Earnings Dynamics, Foreign Workers and the Stability of Inequality Trends in Luxembourg, 1988–2009

Denisa Sologon, Universiteit Maastricht, CEPS/INSTEAD and Institute for the Study of Labor (IZA)
Philippe Van Kerm, CEPS/INSTEAD

We exploit a large-scale administrative dataset to document trends in male earnings inequality in Luxembourg over twenty years of rapid economic growth. A detailed error-component model is estimated to identify persistent and transitory components of earnings inequality. Given the importance of foreign labour in Luxembourg, models and inequality trends are distinguished between native, immigrant and cross-border workers. We observe a modest increase in overall hourly earnings inequality between 1988 and 2009. This apparent stability is the net result of complex underlying changes, with marked increases in persistent inequality (except among native workers), growing contribution of foreign workers, divergence across subgroups, and a decrease in earnings instability (primarily for native workers). Such results show a surprising stability in the face of industrial re-development, changes in employment, and fast economic growth. Such results possibly hint at the role of strict labour market regulations and collective bargaining institutions in holding back earnings inequality.