Growing inequalities and their impacts in Luxembourg

Luxembourg experienced remarkable economic performance and employment growth since the middle of the 1980s. Based on the development of the financial sector, this growth benefited massively from the contribution of immigrants and cross-border workers to the domestic labour force. High economic growth led to a rapid improvement of the overall living standard of the resident population. During the same period, income inequality increased too, albeit modestly. Even if the country can still be considered a low inequality country by international standards, this trend is a potential source of concern.
Several factors may explain the increase in income inequality. Income source decomposition analysis reveals that the relative contribution of paid employment income to total inequality increased over time. This reflects major labour market evolutions: (i) the expansion of the high-wage financial sector, (ii) an increase in the female employment rate, mainly married women, as well as (iii) an increase in earnings inequality. The recent upward trend in the unemployment rate also coincided with a period of increasing inequality. Finally, the analysis of education inequalities shows that for both men and women the share of highly educated increased while the share of low educated remained stable. This changing educational inequalities and the change in skills required by the structural change from a heavy industry based society to a high value-added service society also influenced income inequality.
The evolution of institutional characteristics and social policies may have also affected the income distribution. The Luxembourg labour market is one of the most regulated of the OECD countries with a strong regulatory framework within the Luxembourg ‘social model’, that is a strong social dialogue between unions, employers’ representatives and the government. There is an automatic indexation of salaries to inflation that applies to all wages and to the minimum wage. The minimum wage relative to average wages also increased over time contrary to what happened in other countries. This feature of the labour market, together with the generous welfare state (in particular the pension system and family-related policies) contributed to raise the floor of the income distribution and therefore to contribute ‘from the bottom’ to achieve a comparatively low level of inequality. On the other hand trends in a relatively low personal income taxation since the 1980s generally benefited higher income recipients.
The increase in inequality does not seem to have had a strong impact on most of the social outcomes considered in this project. Material deprivation in Luxembourg is still among the lowest in Europe, the level of life satisfaction is stable and the overall level of health has improved (except for overweight). An exception is the level of criminality and of the population imprisoned which both recently increased. By and large, the positive effects on social outcomes due to the improvement of overall living standards seem to have prevailed compared to the negative effects of increasing inequality.
Increasing income inequality seems also mostly unrelated to political and cultural issues. Political and civic participation, social trust and confidence in institutions, support for extreme parties changed their levels or maintained to the same intensity independent of changes in income distribution, in education attainment, or of the increasing share of immigrants. The same is valid for EU approval and the attitudes towards immigrants. The main driver here seems to be the perceived prosperity, which remained stable disregarding inequality dynamics and increasing share of immigrants in the country. In fact, the immigrants, mostly European and better educated than the immigrants to other European countries, may have also prevented deterioration of social cohesion and support for democracy which might have been triggered by the slight increase in inequality levels.