In 2022, inflation rose to around 7% in Luxembourg, the highest level seen in 40 years and much higher than the 2% seen over the past 20 years, noted the Statec report. The grand duchy’s indexation mechanism aims to compensate the loss of purchasing power linked to inflation, said the report, while the tripartite agreement included a package of measures to protect households’ purchasing power.
Results of Statec analyses show that households in Luxembourg--both modest and well-off--have seen an increase in their purchasing power in 2022 and 2023, when compared to 2019.
Measures were redistributive
“Regardless of the tripartite measures, in 2022 and 2023, wealthier households had, on average, greater purchasing power gains than lower income households. This finding still holds, but after the tripartite measures wealthier households had lower purchasing power gains while modest households had higher gains. Against this background, the measures are redistributive,” Gabriel Gomes, one of the authors of the Statec report, told Delano.
Households in the Q1 income quintile--those with the lowest income--benefitted from an increase in purchasing power of €150 following the November 2022 update (with the measures from the September 2022 tripartite). But those in the Q5 income quintile with the highest income benefit from an increase of €4,966 in purchasing power. And when comparing 2019 to 2023 purchasing power, households in the Q5 quintile would see an average purchasing power gain of €7,903.
This may seem like quite a big increase for wealthier households, when compared to more modest households.
But Gomes had a more in-depth explanation on this point: “As the focus of the publication is to evaluate to which extent purchasing power gains were affected by the tripartite measures, it compares two situations: with measures and without measures. That said, in 2022 households in the Q1 received some extra €105 with the measures compared to €76 for households in the Q5; in relative terms, these extra €105 multiplied by roughly 3 their gains without measures.”
“In 2023, households in the Q1 received €600 with the measures while those in the Q5 lost €1,385 compared to the situation without measures,” explained Gomes. “In relative terms, the average gains of the households in the Q1 were therefore more than doubled.”
The report concluded that wealthier households see more limited gains in purchasing power.
Positive macroeconomic impact
The tripartite agreements, which limited inflation, directly benefitted public and private employers. They also had a positive impact on economic activity (0.4%) and employment (nearly 2%) in 2023, the report found. But because these macroeconomic effects were not taken into account in the purchasing power analysis, the “purchasing power gains are therefore likely to be more favourable than the static analysis presented here determines,” stated the report.
The measures reduced household consumer prices while reducing labour costs by 2.5% over 18 months, representing more than €2bn in savings in terms of wage costs. This, argued the report, promotes the competitiveness of Luxembourg’s economy.