AMSTERDAM: The Dutch like to think of themselves as leaders in social policy. But as we discovered on a recent trip to the Netherlands and Germany, it is in economic policy that today’s Europe looks to Holland for leadership. With unemployment in Germany, France and Italy around 10%, the Dutch jobless rate, at less than 3%, is the envy of Europe.

Holland is that rare example of a booming welfare state (“overheating” was the word used to describe the Dutch economy by three central bankers in Frankfurt). How did this happen? Some credit the so-called “Polder Model” of social cooperation between employers, unions and the government. They’re wrong. Social cooperation per se did not save the Dutch from the mistakes of the 60’s and 70’s. So how can it be credited for economic recovery in the mid 80’s and 90’s?

True, Dutch trade unions have moderated wage demands. But this is not what sparked Holland’s dramatic employment gains. Instead, credit structural reforms in the Dutch labor market for the jobs boom. Primary amongst these is the widespread use of part-time and temporary employees.

The move to part-time employment in Holland was intended to increase female participation in the Dutch labor force. Increasing availability of part-time and temporary jobs, however, raised the labor force participation rates of both men and women. Regular full-time employees are almost impossible to sack under Dutch law, but employers can fire part-time workers and not renew temporary contracts when they expire.

There is an “iron law” of employment: If employers can’t fire workers, they won’t hire them. Ironically, employment boomed in Holland, precisely because an increasing proportion of the work force - made up of part-time and temporary workers - can be fired if necessary.

Among the Euro-11 countries, Holland was the first to both understand this point and act upon it. Yet Holland has not gone all the way. An extraordinarily high proportion of the labor force - 12% - is officially classified as “sick” or “invalid” because putting a worker on disability is practically the only way Dutch employers have of ridding their firms of unwanted full-time employees. Such finagling is costly to business, government and the employees themselves.

So, while still extremely low for continental Europe, the official Dutch unemployment rate underestimates the true level of joblessness in the Dutch economy, because it excludes the disguised unemployment of the “sick” and “disabled”. Were Dutch law to permit the sacking of full time employees (not likely in these prosperous times) the proportion of the work force officially sanctioned as too sick or disabled to work would dramatically decline, as would the number of part-time and temporary workers.

The ability to fire workers not only means less unemployment but more flexible labor markets. The movement of workers from low to higher productivity uses - whether from firm-to-firm, sector-to-sector or region-to-region - is thwarted if employers do not have the power to sack. This is not an issue of class struggle, but of economic growth.

US Fed Chairman Greenspan asked recently, “why U.S. businesses and workers appear to have benefitted more from the recent advances in information technology than their counterparts in Europe and Japan?” His answer: “the relatively inflexible and, hence, more costly labor markets of these economies appears to be a significant part of the explanation… Europe has participated in the wave of invention and innovation, but appears to have been slower to exploit it”. What Greenspan suggests is that the labor market flexibility gap between the US and Europe may be more important in explaining relative economic performance than the alleged technology gap.

There appears to be a right way, a wrong way, and a Dutch way of doing things. The US does labor market policy the right way. Continental Europe, excluding Holland, does it the wrong way. And the Dutch, neither right nor wrong, temper ideology with practicality to forge compromises that have consensus support.

Although this system works for the Dutch, can it work for the rest of Europe? Why not? Politically, no European country can - or really wants to - adopt the American model. At the same time, there is a growing demand in Europe for better economic performance. European unemployment rates are unacceptably high; America’s long boom puts pressure on domestic politicians to do better. The Dutch solution best fits Europe’s present political realities: Keep welfare rules in place, but give people the chance to get around them. The Dutch retain the job-killing laws that make it impossible to sack regular full-time employees, but allow employers to sack part-time and temporary workers. This fudge, not social cooperation, is the true “Dutch model” for success.

The Dutch solution can work for other European countries. In fact, it already has. When the French changed their labor law to mandate the 35 hour work week, heavy restrictions on the use of part-time and temporary employees by French employers were removed. This explains the recent upsurge in French job creation. Superficially, France looks as if it has become more of a welfare state, but the reality is that the French have mimicked the Dutch in increasing labor market flexibility. This Dutch solution may be second best, but in Europe it’s the only alternative that works.

Copyright Project Syndicate 2010