Luxembourg's labor market needs to undergo substantial changes if it is to avoid long-term unemployment.

This is according to the summary of a new report on the nation by the Organization for Economic Co-operation and Development (OECD), which looked at the "severe" effects of the recession.

It said although certain demographics in Luxembourg - such as younger and older workers - have "relatively low" rates of joblessness, residents' unemployment has risen, even during years of growth. This is despite a short-time working scheme implemented across the country.

As such, the labor market's adaptability and function needs to improve by way of more flexible regulation, the paper stated.

In addition, "generous" social benefits need to be adjusted so there is not a reduced incentive to work.

"High unemployment would be helped by structural changes to increase labor demand, encourage participation rates and prevent entrenched unemployment among residents," it explained.

Pension reforms will also be necessary if the system is to be sustained medium to long-term - and possible changes could include raising the effective age of retirement, limiting credits for years spent outside of employment and abolishing early retirement schemes entirely.

OECD reports on each country are published every 18 to 24 months.

Posted by Alex Donnell