Going for Growth 2021 – Luxembourg

Luxembourg

The recovery after the COVID-19 crisis requires a prompt labour market rebound and addressing skill shortages that weighed on firm growth and innovation prior to the crisis. Sustainable public infrastructure investment can improve environmental outcomes. Improving housing affordability and labour market participation of women will render the recovery more inclusive.

Performance prior to the COVID-19 crisis

Economy: Percentage gap with respect to the population-weighted average of the highest 18 OECD countries in terms of GDP per capita (in constant 2015 PPPs). In the case of Luxembourg, the population is augmented by the number of cross-border workers in order to take into account their contribution to GDP.

Inequality: The Gini coefficient for disposable income measures the extent to which the distribution of disposable income among households deviates from perfect equal distribution. A value of zero represents perfect equality and a value of 100 extreme inequality.

Environment: Greenhouse gas (GHG) emissions include emissions or removals from land-use, land-use change and forestry (LULUCF). A high exposure to air pollution refers to above 10 μg/m3 of PM2.5.

Source: Economy: OECD, National Accounts, Productivity and Labour Force Statistics Databases; Inequality: OECD, Income Distribution Database and World Bank, World Development Indicators Database; Environment: OECD, Environment Database and United Nations Framework Convention on Climate Change (UNFCCC) Database.

Easing skills constraints and improving equity outcomes

Despite healthy job creation prior to the COVID-19 crisis, structural unemployment remained high and firms often faced skill shortages. To favour a stronger recovery, both of these issues need to be addressed by improving the education system and enhancing educational outcomes. Grade repetition in both primary and secondary schooling should be reduced, as it contributes to a high age-grade discrepancy in the educational system (Panel A). Quality and accessibility of vocational training should be improved by, for instance, better linking students with the corporate sector, strengthening co-operation between enterprises and research institutions in Luxembourg and abroad, as well as the establishing of circular study programmes, that would allow students to return to Luxembourg after studying abroad.

Luxembourg has the lowest effective retirement age and the second highest replacement rate in the EU, providing older workers with weak incentives to continue in the labour market. Moreover, the participation rate of women lags behind that of men. There is scope to facilitate labour market participation of older workers and women. A pension reform should entail abolishing early retirement schemes, allow a gradual rise of the effective retirement age, limit pension credits for time spent outside work, and insure more actuarial neutrality around the statutory retirement age and indexation of the latter to longevity. To boost female labour force participation it is important to charge health care contributions for each spouse individually, while introducing a fully separate income tax assessment of spouses should also be considered.

Housing prices have grown strongly over the past decade (Panel B), weighing on housing affordability, in particular for low-income households who do not profit from highly subsidised social housing. To improve housing affordability and make the housing market more inclusive, a mix of policies is needed: supply side restrictions should be eased, to tackle land hoarding and resistance to densification; the mortgage interest deductibility phased out or reduced; and fiscal support to social housing should be better targeted.

Vulnerabilities and areas for reform

Source: Panel A: OECD, PISA Database; Panel B: OECD, Analytical House Price Indicators Database.

Cross-border workers already fill a large part of the skill gap in the economy, but commuting poses a burden on the environment and climate. To facilitate connectivity while improving environmental outcomes infrastructure investment should increase. This requires a boost in public investment in cross-border railway connections, more sustainable transport infrastructure and construction. A reduction in traffic congestion and air pollution could be achieved by exploring a system of congestion charges. Investment in smart electricity grids and better interconnectivity in electricity and gas markets can increase efficiency in energy production.

Restrictive regulations in professional services hamper productivity in those sectors but also in downstream production. Moreover, in services, less productive firms have tended to fall further behind, which weighs on aggregate productivity. Lifting anti-competitive product market regulations would contribute to stronger market selection and post-entry growth of efficient firms in the professional services sector and may aid in the recovery from the pandemic. Regulation of professions, especially for civil engineers, should be relaxed, while restrictions on advertising and marketing for architects and engineers should be eliminated. Reforms to bankruptcy law, easing early restructuring and second chance opportunities can facilitate the post-COVID reallocation of resources.

Luxembourg: Summary of Going for Growth priorities and recommendations

Recent progress on structural reforms

Reform progress has been good in some areas, such as the ones concerning the improvement of environmental outcomes and the green transition. Efforts have also been made to improve access to housing and in reforming the education system to improve students’ employment outcomes.

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