Chapter 1: Insuring against lower economic growth in the long term
Economic growth in Luxembourg has picked up to around the trend rate in the past two years, following weak activity in the wake of the bursting of the global equity market bubble. While the estimated trend growth rate remains high by international comparison, it has nevertheless slowed considerably from the 1980s-90s, reflecting lower contributions from financial services. In the long term, such contributions may weaken further as adjustment to factors such as financial market liberalisation and regulatory and tax advantages that have underpinned rapid development of Luxembourg’s financial sector draws to a close, pulling trend growth closer to the European average. In a related development, output growth has become increasingly labour intensive. Labour productivity growth has fallen and, with cross-border workers taking most new jobs, unemployment has risen strongly and growth in GNI now substantially trails that in GDP. In view of these developments, a number of challenges emerge: adjusting public finances to persistently lower growth, notably the PAYG pension system; enhancing the employment prospects of resident workers; improving education achievement and attainment to compete in the labour market; and increasing product market competition to boost productivity growth.
Chapter 2: Public finances: adjusting to lower growth
After having been a model of fiscal rectitude until 2001, Luxembourg has since then joined the group of countries experiencing budgetary difficulties. With expenditure growth remaining brisk, in spite of decelerating growth entailing a slowdown in revenue growth, the fiscal balance has rapidly deteriorated and the general government deficit has reached 1.9% of GDP in 2005, raising concerns with policymakers. The authorities are rightly determined to bring the budgetary position close to balance before the end of the current legislature, i.e., by 2009 at the latest. This will require dealing with the fast-growing trend of public spending, notably the strong momentum of social benefits and public salaries.
The public pension scheme for persons working in the private sector at present looks to be in good shape: the contributions of the growing number of cross-border workers finance a relatively slow increase in this number of retirees. In the long term, however, the pension arrangement will endure a likely decline in employment gains, a rising number of pensioners and an increased longevity of retirees. Thankfully, these effects will be felt later than in other OECD countries, but this should not be interpreted as giving room for complacency. The earlier that measures are introduced to respond to this challenge, the smoother the adjustment will be.
Chapter 3: Improving employment prospects of resident workers
Despite renewed employment growth in Luxembourg, the unemployment rate has continued to rise with new jobs going almost exclusively to cross-border workers. High unemployment benefit replacement rates, generous social assistance and attractive entry-level conditions in the civil service have encouraged residents to hold out for higher wage rates than cross-border workers are willing to accept. Moreover, the public employment service (ADEM) has had difficulties in matching job seekers with jobs owing to its bureaucratic structure and antiquated assignment system. Unemployment mostly affects youths and the unskilled, but not so much older workers, who benefit from generous exit routes from the labour market such as pre-pension and early retirement systems. The participation rate for older workers is one of the lowest in the OECD. On the other hand, women have been able to increase their labour market participation considerably. However, this increase has mainly been through part-time jobs as incentives to work longer hours are low and there are not enough after-school and childcare facilities. The authorities have started to address the labour-market participation problem by increasing the number of childcare facilities and tightening access to disability benefits. They are now considering tightening access conditions to pre-pension and are studying how the public employment service can be improved. More emphasis should also be put on lowering reservation wages, by adjusting some of the social benefits in order to avoid higher unemployment rates becoming structural, as well as on weakening employment protection legislation, which is the strictest in the OECD.
Chapter 4: Improving education achievement and attainment to compete in the labour market
Student achievement in Luxembourg is below the OECD average according to the 2003 OECD PISA study, with the gap in achievement between immigrant- and native students being above average. Similarly, education attainment is below the OECD average. A factor that makes learning more difficult in Luxembourg than in other countries is that it has a trilingual education system (Lëtzebuergesch, German and French are used as languages of instruction). This contributes to social unity by educating students to speak all three languages fluently but is challenging for students from lower socio-economic and/or immigrant backgrounds. The authorities have worked hard to attenuate these difficulties, with considerable success given that the impacts of socio-economic background and immigrant status on PISA scores are around the OECD average. Nevertheless, the large size of the immigrant population, most of which is also from lower socio-economic backgrounds, makes improving performance further all the more important. The authorities are continuing to implement reforms aimed at improving achievement amongst these groups and plan further measures. Reforms are also underway or being considered to enhance achievement more generally, including by improving teacher skills and basing school programmes on key competences. These reforms, which should also contribute to raising education attainment, are important for equipping today’s young people with the skills that they will need to compete successfully in the labour market. To monitor all these reforms, an advisory board composed of international and Luxembourg experts in education has been created.
Read also ECO Working Paper 508 Improving education achievement and attainment in Luxembourg
Chapter 5: Increasing product market competition to boost productivity
Being a small economy with open borders and small travelling distance to neighbouring countries, Luxembourg already enjoys many of the gains coming with competitive pressures on product markets. However, several segments of the economy remain sheltered from competitive pressures. The recent introduction of the Competition Law should be used as a vehicle to reduce these remaining regulatory barriers. This chapter identifies three sectors where the competition authorities could play their essential role of promoting competition in the economy. First, easing the regulation of professional services, a relatively important sector in terms of employment, could foster competition and hence create beneficial effects on, currently adverse, productivity developments. Competition in network industries should also be enhanced, especially in broadband internet access, where the dominance of the incumbent has been scaled back, but conditions for market entry still fall short of international best practice. Finally, existing hurdles to market entry in retail distribution should be lowered, so as to improve consumer welfare, notably with an easing of zoning policy and longer shop opening hours.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
The complete edition of the Economic Survey of Luxembourg 2006 is available from:
For further information please contact the Luxembourg Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by David Carey, Ekkehard Ernst and Stefaan Ide under the supervision of Patrick Lenain.