement age and by supporting part-time workers in working more hours—could build on the progress that has already been achieved to help reduce labor shortages by about 100,000 to 200,000 people by 2030. This would be a two-percentage-point increase on top of the three-percentage-point increase achieved between 2018 and 2022.²⁰“Arbeidsdeelname; kerncijfers seizoengecorrigeerd” (“Labor participation; key figures seasonally adjusted”), CBS StatLine, May 15, 2024. While this impact is smaller than the potential of productivity increases, it’s an important part of the solution to the labor shortage.

Increasing labor market mobility. Increased mobility is essential to realize ambitions for productivity and participation and to match supply and demand at a granular level. The rate of both reskilling and upward mobility will need to increase, which will require structural changes as well as cultural change.

Three pairs of structural changes could help get the train of job transitions moving at speed. Establishing infrastructure to guide people in career changes and reskilling (such as regional work centers) and adopting skills-based recruitment practices could help move talent toward the right opportunities. Apprenticeship-based learning approaches—to move people into paid work more quickly—and financial support for reskilling during the time spent training could help lift the financial hurdles inhibiting the transition from one job to the next. Finally, improving how reskilled individuals are integrated into their new roles and embracing continuous development in organizations are essential to ensure that people can be successful in their new jobs.

Cultural changes are required in practices and thinking about work and learning. Society has to adapt to a new reality in which the majority of people will switch professions at some point in their working lives, perhaps more than once. Existing initiatives do not yet have the scale or interconnections to solve this problem.

Enhancing fitness to work. Fitness to work is the ability to show up for work in good physical and mental shape with the appropriate skill set for the job. To maintain and enhance fitness to work in the coming decade, learning should be structurally embedded in each job. Our belief, based on discussions with a broad set of stakeholders, is that about 5 percent—or on average two hours per full-time week—of working time should be dedicated to learning and that this time should be built in as a core part of work. Furthermore, it remains important to safeguard the physical health of workers. Employers in physically demanding industries have a responsibility to maintain workers’ health—for example, by designing career paths that support employees in making timely transitions to less physically demanding or straining work within or outside the organization. Given the trend of rising stress levels, a focus on improving mental health is also required.

Where to start: An orchestrated action plan

The changes described above are significant. These demand new mindsets, cultures, practices, and infrastructure. Many initiatives to contribute to this transformation are already under way. At the same time, high labor shortages in certain areas that are crucial to realize societal ambitions are expected to remain without more targeted and comprehensive action at higher speed and scale.

An orchestrated action plan to address existing shortages in three areas of work that are critical to the Netherlands reaching its ambitions—skilled manual labor (especially for housing and the energy transition), digital and tech, and health and social care (especially in nursing and elderly care)—could get the train of job transitions moving.

Although the relative impact of various levers differs among areas of work, four levers stand out. First, more incentives and active conversations could help direct students toward pre-occupational education for high-demand professions. Second, reskilling could be a major source of inflow, especially into health and social care and skilled manual labor. Additional actions to lower the barrier to transition could include creating regional collaborations between organizations in search of skilled labor and those from adjacent sectors with labor abundance; scaling up public, private, and in-company education; and fostering collaboration between larger companies and small and medium-size enterprises. Third, developing solutions to improve worker retention, especially in health and social care—for example, through improved onboarding—could help ensure that new entrants stay long term. Finally, developing the existing workforce to fill demand for more advanced skills—for example, through collaboration with educational institutions or in-house academies—could improve upward mobility.

There is an urgency to act now with speed and scale. The scale of the challenge requires a comprehensive, orchestrated action plan for the next five years and beyond in which government, employers, employee organizations, educational institutions, and nongovernmental organizations collaborate to solve the pressing shortages in these three areas of work and catalyze the required labor market transformation toward 2030 and beyond.

The path that is outlined here for the Netherlands is no small undertaking; neither is it comprehensive. But it does suggest the scale of the effort and some of the critical steps for shifting the country’s approach to skills, learning, and work to ensure that the Netherlands remains a great place to live and work—today and in the future.

Download the full report in English: Netherlands Advanced: Building a future labor market that works.
Download the full report in Dutch: Bouwen aan een toekomstbestendige arbeidsmarkt.