Economy: The OECD has called on the Grand Duchy to reform its unemployment and pension schemes, as well as free up land for residential construction.
Luxembourg needs to reform its unemployment benefits system, its tax rates for older workers and its urban planning rules in order to boost economic growth, a rich country economic think tank has said.
“Structural reforms offer governments a powerful tool to boost economic growth, create jobs and bring about a strong and balanced economic recovery,” according to the OECD, which released an economic policy reform paper on Friday.
“Reforming the welfare system would strengthen work incentives” and help combat rising unemployment in the Grand Duchy, said the “Going for Growth 2013” report, which compared the economies of the 35 OECD member states and the “BRICS” countries.
The OECD praised last year’s reform of Luxembourg public employment service ADEM, which increased “the number of case workers and local offices, effectively stepping-up job search assistance.” At the same time, the organisation’s reported called on the Grand Duchy’s government to “lower unemployment benefit replacement rates and make them progressively decline throughout the entitlement period.”
Among OECD countries, Luxembourg’s employment insurance scheme replaced the highest level of net income, 90%, during the initial period of unemployment. The second highest rate, 84%, was in Denmark, while it was 73% in Belgium, 70% in France and 67% in Germany.
Luxembourg provided the fifth highest replacement rate, 68%, of net income during the 60th month of unemployment. That is higher than the amount provided in all the Nordic countries, as well as more than the 65% figure in Belgium, 58% in Germany and 51% in France, although less than the highest rate, 79%, found in Ireland.
Older workers losing out
The OECD report also called on Luxembourg to “reduce disincentives to continued work at older ages. Labour force participation among older workers is low as a result of early retirement schemes and high implicit taxes on continued work embedded in the old age pension system.”
The Grand Duchy has the second highest rate of “lost income” for those working beyond early retirement age in the OECD, 79% of average worker earnings. That was behind Greece’s 84%, but ahead of the 42% rate seen in France, 28% in Belgium, the 24% OECD average, and the 14% rate in Germany.
The OECD also called for “progressive reduction” of the amount of income that the state pension replaces, as well as an automatic indexation of the retirement age to life expectancy.
The think tank said “better designed housing policies would reduce commuting costs” for Luxembourg employees. “The pressures from cross-border workers on the transport system are increased by cumbersome planning regulations and property tax features that contribute to high housing prices in Luxembourg.”
The OECD said the Grand Duchy should “overhaul the planning system to facilitate residential construction” and needed to “reduce implicit tax subsidies to home ownership and incentives to hoard building plots.”