What is the purpose of index-linking?

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.

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[1]. 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.

[1]http://www.statistiques.public.lu/stat/TableViewer/tableView.aspx?ReportId=13277&IF_Language=fra&MainTheme=5&FldrName=5&RFPath=108

Prepared every month, the consumer price index is calculated for the twelve months of a given year compared to the same month of the previous year and related to the 100 baseline as at 1 January 1948. On 1 February 2023, it was increased by 2.5% to 898.93 points (or almost 9 times the 1948 index). Since then, the unqualified minimum wage has risen to €2,387.40 and, in principle, all salaries, wages and welfare payments have increased by 2.5%. Good news!

11/2021