Luxembourg: Selected Issues
IMF Staff Country Reports, May 24, 2023
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- Luxembourg: Selected Issues
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Bibliographic details
- Published: May 24, 2023
- Series: IMF Staff Country Reports
- DOI: https://doi.org/10.5089/9798400243929.002
Summary
- This Selected Issues paper summarizes the recent literature on the effects of automatic indexation of wages on the economy, including specifically in Luxembourg.
- It discusses potential pitfalls of the current system and explores some policy options to tackle them and make the system more resilient.
- With inflation pressure heightening in 2022, applying the mechanism would have entailed several rounds of indexation in a short time span, potentially harming competitiveness.
- The note discusses conjunctural concerns, drawing on the extensive literature about the cyclical properties of automatic wage indexation (AWI) schemes and the recent decisions taken by the Government to mitigate wage-price spiral and competitiveness risks by transferring some of the cost to public finances.
- Structural issues with AWI are explored in the context of long-term productivity and real wage trends at the sectoral level.
- Luxembourg’s practical implementation of the automatic wage indexation hinges on the availability of political will and could erode the country’s fiscal space.
Conjunctural concerns (cyclical properties and near-term risks)
- Recent inflation pressure in 2022 implied that applying AWI would have led to several rounds of indexation in a short time span.
- Several rounds of indexation in a short time span could potentially harm competitiveness.
- The Government took recent decisions to mitigate wage-price spiral and competitiveness risks by transferring some of the cost to public finances.
Structural issues (long-term productivity and real wages)
- Structural issues with AWI are explored in the context of long-term productivity and real wage trends at the sectoral level.
- Luxembourg’s practical implementation of AWI depends on political will and could erode fiscal space.
Policy options and implications
- The paper explores some policy options to tackle pitfalls in the current automatic indexation system and make the system more resilient.
- Policy measures undertaken by the Government included transferring some of the cost of indexation to public finances to mitigate wage-price spiral and competitiveness risks.
Content in this bundle
- Luxembourg: Selected Issues; IMF Country Report No. 23/177; May 1, 2023