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Olaf van Vliet in Trouw on purchasing power and effects of inflation on labour market

The Dutch Government recently announced measures to limit the loss of purchasing power. These include, for example, raising the minimum wage and healthcare benefits. Another way for households to maintain purchasing power is to work more. Olaf van Vliet, Professor of Economics, explains the effects of inflation on the labour market in Dutch newspaper Trouw.

The current inflation rate is causing the purchasing power of many households in the Netherlands to decline. With the same nominal income, people can consume less. One way to compensate for this loss of purchasing power is for people to work more hours. This is known as the income effect: people sacrifice free time to maintain their consumption levels. At the same time, another effect is at play – namely that inflation reduces the real value of hourly wages. As a result, it has become less attractive to sacrifice an hour of free time for consumption. This is the substitution effect.

So inflation can lead to two opposite effects in the labour market: people are tempted to work more hours to repair their loss of purchasing power, while at the same time it has become less attractive to work extra hours. It’s hard to predict which of the two effects is stronger. That depends on people's preferences and circumstances, for instance age, household composition, income, etc.

In addition, taxes and benefits also play a role due to so-called marginal pressure. When someone starts working more, they will pay more taxes and national insurance contributions and receive less housing, healthcare and childcare benefits. That makes it less attractive to work more.

Read the full article (in Dutch) here:


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