Structural Unemployment in Luxembourg: Bad Luck or Rational Choice?

IMF Working Papers, November 8, 2019

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Combines micro and macro approaches to identify drivers of (un)employment and inactivity in Luxembourg.
The young, low-skilled, and non-EU migrants are identified as the most vulnerable groups in the labor market.
Skills mismatches and work disincentives embedded in the tax-benefit system are factors explaining structural unemployment.
High unemployment of young and low-skilled workers reflects substantial unemployment traps.
Disincentives for second earners contribute to lower labor market participation of women.
The generosity of the pension system contributes to lower labor market participation of seniors.
Further reduction of structural unemployment requires better integration of vulnerable groups into the labor market and improved targeting of benefits to make work more rewarding.

Young workers: high unemployment reflecting substantial unemployment traps.
Low-skilled workers: high unemployment reflecting substantial unemployment traps.
Non-EU migrants: identified as among the most vulnerable groups.
Women: lower labor market participation linked to disincentives for second earners in the tax-benefit system.
Seniors: lower labor market participation linked to the generosity of the pension system.

Skills mismatches: cited as a key driver of structural unemployment in Luxembourg.
Tax-benefit system work disincentives: identified as contributing to structural unemployment and low participation for specific groups.
Unemployment traps: particularly substantial for the young and low-skilled, reinforcing persistent unemployment.

Better integration of vulnerable groups (young, low-skilled, non-EU migrants) into the labor market.
Improved targeting of benefits to make work more rewarding and reduce work disincentives.
Address disincentives for second earners to raise female labor market participation.
Review pension generosity implications for senior labor market participation.