The Netherlands of 2040

Bas ter Weel, Albert van der Horst, George M M Gelauff 11 October 2010

a

A

How will we earn our money in 2040? Policymakers are confronted with such questions. Decisions have to be made today based on current knowledge, and cannot be made conditional on future events. For policies that can be changed rapidly, it is feasible to take action immediately and adjust the policy when it turns out to be the wrong one or when more knowledge about outcomes becomes available. It becomes another matter when policies have a long lead-time or when they involve investments with large sunk costs. In such circumstances, policymakers have to trade-off the benefits of waiting against the costs of delay. Young people across Europe are paying the price for policymakers misjudging the trade-off when it came to the labour market (Bentolila et al. 2010).

Scenarios help to (re)consider plans

To provide an answer to the question, scenarios help policymakers to consider and reconsider plans. Scenarios bundle historical developments, current stylised facts and trends into consistent stories for the future. We have developed four scenarios to analyse how the Dutch economy may evolve (Ter Weel et al. 2010). In building the scenarios we split the question of how we make a living into the questions of who earns the money and where the money is earned in 2040. People are considered in their role as workers, cities are viewed according to the type of production that occurs in them, and the connections that exist within and between cities.

How do firms divide tasks among workers, and what will be the main characteristics of workers in 2040? What determines the size and structure of cities in 2040? The answer to both questions depends on the development of technology – the fundamental driver of future economic development.

Technology drives the world

Information communication technology (ICT) changes the division of tasks among workers through two main channels: communication and information (e.g. Baldwin 2010 and Bloom et al. 2009). The communication technology (CT) part of ICT facilitates transmission of ideas and information, and enables people to quickly check and confirm their validity. Tasks that used to be highly integrated can now be disconnected and executed by different persons in different places. Workers specialise. The information technology (IT) part of ICT improves the way workers process information. Many routine tasks have been taken over by computers and expert systems. Systems that link up with each other process larger and more complex types of information. This broadens the scope of work processes. Workers generalise and become a jack-of-all-trades.

Will a new general purpose technology arrive over the next 30 years? How that question is answered implies certain shifts in city size in the scenarios. In its early phases, the development of a general purpose technology strongly depends on face-to-face contacts (e.g. Desmet and Rossi Hansberg 2009). Researchers, innovators, designers and managers all benefit from close personal interaction in order to exchange knowledge. This will initiate a shift towards larger cities (e.g. Glaeser 2010). On the other hand, if there is no new general purpose technology, ICT will lead to scattering of economic activity across space (e.g. Ioannides et al. 2008). This will create smaller and well-connected cities. Since the future arrival of a new general purpose technology represents a major uncertainty, cities may either shrink or expand over the coming 30 years.

Framework

The horizontal axis in Figure 1 presents the options for the division of tasks, the vertical axis shows the possibilities for city size. The scenarios are labelled such that the first term reflects the characterisation of people and the second informs about the type of location. For example, the scenario in which workers specialise and city size is relatively small is labelled Talent Towns.

Figure 1. Four scenarios

The economy is moving towards a task economy in which workers perform one or many tasks rather than producing one or a few products. This implies a new division of work. There are two possible directions.

  • First, workers specialise and excel in one or a few tasks. The cost of coordinating tasks determines how specialised firms and cities become. Examples of specialised cities are Detroit, which has specialised in producing cars.
  • Second, workers are a jack-of-all-trades and mainly produce for the local market. The generalist worker is employed easily in many occupations. He uses inputs from the world’s knowledge stock and imports intermediate goods. Once again, the generalisation of work extends to firms and cities. Examples of generalised cities are New York, London, and Amsterdam.

The uncertainty about cities is not about cities becoming more important, since in all scenarios they will become more important (e.g. Glaeser 2010 and Moretti 2010). The question is about their size: large or small. The first possibility is that cities become relatively small and are scattered across space. They serve as small economic and urban spikes. In this world, the reasons for economic activity to cluster are limited. A second option has economic activity becoming highly concentrated in a limited number of large cities. The cities are the meeting places of people for the purpose of trade, for the exchange of ideas, for the development of new technologies, and to optimise the matching between workers and firms and between producers and consumers.

Table 1 presents the most salient characteristics of each of the four scenarios. The table shows the implications of the scenarios for the size of the city, representing limited agglomeration benefits in Talent Towns and huge benefits in Metroplitan Markets. The scenarios are not only relevant for the Netherlands, but are relevant to the rest of the world.

Table 1. Main scenario characteristics

Policies for the future

How can the scenarios be used for strategic policymaking? Technology determines the allocation of future production, which limits the scope for the government to intervene. The scenarios reveal that uncertainties in future production mainly involve uncertainty about the division of labour and about its distribution across space. This sheds light on today’s choices. Investments in infrastructure should not only solve today’s traffic jams, but should also take some account of possible future growth (or decline) of cities and the connections within and between cities. Public institutions for education, science and innovation have to look beyond today’s questions and consider the possibility that specialisation becomes crucial. Finally, labour-market institutions were designed in the past, but should anticipate future problems too.

In each of the four scenarios, strategic policymaking requires a comprehensive and consistent package of measures.

In Talent Towns, flexibility and excellence rule the world. An excellent network of connections between cities is important, with relations between people and place changing rapidly. Workers have to be able to both excel in their specialisation and switch jobs easily. Education should prepare workers for this. Universities should be specialised, and science in general should focus on the utilisation of specialist knowledge. The incentives in the welfare state should favour frequent job-to-job changes and retraining. Talent towns are a world of chances, there to be seized.

In Cosmopolitan Centres, large-scale specialisation dominates. Both connections between cities and quality urban centres are needed to develop and sustain successful cities. Early selection and a focus on excellence in education are required to train workers. The downside of specialisation is uncertainty and the cost of switching to another field. These downside risks are rare but far-reaching. A complete city will be hit once its specialisation fails, leading to high unemployment rates and a substantial drop in housing values. Both the labour market and the housing market should be prepared. Cosmopolitan Centres are a world of extremes, where high prosperity and deep recessions take turns.

In Egalitarian Ecologies, small is beautiful. Medium-sized cities perform a variety of tasks. The labour force is well prepared to deal with negative shocks because workers are able to change jobs quickly. The downside of this generalisation is that although mean performance is reasonable, and volatility is relatively low, cities don’t benefit from new technological developments. The main challenge for the welfare state is to create incentives. Education should be geared towards training in general skills. Egalitarian Ecologies is a world of stability and moderate prosperity.

In Metropolitan Markets, size matters. Firms, workers, and their activities will concentrate in a few extremely large cities. The opportunities for small-sized cities in the hinterland are limited because all economic activity is attracted by the mega-city. One of the challenges for the welfare state is to redistribute between the mega-city and its surroundings. Science benefits from size and will be able to develop a new general-purpose technology, like bio- or nanotechnology. This will mainly take place within companies, with a focus on the application of the new technology in the production process and in the development of goods and services. Firms have to compete with other local firms, with limited international competition at hand. Metropolitan Markets is a world of prosperity for the winners, but despair for regions that lag behind.

Conclusion

When planning for the future, policymakers have to trade-off the benefits of waiting against the costs of delay. The scenarios we have developed should be helpful for such strategic policymaking. We have shown how policy should prepare for a sound infrastructure, a flexible labour market and a successful knowledge economy.

References

Baldwin, Richard (2010), “Thinking about offshoring and trade: An integrating framework”, VoxEU.org, 23 April.

Bentolila, Samuel, Tito Boeri, Pierre Cahuc (2010), “Ending the scourge of dual labour markets in Europe”, VoxEU.org, 12 July.

Bloom, N, L Garicano, R Sadun and J van Reenen (2009), “The distinct effects of information technology and communication technology on firm organization”, NBER Working Paper 14975.

Desmet, K and E Rossi-Hansberg (2009), “Spatial growth and industrial age”, Journal of Economic Theory, 144(6):2477-2502.

Glaeser, EL (2010), “The paradox of urban triumph”, CPB Lecture, 22 June.

Moretti, E (2010), “Local labor markets”, NBER Working Paper 15947.

Ter Weel, B, A van der Horst and G Gelauff (2010), “The Netherlands of 2040”, CPB Special Publication 88, Koninklijke De Swart, The Hague.

a

A

Topics:  Europe's nations and regions Frontiers of economic research Labour markets

Tags:  Labour Markets, Netherlands, urban planning

George M M Gelauff

Deputy director, Management Board, CPB Netherlands Bureau for Economic Policy Analysis

Bas ter Weel

Head, Department of Labour Market and Welfare State, CPB Netherlands Bureau for Economic Policy Analysis

Albert van der Horst

Welfare State Programme Manager, Department of Labour Market and Welfare State, CPB Netherlands Bureau for Economic Policy Analysis