Unemployment in the Netherlands dipped below 3 per cent recently, a figure for the most part unheard of in Europe since the oil shocks of the 1970s. Indeed, not so long ago unemployment in the Netherlands stood above 10 per cent. Have the Dutch invented a Fourth Way to improved economic performance and are there lessons for the rest of Europe in the Dutch experience?

For some observers across Europe, the economic performance of the Netherlands is so surprising that they believe it a product of smoke and mirrors, or of some statistical trick. But as with those who doubted the reality behind American economic growth five years ago, this view is also emphatically wrong.

Not only is unemployment way down in the Netherlands, but the rate of participation by the entire population in the labour market is growing sharply as well. True, the proportion of workers who remain classified by the State as sick or invalid - currently 12 per cent - remains much too high, to be frank. But this proportion is less today than it was in the 1980s; so a higher unemployment rate is not being disguised by medical certificates.

Other disbelieving observers say that what we are seeing in the Netherlands is the effect of a shortening of the work week. The average work week in the Netherlands (counting both those who work full-time and those who work part-time) is 27 hours, compared to 29 hours in France. Advocates of a shorter work week as the road to full employment, indeed, often cite the Dutch example to declare victory for their arguments.

Those against a shortened work week, however, dismiss the increase in the number of jobs that results from shorter working hours as a false solution - a crude swap of working hours for an increase in the number of workers.

Both hostile camps are wrong. There is a significant increase in part-time work in the Netherlands, to be sure, but it is due, primarily, to a large increase in labour participation among women. Thus part-time work does not mechanically explain the country's lower unemployment rate.

So what is the secret of successful job creation in the Netherlands? The immediate reason is easy to identify. Since the beginning of the 1980s, wage increases have been smaller than technological progress would have allowed. Company profits have thus gone up, leading to new investment and the creation of new jobs. This is a classic mechanism, but one that has worked perfectly. The more delicate question is to identify those factors that made wage moderation in the Netherlands possible.

I see two principal reasons. The first is a reform of unemployment insurance: the Netherlands has put into effect a reform that links unemployment compensation to searching for a new job. Refusal by an unemployed person to take an "acceptable" job offer automatically results in the end of state support for him or her. The longer an individual remains unemployed, the wider the definition of what constitutes "acceptable" becomes. In practice what this means is that an unemployed person must accept a "comparable" job for the first six months of unemployment, and must take any job on offer after 18 months on the dole or lose state benefits.

The second factor is co-operation among social partners. At the root of the Dutch miracle lies the Wassenaar Agreement, signed in 1982, between employers, unions, and the government. At the time, it was clear to all concerned that the Dutch economy was in bad shape. The Wassenaar Agreement was a plan of action: moderation of wage demands was assured in exchange for measures designed to alleviate the human cost of unemployment, from financing early retirement to shortening the work week. By and large, this strategy has been adhered to ever since.

Important lessons are to be found in the Dutch experience for all of Europe. Today, economic conditions in Western Europe are good - in some places, better than that even. But Europe's economies are regularly subject to new recessions. Without a mechanism for social co-operation, the adjustments that any recession will impose are likely to result in high unemployment. It is now, when economies are doing better, that such a structure for social co-operation must be considered and constructed.

(Copyright: Project Syndicate)

Olivier Blanchard is professor of economics at MIT and a former chief economist of the European Bank for Reconstruction and Development.