Place Guillaume II at dusk, in Luxembourg.
In the pretty unique bubble that is Luxembourg — a small open economy which offers highly competitive tax optimisation to multinationals — it is quite surprising to find out that nearly 20% of the residents (Eurostat, 2022) are at risk of poverty or social exclusion.
The threshold is measured against the following metrics: risk of poverty, severe material or social exclusion, and/or living in a home with very low work intensity. A ménage experiencing at least one of the three aforementioned indigence and social exclusion risks would qualify for it.
Severe material and social deprivation is not that rare
Severe material and social deprivation (SMSD) is defined according to the EU Statistics on Income and Living Conditions (EU-SILC). It is defined as per an enforced lack of at least seven out of thirteen deprivation items (six related to the individual and seven related to the household). It has to do with the inability to afford a certain good, service or social activities.
SMSD takes the shape of daily most basic needs, such as managing to put food on the table and keeping your household adequately warm, keeping afloat by making it up for both planned payments and any unexpected expenses. Replacing worn-out furniture and/or clothes also figures in the list, just like having any pocket money to spend on yourself each week without having to ask another household member, to carry out a leisure activity (something as simple as a film screening or a yoga class), or to get together with friends/family for a drink/meal at least once a month.
SMSD questions, EU-SILC.
The elevated housing costs in Luxembourg
I genuinely think it is not this uncommon to be unable to sustain all the costs listed above and thus, be eligible for severe material and social deprivation as a lower income earner, especially a young professional. It is kind of a sad realisation to cope with, yet it perfectly makes sense when 36% (a figure which rises to 42% for low-income homes) of budgets goes into housing.
More specifically, housing costs are estimated by STATEC (National Institute of Statics and Economic Studies of the Grand Duchy of Luxembourg) for 2019 at 54% of the budget for one person living alone; under 40% for couples without kids or single parents; and down to 31% for a couple with two kids. Single individuals do not only play the biggest share of their monthly disposable income¹ on housing, but also are still the ones to pay the highest taxes when it comes to taxation of income, as compared to the other tax classes.
You probably have been there before...
You probably have been there after taking a vacation that not only dried out your personal savings but also required you to put your stability at risk. You still went for it because you deserved a little sunlight, a little break after all the werk.
How privileged is to talk from this perspective! In truth, this is the real cost of living in the wealthiest country in Europe. Luxembourg’s social security is extremely competitive — from the free public transportation (established in 2020); the private care being refunded (up to 88% for adults and 100% for youths under eighteen years old); the free contraception methods ever since April, 2023; the wage indexation (in order to maintain the purchasing power against the inflation); to the family allowance; the maternity and the parental leave; and the unemployment benefits.
You most probably came to Luxembourg for work. You made it here and you are not willing to give up after all the hard work you put in. But is Luxembourg’s lifestyle financially sustainable on a long run? Are you ready to endure these circumstances?
Parc des Trois Glands, in Luxembourg.
The at-risk-of-poverty rate meets uneven income distribution
Going back the Eurostat metrics — the at-risk-of-poverty (AROPE) rate ² takes into account low income in comparison to other residents in that country, without necessarily implying a low standard of living. The at-risk-of-poverty rate is to be considered after social transfers (i.e. after taxes and any other social contributions). Conversely, the persistent at-risk-of-poverty rate shows the percentage of the people living in households where the equivalised disposable income is below the at-risk-of-poverty over a period of four years.
As indicated in EU-SILC 2022 analysis on financial distress, Luxembourg’s AROPE is between 15.0 and 18.0% — the same as Portugal, Malta, France, Croatia and Sweden. On the other hand, central European countries (Germany, Belgium, the Netherlands, Austria, Slovakia, Czechia, Poland, Switzerland, Slovenia, Hungary) along with Ireland, Denmark, Iceland and Cyprus, reported AROPE to be at 13.0-15.0%. The largest social transfers are registered in Luxembourg, Austria and France.
By social transfers, we refer to social support for private households from the State or private institutions (church, NGOs). Social transfers in the narrow sense are benefits in the event of unemployment; family allowances and benefits; in the event of illness and disability; educational support; for the reduction of living costs (housing assistance); to prevent social exclusion (e.g. reduced health insurance premiums). Social transfers in a broader sense also include pension claims either in old-age or for survivors.
Luxembourg's GDP can be deceptive
The GDP per capita in Luxembourg (135,000€, in 2022) is at odds, as it is calculated on the basis of 37 high-earners that earned over 1M€ in 2021 (these are all bankers) and 224,000 cross-border workers. As such, cross-border workers enjoy a lower living cost (especially in hs of housing prices) in the country of residence — would this be France, Belgium or Germany. On top of that, the ratio of total income received by the 20% of the inhabitants with the highest income (the top quintile) to that received by the 20% of the population with the lowest income (the bottom quintile) in Luxembourg is 5.0 and higher than in the neighbour states.
Notably, 18.7% of working people in Luxembourg are considered as working poor, and are mainly aged 18-24. Holding a job in fact does not necessarily prevent the active population from being exposed to the risk of financial distress.
When it comes to the Gender Pay Gap (GPG), women's average hourly pay (excluding public administration) is higher than that of men in 2021. In all other European Union countries, this indicator remains positive, i.e. in favour of men. While the GPG is fixed at -0.2% in 2021. However, the gaps between annual salaries (including end-of-year bonuses) are still in favour of men in Luxembourg: women are still under-represented in very highly-paid positions (e.g, CEO), and the proportion of women working part-time is much higher than men (the Gender Hours Gap is around -13% on average).
We can find salary inequality also throughout the country, where wealth is unevenly distributed. The 2022 statistics about the salaries by municipality reveals that the highest median salaries can be found in Niederanven (at 6,659€; with the average wage of 12,644.86€), while the lowest in Wiltz (at 3,167€; with the average wage of). These numbers are due to a more limited range of jobs and a less diversified economy in the more rural regions in the north and in the municipalities in the south-west.
Median income by municipality in 2022, Luxembourg, by STATEC.
Low work intensity and unemployment
Finally, a household with low work intensity is a household where the members of working age worked a working time equal or less than 20% of their total work-time potential during the previous year.
The unemployment rate is at 5.5% with 18,317 jobseekers (this amount reflects the ones who reside in Luxembourg) on January 31st, 2024, registering an increase of 2,516 (or 15.9%) compared with January 2023. The most highly qualified jobseekers (higher education graduates) and young people under 30 are experiencing the biggest increases. According to ADEM (Agence pour le Développement de l’Emploi), the total number of vacancies at the end of January 2024 stood at 6,966 — this represents a decrease of 36.6% compared to January 2023.
Nonetheless, the lack of qualified talent on Luxembourg’s job market remains a problem. The Chamber of Commerce registers that 55% of Luxembourg companies consider the talent gap as the main challenge for their economic development in 2023. The Big Four along with a few other multinational companies³ have the capability to secure work permits for a relatively convenient price; on the other hand, other employers do not have the mental flexibility to wait 2-3 months for the work permit to be issued to the ideal third-country national, or simply are not open to run the risk.
An important step was taken last July, when the spouse of work-permit holders was made eligible to work in Luxembourg without the need for any additional work permit process. Prior to the recent change in the law, their spouse (who most often are women) was unable to access the employment opportunities.
Training today's labour force for a brighter tomorrow
In fact, training labour force that is already present in the Luxembourgish territory to fit the actual demands of the employment market, should be made a priority. Too little time is accorded to lifelong learning by employers, while it should be considered key to both personal and professional growth, and be reserved the attention it deserves on a year-to-year basis.
The CSL (Chambre des Salariés Luxembourg) informs us that workers are able to devote 200 hours to learning languages (given that there are three official languages; the knowledge of Luxembourgish is required to apply for citizenship) and 80 days for any other continuing education and retraining over their entire career — the leaves must be formally negotiated and agreed with the employer, who can deny them. In truth, workers are required to use their personal time to take any courses. Still, investing on learning opportunities can result in tax refunds at the time of filing for tax returns.
While there is a lack of comprehensive data on employer training investment, employers in Luxembourg might have a tendency to prioritise experience over specific skillsets, potentially overlooking candidates with the potential to be upskilled. Company size and culture could also play a role, with smaller companies unable to offer a training and development scheme to their employees. The focus on experience might be more prevalent in certain sectors or for specific roles within Luxembourg's job market.
We can think of regulated industries, such as finance, banking, and law, where they often place a high value on proven experience and a track record of success. Additionally, senior positions often require not only specific technical skills but also the ability to apply those skills effectively in complex situations. Background checks are used extensively in risk-averse companies to mitigate potential risks at the moment of hiring new staff.
On the other hand, tech companies might be more open to hiring based on potential and skills. A lot of progress still needs to be done when it comes to growing awareness of the talent gap and the benefits of investing in employee development, in favour of a more skills-based approach to hiring in the future.
Detail from Parc des Trois Glands, in Luxembourg.
The most susceptible to the socio-economic inequalities
The EU-SILC survey questionnaire interviewed nearly 4,000 households in Luxembourg. In 2022, more than half of households with difficulty making ends meet did not have the financial capacity to replace worn-out furniture, more than a third could not afford a week's vacation away from home, and more than 10% of them could not afford a meal based on meat or fish (or vegetarian equivalent) every two days.
Additionally, the latest STATEC report from October 2023 shows that economic difficulties and material deprivation remain strong for part of the residents in 2022, a year marked by a significant rise in inflation. While household disposable income has continued to rise on average in 2021, significant inequalities persist among the residents in Luxembourg.
This piece of information is not very reassuring. In 2021, the average monthly standard of living per person is 3,745€ and is expected to raise to 4,032€ in 2022. This increase lies in part in the indexation of April 2022. Conversely, the poverty risk rate is down slightly on the previous year, from 18.1% to 17.4% in 2022. 2021 poverty risk threshold fixed at 2,265€ per month tells us that the 20% of the wealthiest households has an average income 4.7 times higher than that of the 20% of the least well-off households in 2021.
But how automatic wage indexation actually works in Luxembourg? The adjustment rate is put in place to match the cumulative NICP (National Consumer Price Index) increase exceeding the 2.5% threshold. Following the three indexations (one in April 2022; one in February and another in September 2023), we can expect an extra one this year either in Q3 or Q4, with STATEC’s inflation forecast at 2.2%. Finally, in the high energy price scenario, there will be two additional indexations in 2025 Q2 and Q3.
Households with dependent children are those who have the worst feeling about their financial situation. While 22% of adults living alone encounter difficulties, it is couples without kids who appear to be the least affected.
In 2022, 19% of households in Luxembourg reported that they are unable to afford an unexpected expense of 1,900 euros from their own resources alone. This percentage rises to 65% for households that reported having difficulty making ends meet, compared to only 7% for those who do not encounter difficulties.
Multidimensional poverty in Luxembourg
STATEC research identifies as the most vulnerable groups to financial hardship the unemployed, the foreigners and the single parents (1,759 at the end of 2021). LIS (Luxembourg Income Study Database) also determines that deprivation for children concerns almost every fourth child in Luxembourg in 2022. In particular, young people, the unemployed, the economically inactive, tenants, single parents with two or more children and people with a low level of education are more exposed to it. This multi-faceted deprivation means suffering multiple disadvantages at once, and takes into account income, consumption and assets; and is fixed at 3.9% in 2022. Curiously, there is no mention of foreigners here.
Multidimensional poverty in 2021, Luxembourg, by STATEC.
As the the demographic growth in Luxembourg over the last ten years is primarily due to international migrations (mainly from the countries of the European Union), it is quite alarming to hear that foreigners figure between the most fragile groups. With regard to EUROSTAT (2021), the Portuguese are the largest foreign community, accounting for 14.5% of the total population. They are followed by the French with 7.6%. These two foreign communities make up almost half (47.0%) of the foreign population. Next come the Italians (3.7%), the Belgians (3.0%) and the Germans (2.0%).
When looking at the education system, we encounter significant weaknesses that do not improve intergenerational inequality. LUCET (Luxembourg Centre for Educational Testing) in 2021 finds out that pupils’ access to academic pathways depends more on their socioeconomic and linguistic background than on their school performance.
In 2020, among babies with a foreign passport, the Portuguese (756) are ahead of the French (615), followed by the Italians (276). While, 52.9% of newborns are of Luxembourgish nationality. Data suggest that disadvantaged pupils are oriented disproportionately more often to the lowest track of secondary education (régime préparatoire) and less often to the highest track (enseignement secondaire classique, ESC).
LIS (Cross-National Data Center in Luxembourg) in 2022, shares that the AROPE rates for the third country nationals are by far the highest. The rates for EU & EFTA citizens which are the second highest, are slightly increasing throughout the year. EU & EFTA group is quite heterogeneous, counting both highly qualified individuals that work for the European institutions or financial markets and not only, and a large group who work in less qualified and less well remunerated jobs.
Conversely, Luxembourgish citizens have the lowest rates. Even among Luxembourgish citizens, we observe variations in destitution rates depending on their immigration background (i.e. Luxembourgish with both parents born in the country; Luxembourgish with only one parent born in the country; second generation or naturalised citizens). The rates are by far the highest in all years, among foreigner single parents. On the second highest place are Luxembourgish single parents. Not far behind them are the foreigners living alone, regardless of their nationality. LIS also determined that poverty risk for children concerns almost every fourth child in Luxembourg.
Switzerland's risk of poverty at household level
While being an EFTA country (along with Liechtenstein, Norway, Iceland), Switzerland uses EU-SILC standards to understand severe material and social deprivation in the country: some 8,500 households (for a total of more than 18,000 individuals) are surveyed every year. The AROPE rate in 2021 is at an European average of 16.8%, and the material and social deprivation is fixed at 11.9~. In European comparison, the at-risk-of-poverty threshold in the Helvetic Republic — expressed in terms of purchasing power without imputed rent (i.e. the rental value of the property, after deduction of the dwelling costs actually paid) — is among the highest, after Luxembourg.
SMSD in 2021, in Europe, by Eurostat.
It is quite convenient to compare Luxembourg to Switzerland, also considering that data are not always available for Liechtenstein. Similarly to Luxembourg, material and social deprivation rates in Switzerland are the highest among the unemployed, foreign nationals from Eastern Europe or non-European countries and persons in the lowest income group. Inversely, below-average rates are experienced by working-age couples without children, persons having completed tertiary level education, employed persons and Swiss nationals.
The Swiss Federal Statistical Office (SFSO) specifies that the most affected groups in 2021 are persons living alone or in single-parent households with minor youths; persons with no post-compulsory education; and those living in households where no-one works. At regional level, the material and social deprivation rate is higher in the Italian and French-speaking language regions than in the German and Romansh-speaking regions. It is also higher in densely populated areas.
In 2021, 5.2% of people in Switzerland are considered materially and socially deprived; and 8.7% (ca. 745,000 people) at risk of poverty (close to pre-pandemic level: 8.5%, 2020; 8.7%, 2019). Some 448,000 people have self-reported deprivation in at least five of the thirteen areas. The severe material and social deprivation rate (deprivation in seven of thirteen areas) is 1.8% in 2021, with 3.3% of all employed persons — namely 124,00 people — affected by material deprivation. This data is well below the European average of 7.3%.
The most common type of deprivation is the inability to face unexpected financial expenses of 2,500CHF within one month (8.9% of the population) — the same happens throughout Europe. Around half of working-age people who are income poor cannot meet unexpected expenses, and around a quarter cannot afford leisure activities, a one-week holiday or new furniture for financial reasons. 4.2% (ca. 157,000) of working people are considered as working poor, earning less than a monthly average of 2,289CHF monthly for a person who lives alone, and less than 3,989CHF per month for a household with two adults and two children.
The role of social transfers in the Swiss Confederation
Given the median equivalised disposable income and despite the elevated cost of living, the standard of living in Switzerland is definitely higher than in the neighbour countries. In Switzerland, social transfers in the narrow sense play a slightly larger role than on European average. In 2015, considerable differences can be seen before social transfers among foreign nationals by country of origin. For instance, without social transfers, more than one third (36.3%) of persons from “other countries” (i.e. countries that do not belong to Northern, Western or Southern Europe) and around one quarter (24.6%) of persons from Southern Europe would be affected by financial distress.
As a result of social transfers, in 2015, the poverty rates fall to 11.7% and 8.9% respectively — the data are similar for 2020. For younger people, social transfers are of particular importance. For most groups the rate is considerably reduced by such benefits. In the case of households with minor children, they play a greater role in combating indigence than they do in comparable households without children. However, the groups considered to be poor remain largely unchanged.
In Switzerland, the PPS decreases by 1.9% in 2022 due to high average inflation (+2.8%), with real wage development ranging from –5.0% to +1.2%. In fact, automatic wage indexation is available only in Luxembourg and in Belgium; while, Malta and Cyprus have a fixed form of wage indexation.
Switzerland's at-risk-of poverty rate after social transfers in 2021, by EU-SILC.
The risk of poverty or social exclusion affects similar groups in Luxembourg and in the Swiss Confederation. Both countries attract a high volume of foreign nationals who seek better professional opportunities. Furthermore, the income is not distributed in an even manner throughout both the Grand Duchy and the Helvetic Republic, where the high GDP and cost of living do leave some groups behind struggling to make ends meet and unable to deal with unexpected expenses.
Still, in these two welfare states with high standards of living, the social transfers in the narrow sense play a big role in households that are at risk of poverty. In comparison to Luxembourg that provides for wage indexation, the high average inflation is relatively high when paired up with the decrease in purchasing power. Both Luxembourg and Switzerland have low unemployment, yet integration challenges and educational disparities among foreign nationals persist in both countries.
Are Luxembourg's residents ready to endure the financial challenges of the Grand Duchy?
It is difficult to definitively say if Luxembourg's lifestyle is sustainable on a longterm basis. While households with low work intensity are better protected from material deprivation in countries with a strong welfare state like Luxembourg, long-term stability is still a mirage for many residents who have difficulty making ends meet and are unable to face an unexpected financial expense. In an European Union member state where social transfers play an important role to combating poverty, the aging population could pressure social security systems and healthcare in the long run. The positive balance of the general pension scheme is already shrinking — raising the effective retirement age appears to be the only effective policy on a macroeconomic level.
Despite a high average income, wealth distribution is unequal and housing costs are particularly high in the Grand Duchy, impacting affordability especially for young people and lower-income earners. Finally, the country’s economy heavily relies on financial services, making it vulnerable to global financial fluctuations.⁴ A diversification of the economy is much needed.
Vincent Hein, senior economist at Luxembourg think tank Idea, explained that the low share of public expenditure on business innovation (0.74% of GDP in 2022, compared to an EU average of 2.23%) might be clouded by the high GDP majorly due to financial services. Interestingly, the highest government spending per capita in 2022 were recorded in Luxembourg, when the EU level stood at 262.7€ per person. An important part of the expenditure on R&D in Luxembourg (47.0 %) was funded by the government sector in 2021. This suggests a heavy reliance on public funding for research and development activities, potentially due to a lack of private sector investment in this area.
Parc Municipal, in Luxembourg.
Social exclusion: a society without a real sense of community
Social cohesion is equally important. Successful integration fosters a sense of belonging and acceptance, leading to increased social connections, reduced social isolation, and improved mental health for foreign nationals. While offering personal space and freedom, the individualistic and competitive nature of the strongly work-intensive society of Luxembourg can hinder the creation of significant social bonds and a sense of community for some individuals. Some challenges remain, such as language barriers and potential instances of discrimination.
Luxembourg is called upon to create an inclusive society for all its residents. Notably, CLAE (Comité de Liaison d'Associations d'Étrangers, Liaison Committee of Associations of Foreigners) takes a firm standon the draft law on intercultural living together from February 20th, 2023: “Information, language courses, and local integration are not enough to develop a real welcome policy in a country that remains marked by many socio-cultural inequalities. It would have been desirable for the project to go beyond the fight against discrimination and show the will to tackle the difficulties experienced by people; that Luxembourg finally provides itself with the means to implement a real reception policy that affects equality of rights and equal access in all areas that allow people who have migrated to take their place in Luxembourgish society: schooling, labour market, training, housing, health, etc.”
Without restraint, CLAE highlights the structural inequalities that affect nearly 20% of Luxembourg’s residents. The 41st Festival des Migrations, des Cultures et de la Citoyenneté (February 24th-25th, 2024) coordinated by CLAE, is a very accomplished event that gives an idea of the extremely diverse communities that make up Luxembourg's society, a multicultural yet not socially cohesive society.
¹ The disposable income (expressed by the Eurostat in PPS, Purchasing Power Standards) of a household is the income remaining after taking into account social security contributions and income tax. The unit PPS considers the price-level variations required to purchase the same goods and services depending on the country. LIS (Cross-National Data Center in Luxembourg) defines disposable household income as the sum of monetary and in-kind income from labour, capital, pensions and monetary and in-kind public social benefits, as well as the monetary and in-kind private transfers, from which the income taxes and social contributions paid are deducted.² The poverty risk rate corresponds to the percentage of individuals whose standard of living is below 60% of the median standard of living of the population (i.e. the poverty risk "threshold”).³ Amazon, ArcelorMittal, Cargolux, Google, Luxair, Samsung, Siemens, Sopra Steria, TATA Consultancy Services.⁴ Luxembourg confirms itself as a leading investment fund domicile, handling middle and back-office financial services and products. With large, mainly US asset management firms who invest money via London, Luxembourg and Ireland function as satellites in the global finance industry as per the 1985 UCITS Directive.