Economic Policy Reforms 2023

Luxembourg

See more data for Luxembourg on the related dashboard.

Product and labour markets functioning

Performance gaps

• The unemployment rate is relatively high for young people, while the participation rate of old people is one of the lowest in the OECD.

• Product markets are highly regulated, with the regulatory environment for businesses remaining overly restrictive.

• The indexation of wages to inflation risks eroding the competitiveness of firms.

Recommendations

• Subsidise active on-the-job training schemes targeted toward over-45-year-old workers.

• Reduce administrative burdens on small firms, notably by streamlining procedures for starting a business.

• Reform the wage indexation system in consultation with social partners to take better account of its productivity, employment, and investment effects.

Digital transition

Performance gaps

• Despite Luxembourg having a strong ICT infrastructure and a relatively well-educated workforce, businesses report persistent shortages of qualified ICT professionals as a brake on digitalisation. SMEs lag behind in digital adoption, and total private ICT investment as a share of GDP is low.

• The development of public digital services has not taken off.

Recommendations

• Establish an actionable roadmap for the development of digital infrastructure and services, with clear milestones to be re-evaluated at regular intervals.

• Establish dedicated adult training programmes and introduce key programming skills early on in school curricula to address skill mismatches.

• Expand business advisory services and support financing schemes to foster digital diffusion among SMEs, including through direct funding of ICT equipment.

• Consider developing a single personal digital key to reduce the administrative burden for citizens when interacting with the public administration.

Inclusiveness, social protection, and ageing

Performance gaps

• Schooling quality is uneven and educational pathways are rigid. This increases the impact of the socioeconomic background on education outcomes and results in high dropout rates among the most vulnerable.

• With a low effective retirement age, not linked to life expectancy, pension costs risk becoming an increased fiscal liability.

Recommendations

• Develop an early warning system to identify students at risk of early drop-out and take preventive measures.

• Link the statutory retirement age to life expectancy and phase out incentives for early retirement while providing more flexible working arrangements for older workers.

• Promote accessibility of alternative education to help early school leavers re-enter education.

• Reform the first part of secondary education to offer a more general and broad-based education and postpone selection into different educational pathways.

Climate transition

Performance gaps

• The share of renewables in the energy mix is low, as is the share of environmentally-related government R&D spending.

• Car ownership is high, while the price of petrol and the usage of public transport is low.

• Environmental standards in agriculture are low.

Recommendations

• Increase public spending on environmentally-related R&D to match private R&D funding and encourage greater investment by firms.

• Introduce and gradually increase road use charges, taper tax incentives for company car fleets and review parking policies.

• Increase benefits for households undertaking energy-efficient renovations.

• Set a rising carbon tax trajectory over the medium- and long-term, while redistributing revenues to minimise the costs for the most vulnerable.

• Strengthen regulations on fertiliser and pesticide use.

Overall performance