The Dutch Door To Prosperity.

• Author: KRAUSS, MELVYN

The Netherlands has struck a balance between the welfare state and flexible labor markets.

Netherlands is a nation of just 16.5 people. But the Dutch influence on world affairs is out of all proportion to their numbers. In economic policy, for example, Holland's unemployment rate is less than 3 percent, while unemployment hovers between 9 and 10 percent in other euro-zone countries. Over the past fifteen years, job creation in the Netherlands has been four times the European average. How do the Dutch keep unemployment so low and job creation so high? And can their formula for success be duplicated in other European countries?

Many ascribe Dutch economic success to the so-called "Polder Model" of social cooperation between big business, big labor, and big government. Nothing could be further from the troth. Social cooperation has been a hallmark of Dutch economic policy since the end of World War II. Yet, it did not save Holland from the severe economic difficulties of the 1960's and 1970's. Why should it be credited for the economic recovery of the 1980's and 1990's?

What really happened? Because of the hard times in Holland, the Dutch political consensus changed in the early 1980's away from bloated welfare state-spending fueled by North Sea gas and oil, away from strict adherence to welfare state rules, particularly in labor markets and, yes, away from corporatism and the "consultation economy" to decentralization and greater reliance on market forces.

If there is a "Dutch model" for other European nations to emulate, it is to mimic the new Dutch consensus for decentralization, a smaller welfare state, and flexibility in applying welfare state rules to labor markets.

Old-fashioned social democrats miss the point when they link superior Dutch labor market performance to moderate trade union wage demands. First, as the ex-leader of the Dutch Liberal Party, Frits Bolkestein, points out in The Economist, "tax cuts played an important part in wage moderation. They increased people's purchasing power and, thus, made it possible to limit increases in wages." But even more important, wage moderation never could have sparked the dramatic unemployment gains witnessed in Holland over the past decade and a half without the structural reforms that took place in the Dutch labor market. Primary among the reforms was the widespread use of part-time employees and temporary labor contracts.

The move to part-time employment in the Netherlands was intended...