What is the purpose of index-linking?
In Luxembourg, all wages and welfare payments (including the minimum wage) are regularly adjusted to changes in the retail prices of consumer products, in other words to inflation. This mechanism is called the “automatic index-linking of earnings to the cost of living”, “salary escalation scale” or simply “index linking”. Along with Belgium, Luxembourg is one of the few European Union countries to have a mechanism for adjusting salaries to match inflation.
A mechanism almost a century old
Index-linking is an elderly mechanism, first emerging as the dust settled after the First Word War, to maintain workers’ purchasing power. The first to benefit from index-linked wages in Luxembourg were railway workers and civil servants. The very first price index was established on 1 June 1921. Known at the time as the “cost of living index”, it was based on a basket of goods comprising 19 basic items supposed to match the spending habits of a family of five (two adults and three children). Gradually, the standard basket grew, reaching 36 items by 1948, and was extended to other categories of employee before being applied across the entire public and private sectors by a law of 27 May 1975. The only exception concerns employees seconded to Luxembourg, whose salaries are higher than the minimum wage.
How index-linking works in practice
The principle is very simple. When the average of the consumer price index rises or falls by 2.5% over the course of the previous half year, earnings are in principle adjusted by the same proportion. This index and its impact on the salary escalator are published monthly by Luxembourg’s national institute of statistics and economic research, Statec. To conduct a thorough calculation, Statec uses a European methodology and compiles a sample of goods and services that is representative of household consumption. These goods and services, numbering approximately 8,000, are collected into 255 categories or aggregates (or index positions). A weighting coefficient, corresponding to the relative importance in households’ total spending, is then assigned to each aggregate. Since 1999, the list of these items and their weighting has been adjusted every year to take into account changing consumer spending habits.
Last increase on 1 January 2017
Prepared every month, the consumer price index is calculated for the twelve months of a given year compared to the month of December the previous year and related to the 100 baseline as at 1 January 1948. From 2014 to 2016, the index was consequently level at 775.17 points, and on 1 January 2017 it was increased by 2.5% to 794.54 points (or almost 8 times the 1948 index). Since then, the unqualified minimum wage has risen to €1,988.59 and, in principle, all salaries, wages and welfare payments have increased by 2.5%. For the first time for four years!
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