Explaining unemployment trends in the Netherlands

In this paper, a small macroeconomic model of the Dutch labour market is es timated. The model is used to detect the causes of the rise in unemployment since the early 70s. In contrast to existing empirical work, we treat labo ur supply as an endogenous variable. This adjustment appears to have seriou s consequences For the conclusions drawn. In particular, we show that the d etrimental effect of the replacement rate on unemployment has been overesti mated in earlier studies. Furthermore, we include contractual working time in the analysis. Our estimates imply that work sharing does reduce unemploy ment, but at a high cost. Because hourly wages rise in response to reduced working hours, aggregate output is damaged quite strongly. (C) 2001 Society for Policy Modeling. Published by Elsevier Science Inc.