Why does Luxembourg have such high productivity?
- Sajeel Bhat
- Jan 28, 2022
- 3 min read
Productivity is generally defined as the rate at which a company or country makes goods — in economics, it is seen as the relationship between inputs and outputs.
Labour productivity is the most common measure of productivity. It is measured by dividing the total amount of output by the number of workers or the number of hours worked. The figure represents the average output per worker or per hour in a firm or a country.
Gross Domestic Product (GDP) per hour worked is often used to compare productivity between countries. GDP shows the market value of all the final goods and services produced during a specific time period in an economy.
Before looking at productivity in a country, it is important to understand what factors affect productivity, especially labour productivity in individual firms. This article will explore three factors: ratio of capital to labour employed, skills and qualifications, and work-life balance.
The first factor is the ratio of capital to labour employed in its production processes. Labour intensive processes yield far lower productivity levels than capital intensive processes, as generally, machines produce goods at a quicker speed than humans. However, changes from labour-intensive to capital intensive processes often lead to structural unemployment at least in the short term until new industries emerge. Over the last two decades, these labour-intensive processes have moved to Asia and Africa, especially China and India, which hold a comparative advantage with low unit labour costs.
Two other crucial factors are the skills and qualifications of the worker and the morale of the workers. Further on this article will examine how important these factors are.
In 2021, Luxembourg was crowned the most productive country in the world, based upon GDP per hour worked, with a figure of $128.1. This was closely followed by Ireland, which boasted an almost equally high figure at $122.2. They were placed first and second respectively with ease, as the next country up, Singapore, received a figure around 40% less than Ireland at $73.7.
So, how did Luxembourg do so much better than the rest of the world?
Table of most productive countries in 2021
Luxembourg is a very small country in Europe, with a population of 632,000. Despite the drying profits from its steel industry since the 1970s, the country has adapted incredibly well by establishing and maintaining an extremely strong financial sector. The industry is upheld by its highly educated workforce, which is also crucial for maintaining the nation’s high productivity levels.
Luxembourg is ranked number 7 in the world for being the most educated country by the Organisation for Economic Co-operation and Development (OECD), which writes,
"A master's degree is the commonest qualification held by tertiary-educated adults in Luxembourg. … The employment advantage of a master's degree over a bachelor's is double the OECD average."
Such an educated workforce not only attracts investment from multinational companies but brings with it, advanced capital. Especially during a shift towards more capital intensive processes, such inflow of capital massively increases productivity. Then, a highly skilled workforce like Luxembourg would further boost its productivity levels.
The last factor to explain Luxembourg’s success is the work-life balance in the country. A study conducted by the Independent News concluded Luxembourg to have the best work-life balance in the world, they based this upon research into the countries with the highest wages but the lowest hours worked. Luxembourg also offers employees a generous 26 days of paid leave, recently increased from 25 days, this is more than similar countries such as Germany which only offer a statutory minimum of 20 days.
This balance is especially important as it offers employees the chance to rest properly and boosts their morale. This will eventually motivate them to complete the tasks at work as efficiently as possible. In fact, this theme of a good work-life balance resulting in higher productivity is consistent in many other developed countries. For example, Norway and Denmark are both also in the top 10 for the most productive economies, as well as being in the top 10 for countries with the best work-life balance, suggesting a correlation between these two variables.
It is clear how Luxembourg has achieved such high levels of productivity — advanced production processes with excellent skills and qualifications and work-life balance have enabled it to achieve what no other country could.
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