Amsterdam, Netherlands – In 2024, Dutch households experienced a notable advancement in their financial standing, with real income increasing despite important inflationary pressures. According to recent data, higher wages across various sectors enabled households to retain approximately 3% more of their income compared to 2023.This positive trend offers valuable lessons for U.S. consumers currently grappling with similar economic challenges.

The Central Bureau of Statistics (CBS) released figures highlighting this positive shift in the real available income of households. Peter Hein van Mulligen, chief economist at Statistics Netherlands, explained, “You could say: the purchasing power. The income that we have all earned, corrected for inflation. So despite the increase in prices, more is left under the line for all of us to spend.”

wage Growth Fuels Income Increase

The primary driver behind this increase in real income is wage growth, spurred by labor market shortages. This phenomenon wasn’t limited to employees covered by collective bargaining agreements; self-employed individuals also benefited from increased demand for their services.Van Mulligen noted, “There was a lot of demand for self-employed people, so they can screw their rates up,” particularly in sectors facing acute staffing shortages, such as healthcare, retail, and hospitality.

This situation mirrors, to some extent, the labor market dynamics seen in the U.S. post-pandemic,where certain sectors struggled to attract and retain workers,leading to wage increases. Though, the extent to which these wage gains translate into real income growth depends heavily on the rate of inflation. For example, in the U.S., while wages for some sectors like truck drivers saw considerable increases in 2021 and 2022 due to supply chain disruptions, inflation eroded much of that gain, leaving many with little or no increase in real purchasing power.

Consider the case of a truck driver in Ohio who saw their hourly wage increase from $25 to $30 in 2022. While this represents a 20% increase, if inflation was at 8%, the real wage increase is only 12%. After taxes, the actual increase in disposable income might be even less, highlighting the importance of wage growth outpacing inflation.

Minimum Wage Impact

Crucially, the benefits of increased income extended to those without employment. Van Mulligen stated, “That is mainly due to the rise in the minimum wage. As many benefits such as the AOW and the assistance are linked to the minimum wage.” This linkage ensures that social safety nets provide a more adequate level of support during inflationary periods, a concept that resonates with ongoing debates in the U.S. regarding the federal minimum wage and the indexation of Social Security benefits.

The debate around raising the minimum wage in the U.S. frequently enough centers on its potential impact on businesses and employment levels. Though, the Dutch example highlights the potential for minimum wage increases to lift the real income of vulnerable populations, particularly when coupled with inflation-indexed benefits. As an example, if the U.S. federal minimum wage were indexed to inflation,it would provide a more stable safety net for low-income workers,ensuring their purchasing power doesn’t erode during periods of rising prices.

Savings vs. Spending: Implications for economic growth

The impact of this increased real income on the Dutch economy hinges on consumer behavior. “It has grown, but less hard than the income. That means that we have left a very large part of the extra income on the savings account,” says van Mulligen. If consumers choose to spend their increased income, it will stimulate economic growth. However, if they primarily save it, the impact will be more muted.

This is a critical point for the U.S. economy as well. Consumer spending accounts for a significant portion of GDP. If Americans, facing similar inflationary pressures, choose to save rather than spend any income gains, it could dampen economic growth. Factors influencing this decision include consumer confidence, interest rates, and expectations about future economic conditions.

Consider the following table illustrating the potential impact of savings rates on economic growth:

Lessons for the U.S. Economy

The Dutch experience offers several valuable lessons for the U.S. economy:

• Wage growth is crucial for maintaining real income during inflationary periods. Policies that promote wage growth, such as investments in education and job training, can help offset the negative effects of inflation on household purchasing power.
• Minimum wage increases, when implemented strategically, can provide a safety net for vulnerable populations. Indexing benefits to inflation can further protect these populations from erosion of their purchasing power.
• Consumer confidence and spending habits play a critical role in economic growth. Policymakers need to monitor these factors closely and implement measures to encourage spending when appropriate.

Ultimately, the ability of U.S.households to maintain and increase their real income in the face of inflation will depend on a combination of factors, including wage growth, government policies, and consumer behavior. The Dutch example provides a useful case study for understanding these dynamics and informing policy decisions.