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Table 14. Employment in foreign-owned enterprises, 1998

Table 14. Employment in foreign-owned enterprises, 1998

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The economic impact of migration in Luxembourg



105



The physical presence of natural resources lay behind the earlier inward

movements of capital and labour in creating and developing the iron and steel

industry, with its legacy still apparent in manufacturing (both in terms of the

presence of foreign companies and of immigrant workers). The more recent

inflows of foreign companies and accompanying migration are to a considerable

extent a combination of regulatory and tax advantages of locating in Luxembourg.

Building on a history of bank secrecy dating back from before WW II and enjoying a

liberal regulatory environment, it was possible to generate a virtuous circle of

capital and labour inflows – further strengthened by agglomeration effects,

increased government revenues permitting lower taxation, and this in turn

increasing the attractiveness of locating in Luxembourg. These attractions do not

apply only to employers; for given pre-tax earnings, take-home pay after taxes is

significantly higher in Luxembourg than in any of the neighbouring countries, and

social security deductions are lower.

A three-sector labour market?

Although this virtuous circle process of labour and capital inflows could

have occurred to some extent also with lower labour force growth, immigration and

the inflows of frontaliers have permitted faster overall output growth and probably

sustained it for longer without being constrained by labour market bottlenecks

(see Annex I). One issue is whether it has permitted faster per capita growth,

another is how the benefits from the effect of immigration are distributed, among

the immigrants themselves and among existing residents. Overall, the answer to

the first question is clear: Net National Income (NNI) per inhabitant increased

nearly fivefold between 1985 and 2000. Developments on the labour market

suggest that immigrants and frontaliers have prevented any supply shortages of

labour arising from the strong expansion of Luxembourg enterprises, which

implies that the improved overall per capita output was not fuelling inflation.

Existing residents are likely to have benefited from this additional growth through

various channels: employment opportunities in the public sector, lower taxes, a

high level of public transfers and services, and – insofar as they are property

owners – through higher property prices. Negative effects are harder to quantify

and mainly consist of congestion costs. Migrants must have benefited, because

they preferred employment in Luxembourg to staying in their original location.

Besides the reduction of structural labour market bottlenecks with the help

of foreign labour Luxembourg is also benefiting from migration smoothing the cycle.

Analysis by the Secretariat for the 2001 Luxembourg Economic Survey suggested that

frontaliers provide a “buffer” against cyclical fluctuations, with variation in employment of frontaliers being significantly greater than for Luxembourg residents. This

analysis covered a period of rapid growth in employment. It implies that employers

are benefiting from a more flexible labour market to maintain higher output and



© OECD 2003



106



OECD Economic Surveys: Luxembourg



total productivity. The steady growth in the number of frontaliers over the last

twenty years (see Figure 25) implies that the size of this benefit has been continually increasing over this period. Some econometric evidence also corroborates the

idea that frontaliers – and potential frontaliers resident in the neighbouring

regions – have to be considered as an integral part of the Luxembourg labour market. Models attempting to explain Luxembourg inflation using unemployment tend

to work better if also the regions around Luxembourg are taken into account. It

appears likely that frontaliers would also provide a buffer in the case of a severe

downturn in the labour market, although feedback mechanisms might complicate

the picture. Cyclical unemployment often becomes structural – in particular when

unemployment and related benefit replacement rates are high – so avoiding cyclical

unemployment could confer long-lasting benefits for Luxembourg. As mentioned

above, the sectoral distribution of Luxembourgers, resident foreigners and frontaliers is quite different (see Table 13), which suggests that cross-sectoral substitution opportunities are limited and layoffs would mainly affect employees in the

sectors experiencing a crisis. Residents, employed either in the public sector or in

construction and personal services, would suffer in a second round of adjustments

to an adverse labour market shock as declining government revenues and private

incomes would reduce the demand for their services.

At the same time, more flexible work contracts have also become more

widespread. Temporary work contracts are rare in Luxembourg, due to the

rigidities of the labour code, but they do exist. Most of them are taken by

immigrants or frontaliers (available data cannot distinguish between them).

In 2000 there were about 6 000 workers with such contracts, but only 3 per cent

were Luxembourgers. Portuguese and Italians, who can be presumed to be mostly

Luxembourg residents, accounted for over 12 per cent and nearly 3 per cent

respectively; 7 per cent were Belgians and 69 per cent French, many of whom were

probably frontaliers.109 To the extent that this may be occurring as a result of

pressure from the more flexible cross-border workforce, it may be here that there

is some adverse effect on certain residents, who may face a choice between less

secure working conditions or their job being taken by a frontalier.

Frontaliers may provide a more flexible workforce, but they do not seem to

have lower wages than equivalent residents – once certain labour market

characteristics have been taken into account. STATEC (1995) observes that average

wages among frontaliers in 1993 were some 16 per cent below those of residents110

but that when comparing groups of similar age, economic sector and status (blue-collar, salaried or civil servant) there were not significant differences. Also more recent

labour market data do not suggest the existence of discrimination against frontaliers.

A distinction may need to be made in this analysis between existing

residents who are immigrants and the Luxembourg nationals themselves. Over

40 per cent of the employed Luxembourg nationals work in the public sector or



© OECD 2003



The economic impact of migration in Luxembourg



107



closely related sectors.111 These workers are largely protected from any immediate

competition in the labour market from either frontaliers or resident immigrants. As

to other sectors, Luxembourg nationals are under-represented in hotels and

catering, construction, property and personal services, sectors that are generally

speaking relatively low-paid (Figure 28).



Figure 28. Relative salaries and employment shares of Luxembourg nationals,

by sector

Per cent



Per cent



200



200

Luxembourgers as percent of employees, 2001

Realtive salaries 1995-2001 (1)



180



180



160



160



140



140



120



120



100



100



80



80



60



60



40



40



20



20



0



H



F



P



K



J



A+B



G



D



C



Notes: A + B: Agriculture, hunting and fishing.

C: Mining and quarrying.

D: Manufacturing.

E: Electricity, gas and water supply.

F: Construction

G: Trade; repair of motor vehicles and households goods.

H: Hotels and restaurants.

I: Transports, storage and communications.

J: Financial intermediation.

K: Real estate, renting and business activities.

L: Public administration.

M: Education.

N: Health and social work.

O: Other community, social and personal service activities.

P: Private households with employed persons.

1. Salaries in sector as a percentage of average salaries.

Source: STATEC and OECD calculations.



© OECD 2003



I



O



N



M



E



L



0



OECD Economic Surveys: Luxembourg



108



Figure 29. Luxembourg residents: household income distribution by nationality

Per cent



70

60



Per cent

Luxembourger

French, Belgian and German

Portuguese and Italian



70



Other EU

Other



60



50



50



40



40



30



30



20



20



10



10



0

1



2



3



4



5



0

Income quintile



Source: STATEC et al. (2000), Population et emploi no 1.



This analysis, though not conclusive, suggests that for a significant proportion of Luxembourg nationals – the over 40 per cent of nationals who work in the

public sector – their comparatively high earnings are linked to government revenues

depending on high employment growth rates. This indicates that the necessary

expansion of the foreign labour force is a complement for high public sector

employment. Those nationals who do not work in the public sector work relatively

rarely in low-paid sectors. Income distribution data by nationality shows that certain

immigrants tend to have much higher proportions of low-income households than

nationals, while others have relatively more high-income households. This could

reflect a process whereby foreigners either fill low-paid jobs with which Luxembourgers do no want to compete, or fill high-skilled or specialised highly-paid jobs

for which there are insufficient numbers of qualified nationals (Figure 29).

Fiscal impacts

The lack of comprehensive studies, which measure the fiscal impact of

migration in Luxembourg, makes it difficult to assess policy in this respect. For

other countries it has been found that the two major determinants are participation and unemployment rates in the short as well as the long run, and for the

longer run effect the way pension provisions affect immigrants is crucial.112 Since

migrants have high participation rates on average and access to unemployment



© OECD 2003



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