Although GDP growth in the Netherlands has recently been stronger than in peer countries, the main contributor has been the growth in labor. If GDP is divided by labor, productivity growth appears to have been slower than in peers. This chapter discusses both exogenous and endogenous factors behind the disappointing productivity growth in the Netherlands and derives policy implications.

This paper studies the impact of localization, urbanization, and diversification on regional labor productivity levels and growth. We find substantial effects, accounting for roughly half of the explained variation in the labor productivity differences within the Netherlands in the 1990s. Diversification, urbanization, and localization effects are significant and positive for productivity levels. These levels appear cointegrated. The error correction specification of productivity growth surprisingly reflects negative agglomeration effects. From the theoretical model it follows that congestion effects must have taken precedence over agglomeration effects during this period. Both agglomeration and congestion effects are dampened by job density in neighboring regions. Finally, policy simulations with the estimated model show that spatial concentration is more harmful to national productivity growth than spatial dispersion.

The drift to the city has been going on for hundreds of years. As a result, most economic activity is concentrated in small geographical areas. The advantages of proximity of people and firms go under the name ‘agglomeration economies’. In this paper, we measure their strength on the basis of Dutch regional data. We regress regional labour productivity on a set of agglomeration indices, and find evidence for a productivity effect of concentration of production with a malus for industrial variety. Thus, the evidence supports Marschall-Arrow- Romer economies. The evidence does not support, however, Jacobs economies, nor variants of the Creative Class Hypothesis.