Austria: Selected Issues and Statistical Appendix

This Selected Issues paper and Statistical Appendix presents estimates of potential output and the output gap for Austria to identify the scope for sustainable noninflation growth and allow an assessment of the current stance of macroeconomic policies. The estimates of the cyclical fluctuations in Austria are compared with those of the other countries of the European Union to provide the basis for an assessment of the relative economic benefits and constraints for Austria in the context of its participation in European Monetary Union, both in the short and longer term.


This Selected Issues paper and Statistical Appendix presents estimates of potential output and the output gap for Austria to identify the scope for sustainable noninflation growth and allow an assessment of the current stance of macroeconomic policies. The estimates of the cyclical fluctuations in Austria are compared with those of the other countries of the European Union to provide the basis for an assessment of the relative economic benefits and constraints for Austria in the context of its participation in European Monetary Union, both in the short and longer term.

II. The Austrian Labor Market: Performance and Policies1

A. Introduction

44. Compared with other industrial countries, Austria has been remarkably successful in maintaining low levels of unemployment and flexible labor market flows. However, with rapid productivity increases containing employment growth in the business sector, this favorable performance has been partly due to a rise in public employment and substantial recourse to early retirement and disability pensions. Nonetheless, unemployment has been gradually rising in recent years, with growing signs of persistence, and, owing to a significant expansion of the labor force, the present upswing is expected to bring only modest unemployment relief in the near term.

45. Against this background, Austrian policymakers (including the social partners) have become more aware of the structural weaknesses of their labor market in the face of a rapidly changing international environment. They have started to implement reforms in order to improve the job-generating capacity of the economy, both in connection with the fiscal consolidation undertaken since 1996 and with a view to meeting the challenge of increased globalization and competition from other economies of the European Union (EU) and the transition economies of Central and Eastern Europe. This chapter examines the need for structural labor market reforms in Austria and assesses the measures that have been adopted in recent years.

46. The chapter is organized as follows. Section B reviews recent developments and the main features of the Austrian labor market. Section C identifies the principal sources of strains and discusses the reforms that appear to be needed. Section D discusses the measures that have already been adopted by the government and labor market institutions, and section E provides a brief conclusion.

B. Labor Market Performance

47. The different measures of employment and unemployment in Austria have shown an unusual degree of divergence in recent years. According to the Labor Market Service (AMS) and social security registrations, registered unemployment increased from about 1½ percent in the 1970s to close to 6½ percent of the total labor force in 1997. In the meantime, based on a labor force survey, the international standardized unemployment rate increased only gradually, to 4½ percent at last count.2 Different as they are, those levels remain enviable by international standards and are much lower than in the EU, particularly for youth and long-term unemployment (Figure II-1 and Table II-1). With the standardized employment rate at 68 percent of the working-age population, the overall degree of labor utilization is also relatively high and general labor market flows—both in and out of unemployment and between occupations—are significant, albeit somewhat inflated by the relatively high share of seasonal employment in the tourism and construction sectors.3

Figure II-1.
Figure II-1.

Austria: Employment and Unemployment Rates

Citation: IMF Staff Country Reports 1998, 107; 10.5089/9781451802313.002.A002

Sources: WIFO; OECD, Economic Outlook and Labor Force Statistics.1/ Based on administrative data; registered unemployment from labor market service, dependent employment from social security, and WIFO estimate for self-employment.2/ Based on labor force survey; standardized unemployment and employment from microcensus as of 1994.
Table II-1.

Characteristics of Unemployment in Industrial Countries, 1996

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Source: OECD (1997b).

Based on labor force surveys.

Data for 1995 for unemployment rate by age.

Data for 1995.

Age group 15 to 24 refers to 16 to 24.

48. This favorable performance has, however, masked poor employment growth since the mid-1970s. As in most other EU countries, hefty real wage increases were accompanied by strong productivity gains and total employment increased by only 0.3 percent a year on average during the period (Figures II-2 and II-3). Moreover, somewhat lower growth in private dependent employment and a gradual contraction of the number of self-employed have led to the stagnation, and even a modest decline, of total employment in the business sector. The small expansion in overall employment has indeed been entirely due to a rapid increase in government employment since the early 1970s. As a result, the share of public employment—excluding employment in state-owned enterprises—rose steadily from some 13 percent to 22½ percent of total employment in recent years, a level that appears particularly high by international standards (Figure II-4).

Figure II-2.
Figure II-2.

Austria: Output, Employment, and Productivity

Citation: IMF Staff Country Reports 1998, 107; 10.5089/9781451802313.002.A002

Sources: WIFO; OECD, Economic Outlook.1/ Real gross domestic product per employed person.
Figure II-3.
Figure II-3.

Austria: Wages, Inflation, and Productivity

Citation: IMF Staff Country Reports 1998, 107; 10.5089/9781451802313.002.A002

Source: OECD, Economic Outlook.1/ Deflated by private consumption deflator.
Figure II-4.
Figure II-4.

Austria: Public and Private Employment, 1970-97

Citation: IMF Staff Country Reports 1998, 107; 10.5089/9781451802313.002.A002

Source: OECD, Economic Outlook.1/ Government sector (excluding public enterprises).

49. The unemployment rate has also been maintained at a relatively low level because of extensive resort to early retirement and disability pensions, which has significantly reduced the labor force since the early 1980s. While the proportion of workers benefiting from the general early retirement scheme stabilized in the second half of the 1980s, the share of older workers receiving disability pensions continued to rise and the number of those with other benefits and early pension support has expanded rapidly in recent years (Figure II-5). Thus, although the incidence of unemployment among older workers remains low in Austria, their employment rate has declined to levels significantly lower than in most other industrial countries (Table II-2). With nearly 7 percent of the entire working-age population benefiting from these schemes, the effective retirement ages for men and women were only 58 and 57 in 1996, compared with respective statutory retirement ages of 65 and 60 years.4

Figure II-5.
Figure II-5.

Austria: Early Retirement and Employment Rates by Age

Citation: IMF Staff Country Reports 1998, 107; 10.5089/9781451802313.002.A002

Source: WIFO; OECD, Economic Outlook.
Table II-2

Ratios of Employment to Working Age Population in Industrial Countries, 1996

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Sources: OECD (1997b).

Ratio of employment to population of each group.

Employment rates based on labor force survey (microcensus).

Data for 1995 for employment to population by age.

Data for 1995.

50. Although Austrian unemployment remains modest compared with most other industrial countries, it has gradually, but steadily, risen in the last two decades. The comparatively low rate of unemployment has resulted mostly from smaller increases during recessions rather than larger falls during upswings. This favorable outcome during downturns has been due partly to a strong cyclical sensitivity of the labor force as well as highly responsive migration flows and the expansion of early retirement schemes. But it is also associated with the fact that employment in Austria has proved to be more stable than in other countries, reflecting a combination of factors—including lower volatility in output, labor hoarding, and public employment policies, and a strikingly strong aggregate real wage flexibility—most of which would appear to be intertwined (see chapter I and section 3; and OECD 1996a, 1997a).

51. The rise in unemployment has also been accompanied by increased signs of persistence. Following each downturn, wages and prices have begun accelerating at a higher level of unemployment, suggesting a steady rise in the short-term NAIRU (Figure II-2). Similarly, the rates of unemployment associated with an average vacancy rate or a normal rate of capacity utilization have increased over time, implying a series of adverse shifts in the Beveridge curve and in the Okun law relationship. Standard indicators derived from these relations point to a continued increase in structural unemployment since the mid-1970s. Despite some stabilization in recent years, this structural component now seems to account for the bulk of actual unemployment (see chapter I). In the meantime, the rate of outflows from unemployment (i.e., the rate at which the unemployed either find a job or leave the labor force) declined markedly, from some 60 percent in the 1970s to 25 percent in the 1990s.

52. These structural pressures have also been reflected in a steady increase in the share of long-term unemployment (i.e., those unemployed for more than a year), which has risen from about 10 percent in the 1970s to 20 percent of total registered unemployment—25 percent based on survey-based unemployment measures—in recent years. While this proportion remains much smaller than for most other EU countries, its growth has been substantially slowed by the ease of access to early retirement and disability pension schemes. As in other EU countries, the long-term unemployed appear to be concentrated among workers who are less skilled or whose skills are increasingly made redundant by technological progress. They are also largely drawn from industries that have been undergoing severe adjustments imposed by increased exposure to international competition—such as in the leather, clothing and textiles, and chemical, metal, and electrical industries (Biffl, 1996).

53. The level of female labor force participation used to be low in Austria, but it increased markedly in the 1980s, offsetting in part the decline of male participation. Estimated at 62–63 percent in standardized labor force surveys (compared with 81–82 percent for men), the female participation rate was still much lower than in most Nordic countries and the United States, but it has been some 6 percentage points higher than the EU average in recent years. In the meantime, however, the incidence of part-time work and other flexible work arrangements—including hours worked, shift work, and fixed-term contracts—has remained comparatively low in Austria.

Figure II-6.
Figure II-6.

Austria: Unemployment Persistence

Citation: IMF Staff Country Reports 1998, 107; 10.5089/9781451802313.002.A002

Sources: WIFO; OECD, Economic Outlook; and staff calculations.1/ Based on compensation rate in business sector.2/ Share of long-term unemployment (over 1 year) in August in percent of total unemployment.3/ Outflows in percent of unemployment.

54. Another important characteristic of the Austrian labor market is the high share of foreign workers. In the beginning of the 1990s, the Austrian government allowed a substantial increase in inflows of unskilled labor, in order to relieve the labor shortages associated with brisk demand growth. As a consequence, the share of foreign workers climbed from 5 percent to nearly 9 percent of total employment in 1996-97 (Figure II-7). Tight restrictions have, however, been subsequently introduced since 1991 on both immigration flows and work permits for immigrants.5 Thus, while net immigration flows helped to buffer cyclical fluctuations of employment and unemployment of Austrian-born labor in the past, these restrictions may have contributed to reducing the cyclical sensitivity of the labor force in recent years.

Figure II-7.
Figure II-7.

Austria: Foreign and Total Employment

Citation: IMF Staff Country Reports 1998, 107; 10.5089/9781451802313.002.A002

Sources: WIFO; and OECD, Economic Outlook.

C. Directions of Labor Market Reforms

55. Against this background, this section reviews the main factors hampering the performance of the Austrian labor market and outlines the need for structural reforms. In doing so, it examines the extent to which Austrian institutions and practices share some of the weaknesses generally considered responsible for the European unemployment problem.6 This section also draws on the recommendations of the OECD Jobs Study for Austria (see OECD, 1997a, 1998a; and Appendix II).

Wage flexibility and differentiation

56. Austrian labor market institutions have been successful in achieving one of the highest degrees of aggregate real wage flexibility among industrial countries. Empirical studies indicate that a 1 percentage point rise in the unemployment rate would contribute to moderating real wages by 1–1½ percent in the short term and by nearly 2½-3 percent in the longer term (Table II-3). This restraining influence is much higher than in most other advanced countries, with the notable exception of Japan, and is believed to be largely responsible for the relatively stable level of employment and output in Austria and the fact that unemployment did not ratchet up as much in Austria as in the EU during recessions (see chapter I; and Pichelmann and Schuh, 1998). This favorable feature reflects the highly centralized wage-bargaining framework of the Austrian social-partnership system, which has generally emphasized productivity, international competitiveness, and general labor market conditions in assessing wage demands.7 But, as in Japan, the higher real-wage flexibility may also be related to the fact that the wage-formation system relies to some extent on tenure, particularly for white-collar workers, which implies a substantial cost for employees losing their jobs (OECD, 1997a).

Table II-3.

Measures of Aggregate Real Wage Flexibility in Industrial Countries 1/

(Millions of U.S. dollars)

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Sources: Layard et al. (1991); Nickel (1997); OECD (1997b); Roeger and Veld (1997).

Percentage increase (reduction) in real wages in response to a 1 percentage point fall (increase) in the unemployment rate

Measures derived from econometric estimations based on aggregate time series. The precise specifications and the estimation periods are detailed in the studies. The results are not perfectly comparable across countries as the specifications vary somewhat across them.

Aggegate measures by Nickel (1997) derived from the results of the microeconomic studies reported in Blanchflower and Oswald (1994).

Based on West Germany.

57. While centralized wage bargaining is often associated with less wage differentiation, owing to a higher emphasis on social equity considerations, the Austrian social-partnership system has also led to a relatively high degree of wage dispersion among sectors and companies (Guger, 1991; OECD, 1997a; and Pollan, 1997). Part of this variability may reflect differences in the sectoral composition of the work force by tenure, age, and skills. In addition, there are indications that the sectoral wage structure has been rather stable over the years and that the wage dispersion reflects, in large part, institutional factors such as the source of ownership—public or private—and the degree of exposure to international competition, rather than different productivity trends.

58. A wider wage dispersion appears to have become more important in recent years in order to reorganize work in an environment of intense structural changes prompted by rapid technological progress and higher foreign competition as well as to expand employment in the private services sector (Siebert, 1997). In that respect, one key challenge for Austrian institutions is to promote a more flexible wage structure between and within companies, while preserving the existing high aggregate real-wage flexibility. While bargaining practices have moved somewhat in that direction in recent years (see section D), the introduction of formal “opening clauses” allowing adjustments of wage and working conditions to the requirements of individual enterprises would further help to reach that objective (OECD, 1997a).

Direct labor market rigidities

59. Until recently, Austria appeared to have one of the strictest labor market regulations among industrial countries (Table II-4). International comparisons indicate that the level of employment protection is relatively high in Austria, particularly for older workers. Although there is some disagreement on the precise impact of employment protection legislation on labor market outcomes (see OECD, 1994; and Jackman et al., 1996; or Blanchard and Katz, 1997, for different views), strict employment protection legislation is believed to raise the effective cost for firms of adjusting their level of employment, and can slow down labor reorganization (including new hiring) within firms and the realization of productivity increases.

Table II-4.

Labor Market Rigidities and Incidence of Part-Time Employment

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Source: OECD (1994).

Indicators computed by the OECD for employment protection legislation during the late 1980s and early 1990s. The rankings increase with the strictness of legislation.

Indicator of the strictness of protection against dismissals in 16 industrial European countries (OECD, 1994).

Indicator of employment protection legislation for 21 industrial countries based on different sources (OECD, 1994).

Indicators of the overall strength of labor market legislation, including for working time, fixed-term contracts, employment protection, minimum wages, and employees’ representation rights (OECD 1995, from Nickel, 1996).

Part-time unemployment defined as usually working less than 30 hours per week.

60. The incidence of flexible work arrangements also used to be low in Austria. Until 1997, hours worked were limited by rather strict legislation—usually reinforced by collective agreements—and work at night and in shift-type arrangements on a regular basis still covered only about 10 percent of the labor force (OECD, 1997a). Similarly, most employment contracts have unlimited duration, as strict regulations have considerably slowed the expansion of fixed-term contracts, which still covered only 5 percent of employees in the mid-1990s. According to this legislation, fixed-term contracts that are extended or renewed automatically become unlimited in duration, unless justified by specific economic or social conditions.

61. Resort to part-time work is also smaller in scale than in some other industrial countries, but this has been attributed to a comparatively lower incidence for men than for women (see Table II-8). As there is no major legislative hindrance to its expansion, this situation could reflect the structure of the Austrian industry and may be related to some aspects of the tax and benefits system (Biffl and Pollan, 1995; and OECD, 1995 and 1997a). But it could also be partly explained by the widespread use by Austrian firms of work contracts with self-employed persons, as, until last year, such contracts were not subject to employers’ and employees’ social security contributions.

Welfare benefits system

62. The development and structure of the social security benefits system is known to be a key determinant of labor market incentives, including those for work effort, wage claims, job search, and labor force participation (Layard et al., 1991; Nickell, 1997). As in most other EU countries, the Austrian social security system is characterized by generous unemployment and welfare benefits that have been associated with undesirable unemployment and poverty traps. In addition, legal provisions and financial incentives in favor of early retirement and disability pensions have been responsible for the low labor force participation rate of older workers.

63. The Austrian unemployment benefits system comprises unemployment insurance (UI) benefits for 20 to 26 weeks and, on exhaustion of these benefits, unemployment assistance (UA) of almost unlimited duration, while social assistance (SA) is granted to low-income households, including the unemployed. Even though statutory replacement rates for UI—at some 57 percent of net income for single-earner households at the average production worker’s level of earnings—appear lower than in most other industrial countries, unemployment benefits are exempted from social security contributions and the replacement rates rise substantially if one takes into account the combined tax and benefit system—particularly family allowances. Moreover, with a relatively high replacement rate for UA—of more than 90 percent of UI payments—and SA benefits, the combined effect of those replacement rates can be as high as 70-80 percent for some categories of workers, even after several years of unemployment (Table II-5).

Table II-5.

Treatment of the Unemployed in Industrial Countries

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Sources: OECD (1996 and 1997b).

OECD estimates. See OECD (1996 and 1997b) for country-specific definitions and period.

Excluding social assistance.

Including social assistance.

Includes expenditures for public employment services and administration, labor market training, youth measures, subsidized nemployment, and measures for the disabled.

Includes expenditures for unemployment compensation and early retirement for labor market reasons.

64. The disincentive effects for job seeking are particularly strong for older workers and the lower paid. Older workers generally benefit from higher statutory replacement rates, and since wages are heavily dependent on tenure and age, once unemployed, they would tend to face employment opportunities at wages substantially lower than those used for calculating their benefits (OECD, 1997a). Means testing of UA and SA—with benefits drastically reduced once the income of households (or even extended families) rises above relatively low thresholds—also contributes to unemployment and poverty traps for some categories of low-skilled workers, with strong disincentives to take casual or part-time jobs.

65. While recipients of unemployment benefits must be seeking work, the practical requirements for active job-search and work acceptance as well as the monitoring and enforcement of these conditions by employment offices are not particularly strict. This feature is strikingly illustrated by the extreme seasonal fluctuation of registered unemployment in Austria, with seasonal workers, in particular from the tourism and construction sectors, accounting on average for about one-third of total unemployment. Contracts between employers and employees in these sectors seem indeed to be tailored to take advantage of the UI system at times of seasonal slack, thereby leading to an implicit government subsidy to these sectors.

66. Generous provisions for early retirement and disability pensions contribute to the low labor force participation rate of older workers in Austria. Until the adoption of tightening measures in 1996 (see section D), the general early retirement scheme on account of old age provided full pension entitlement for persons having worked 35 years and being 60 years or older for men and 55 years or older for women. Disability pensions are formally granted on the basis of medical criteria alone, but there are widespread indications—including from household surveys—that such pensions are only loosely connected with the health status of retirees. In addition, until recently, older workers becoming unemployed or with a reduced work capacity, benefited from easier access to early retirement and disability pensions.

Labor taxes

67. Taxes and social security contributions have significantly increased since the early 1970s and amounted to 44 percent of GDP in 1997, a relatively high level among industrial countries (OECD, 1998a). The rise in the tax burden has also been accompanied by a disproportionate increase in social security contributions, which accounted for more than one-third of total government tax revenues in recent years. With social security contributions and income taxes at some 45 percent of gross wage costs, Austria has one of the highest direct tax burdens on wage earners (OECD, 1998a). The size of the tax wedge is even higher when indirect taxes are taken into account, as the Austrian government also raised these taxes to contain the expansion of social security contributions over the years.

68. Although the Austrian tax system imposes a relatively high aggregate effective tax burden on labor, the latter is not out of line with that of some other European countries and tax wedges facing individuals seem to be generally smaller for standard categories of workers. Direct tax wedges for workers with average incomes are higher in Austria than in Japan, the United States, and the United Kingdom, but—despite a significant rise since the late 1980s—they remain lower than in most other EU countries, with the exception of Greece, Ireland, Portugal and, to some extent, Spain. These tax wedges are smaller in Austria than in France, Germany, and Italy, particularly for workers with lower incomes and those with families and children, and they remain below those in the Netherlands, which have been substantially lowered since the early 1990s (see OECD 1997c; and Figure 19).

Active labor market policies and labor force skills

69. While generous social benefits are believed to be partially responsible for the high rates and persistence of unemployment in the EU, suitable active labor market policies (ALMP) can help to alleviate the problem, as illustrated by the apparent success of the Swedish model until the 1990s (Layard et al., 1991; OECD, 1994). Given the low levels of unemployment, particularly for youth and long-term unemployment, active labor market policies have remained relatively modest in Austria. Out of a total of 1.8 percent of GDP of public expenditures devoted to labor market programs in 1996, only 0.4 percentage point was spent on active labor measures, a proportion lower than in most other industrial countries (seeTable II-5). Until recently, those measures largely consisted of training for unemployed adults and those at risk of unemployment (about one-third of the total), while subsidized work schemes and specific measures for job-market entrants remained quite limited (OECD, 1997b). Existing studies evaluating training programs point to variable degrees of success. Despite greater flexibility in recent years, the market for training provision has not become very competitive, as adult training services continue to be dominated by trade unions and the employers’ association.

Figure II-8.
Figure II-8.

Austria: Tax Wedges on Wages

Citation: IMF Staff Country Reports 1998, 107; 10.5089/9781451802313.002.A002

Source: OECD, Tax/Benefit Position of Employees 1996-96 (1997); and staff calculations.1/ Employees’ social security contributions and personal income tax less transfer payments.2/Employers’ social security contributions.3/ Employees’ and employers’ social security contributions and personal income tax less transfer payments, in percent of gross wage earnings plus employers’ social security contributions.

70. With the exception of university qualifications, Austria stands out as a country with a well-qualified labor force, owing to a diversified school curriculum and a well-developed secondary vocational and apprenticeship system. Early school leaving is very limited, as the vast majority of younger workers complete secondary education or undergo vocational training. The level of educational attainment has also risen substantially, with about two-fifths of the cohort of 18-19 year olds enrolled in higher education and three quarters of those reaching 15 years (the age limit for compulsory schooling) moving on to vocational studies and about one half of these into an apprenticeship program. The apprenticeship system, however, has come under pressure in recent years, owing to the narrowness of the skills offered, the fact that it did not provide access to all trades, particularly modern ones with a high technological content, and the relatively high costs of training for firms.

71. The university sector has been under the most intense pressures for reform in recent years. With long periods of study and high rates of non-completion, universities have provided the labor force with a relatively low number of graduates. Until recently, the system was also excessively rigid with respect to fields of study, curriculum, and the duration of studies. In addition, universities used to absorb the bulk of public funds for research and development (R&D), but their R&D activities were insufficiently related to the structure and needs of the economy. Thus, the contribution of universities to the innovation potential of the economy has been lower. Against this background, the recent development of polytechnic schools (Fachhochschulen) has provided another avenue of tertiary study for acquiring high-quality technical training beyond the apprenticeship level. Admission to those schools has been rather strictly regulated, however, and, until recently, their curriculum was limited to niche courses (OECD, 1997a).

Product market competition and the business environment

72. Other factors that may have contributed to the low job-generating capacity of the Austrian economy in recent years include a relatively low level of product competition, a highly regulated business environment, and a rather low technological innovative capacity. The Austrian economy has long been characterized by a pervasive lack of competition, associated with a high share of public enterprises in the economy and tight regulations concerning trades and professions. This has led to higher product prices than in more open economies in some sectors, particularly in network industries such as telecommunications and energy, and may have slowed down structural change and the expansion of non-government services.

73. Weaknesses in the business climate are also reflected in a low rate of business startups. This feature may reflect a lack of risk-taking entrepreneurial behavior, but is also related to the relatively strict administrative and regulatory burden on enterprise creation, a widespread provision of private service substitutes by local governments and Länder, a strict and penalizing bankruptcy law, and other types of regulations, such as restrictions on shopping hours. As for the apparent lack of innovative capacity, it may have resulted from the low level of R&D expenditure undertaken in the business sector and a lack of access for small and medium-sized firms to venture capital, as such markets have remained somewhat underdeveloped in Austria (OECD, 1997b; see also chapter IV).

D. Recent Labor and Product Market Reforms and Policies

74. In the face of these pressures, the Austrian government and the social partners have adopted in recent years various measures in order to improve the job-generating capacity of their economy and foster greater labor utilization. Some of these measures were implemented in connection with the fiscal consolidation program for 1996-97 and the 1997 pension reform, but most of them also reflected the social partners’ recognition of the need for greater labor efficiency.

Wage and labor cost flexibility

75. In response to higher competitive pressures and rising unemployment in recent years, the social partners have spontaneously allowed some additional wage flexibility and differentiation at the enterprise level. The traditionally high wage drift (the difference between centrally negotiated and actual wages) steadily declined from above 25 percent in the early 1980s to below 20 percent in recent years. There have also been reports of work councils in small and medium-sized enterprises accepting downward adjustments to centralized wage agreements, even though this is formally prohibited by law (see Appendix III). The unions and their federation (OGB) have not challenged such arrangements in court.

76. In the metal industry—Austria’s largest industry and a leading sector for wage bargaining—there was a new, albeit modest, initiative to allow for greater wage differentiation in 1997. While the collective agreements for 1997-98 envisaged a general wage increase of 2.1 percent, agreements at the company level could stipulate a uniform 1.9 percent increase for all workers, with an additional 0.5 percent of the wage bill distributed on the basis of merit only. Similarly, the union for white-collar workers agreed to shift the lifetime earnings profile in favor of younger workers. Although these developments indicate some progress toward greater wage differentiation—after an unsuccessful attempt in 1993—genuine opening clauses in the centralized agreements, which could help firms in difficult situations, have not yet been introduced.

Work arrangements and practices

77. The 1997 amendment of the working-time law, which eased the rules for time averaging and payment for overtime, has been one of the most notable changes achieved recently toward more flexible working arrangements. In particular, the new law increased from eight weeks to at least one year the period during which the maximum allowable working time would be calculated, providing considerably more operational flexibility for most enterprises, especially for those in sectors exposed to sharp seasonal fluctuations The new law also paved the way for an agreement in the metal industry, which introduced “working time accounts” allowing the number of hours worked to vary from 32 to 45 a week (with additional daily and annual limits) and a more flexible and progressive mode of calculating the payment for excess hours worked. The construction industry has introduced work-averaging, thus lowering the length of seasonal unemployment, and similar agreements could be introduced in other sectors in the future. A general prohibition against night-work for women was also lifted in early 1998.8

78. The number of people with casual jobs and part-time work rose substantially in 1997, accounting for most of the ½ percent increase in dependent employment. As part of the pension reform adopted in November 1997, however, the government decided to make most casual jobs and all forms of self-employment liable for social security contributions, with employers being required to pay and workers having the option to contribute and be covered by social security benefits. While this measure fosters a more equal social coverage of workers, it should contribute to raising the wage costs of casual jobs and could therefore lower the demand for such jobs, particularly for workers with lower skills. This decision may also have adverse consequences for the long-term financial sustainability of the pension system.

Taxes and benefits

79. The government has adopted several measures to raise the effective age of retirement and work incentives for older workers. As part of the 1996-97 fiscal consolidation package, the incentives for early retirement have been markedly lowered in the public sector (with a full pension available only from age 60 for men) and significantly reduced in the private sector, as the number of months of contributions necessary has been increased from 420 to 450 months (while time spent in education has been excluded) and early retirement on account of long-term unemployment has been eliminated.9

80. Over time, the 1997 pension reform will further reduce these incentives. The earnings base from which pension entitlements are computed will be gradually increased by 3 years to the 18 best-paid years of a person’s work history. In addition, for each year of early retirement the pension will be cut by 2 percentage points up to a maximum of 10 percentage points. The eligibility conditions for early retirement on account of reduced capacity to work have also been tightened, the required contribution period was extended from 36 months to 72 months, and a minimum period of sickness necessary to qualify (20 weeks) was introduced.

81. Following the tightening in eligibility conditions, the number of new early retirement pensions declined in 1997, but this development has also reflected a clear substitution effect as the number of new disability pensions appears to have risen, despite the stricter controls that were introduced in 1996. In addition, the reductions in pensions for early retirement that are envisaged in the new pension reform fall short of the actuarial deductions that would seem necessary to completely eliminate the remaining incentives for early retirement (see chapter III).

82. With a view to encouraging employment of older workers, the government introduced a bonus-malus system in 1996. This scheme provides firms with additional financial incentives to employ workers above the age of 50—through a reduction of social security contributions—and contains a special system of fines for their dismissal. So far, the employment effect of this bonus-malus system has been modest. A further reduction in the incentives for early retirement would improve the chances of success for such subsidies.

83. The 1995 and 1996-97 fiscal packages also contained measures tightening the conditions of access to, and the amount of, unemployment and other social benefits, which should have strengthened the incentives for job seeking by the unemployed. Among them, the qualifying period for unemployment benefits was increased from 26 to 28 months and the earnings base for the calculation of benefits was raised from 6 to 12 months. A special scheme that entailed higher unemployment benefits for older workers (up to 25 percent for men above the age of 59 and for women above 54) was eliminated. In the meantime, the conditions of access to special assistance for long-term unemployed persons have been tightened and the unemployment benefits for higher income workers as well as the amount of family allowances have been somewhat lowered.10

84. The government envisages a major tax reform for 2000, with the aim of reducing the relatively high tax burden on labor. A special commission is expected to present its recommendations by the end of 1998, but the authorities plan to achieve this reduction in large part by shifting taxation toward capital (by basing taxation more broadly on gross value added rather than labor income) and environmental taxes. While this reform may be difficult to implement—owing in particular to EU membership and the mobility of capital—the evidence from other industrial countries suggests that the gains in employment from such a shift should not be overestimated (OECD, 1998a). In particular there is now a wide recognition that for industrial countries—exposed to a high international mobility of capital as contrasted with that of labor—the total tax burden (the sum of social security contributions, personal income taxes, and indirect consumption taxes), more than the payroll taxes per se, can limit the demand of labor in the long term (Lindbeck, 1996; Nickell, 1997).

Active labor market policies

85. The Austrian National Employment Action Plan, designed along the guidelines adopted by the EU in December 1997—with a view to promoting employability, entrepreneurship, adaptability, and equal opportunities—envisages a significant increase in public expenditure on labor market measures—from S 3-4 billion to S 7-8 billion a year by 2002—and an increased emphasis on active labor market policies. The government intends, in particular, to provide additional training schemes for the unemployed, expand in-work schemes for workers at risk, and improve the job placement services. As a result, the number of ALMP beneficiaries is expected to double in the medium term.

86. The government has also adopted several schemes to encourage new forms of work sharing. After three years of continuous work, workers who qualify for study leave can now receive income support from the AMS for up to one year. Workers on non-educational leave may also receive such benefits when their employers hire unemployed persons during a period between six months and one year. In addition, workers can obtain bonuses when they reduce their work time in connection with the hiring of an unemployed person. While these measures could prove useful, the experience of other countries suggests that such schemes, if insufficiently targeted, can entail significant deadweight costs so that their overall effect on employment may be modest.

Other areas

87. Notable progress has also been achieved in other areas of structural reform. In the education sector, the curricula for some apprenticeships have been revised, new job profiles have been defined in the service sector, and the possibilities for apprentices to make the transition to the tertiary polytechnic schools have been widened. The training cost for apprentices for firms has been lowered as the AMS is now responsible for their health insurance contributions and the restrictions on their working time have been eased. Meanwhile, the social partners have agreed on a new university law which should help to shorten the periods of study. The government also plans to introduce additional apprenticeship programs and shorten the time requirement for introducing new qualification profiles in the near term

88. Important measures have been taken to improve the degree of product market competition and improve the business environment. The new regulation for trades, which was introduced in 1997, has broadened the definition of registered occupations and cut their number by nearly one half—from 153 to 84. The conditions of access to some of the regulated trades have also been relaxed. Shop opening hours were extended in early 1997, but the impact on employment seems to have been relatively modest so far, inasmuch as new restrictions have been imposed on the establishment of large shopping centers.

89. Some progress has been achieved in introducing greater competition in the network industries. A new telecommunication law has been adopted and the post and telecommunications agency has been split into its three component parts which have been incorporated to prepare them for privatization. The negotiations to liberalize the electricity sector in order to conform to the EU directive have also been proceeding, albeit at a slower pace owing to the complexity of the situation reflecting vertical integration (generation, transmission, and distribution) and widespread public ownership at all three levels of government. In the financial sector, the government has started to withdraw from ownership of banks with the sale of Creditanstalt and has sold shares in Bank of Austria (see chapter IV).

90. Other measures intended to improve the business environment include the reorganization of the Vienna stock exchange, the revision of the insolvency and restructuring laws, and a considerable reduction of the administrative approval time for business start-ups. The government has also prepared two special programs to promote exports and enhance the creation and diffusion of technological know-how. Other recent measures affecting the labor market are detailed in Appendix II.

91. In its National Employment Action Plan, the government envisages further measures to reduce the administrative burden on enterprises, financial and practical measures to facilitate business start-ups, measures allowing better access to capital for small and medium-sized enterprises as well as measures to promote greater female participation in the labor force

E. Conclusion

92. This chapter has reviewed the performance of the Austrian labor market and the recent policies by the government and the social partners. While the performance of the Austrian labor market appears rather good, especially by continental European standards, there have been increased signs of stress in recent years, including weak employment growth in the business sector, low labor force participation for older workers, and growing signs of unemployment persistence. In response, the social partners and the government have adopted a number of welcome structural reforms, but further measures would be needed to improve the job-generating capacity of the economy, sustain the low level of unemployment—particularly for youth and long-term unemployment—and flexible labor market flows, and strengthen the degree of labor utilization for older workers. The OECD Jobs Strategy for Austria has recommended a series of measures that would also help the Austrian labor market to meet the challenge of increased globalization and a more competitive international environment.

93. Such measures would include, among others, the introduction of genuine opening clauses in sectoral agreements in order to allow greater wage differentiation at the firm level; an easing of job-security provisions and of restrictions on fixed-term contracts, and further measures toward greater working-time flexibility; a further reduction in incentives for early retirement and a tightening of eligibility for disability pensions; cuts in unemployment benefits to seasonal workers, in particular in the tourism industry; and more generally, measures to reduce the distortions arising from the system of tax and social benefits with the aim of enhancing job search and work efforts, reducing reservation wages, and eliminating unemployment traps, particularly for older workers. Further measures toward greater labor force skills, increased product market competition, and a more favorable business environment would also be useful.

94. As for most other industrial countries, there are clear indications in Austria that some aspects of these reforms are complementary and that their beneficial impact on employment would be higher if implemented in a comprehensive form (see, for instance, OECD 1994, 1997d and 1998b; Lindbeck, 1996; or Coe and Snower, 1997).

APPENDIX I Differences in Employment and Unemployment Measures in Austria

95. Measures of employment and unemployment from administrative data and labor force surveys differ to some extent in nearly all countries, but they generally point to similar developments over time. This is not the case in Austria, where this divergence has been substantially widening since the early 1980s, with significant complications for the analysis of labor market trends.

96. Based on unemployment data from the Labor Market Service (AMS) and social security registrations for dependent employment—and WIFO estimates for self-employment—the registered unemployment rate increased from about 1½ percent in 1980 to nearly 6½ percent of the total labor force in 1997. The best-known definition of unemployment in Austria, defined as the ratio of registered unemployment to the dependent labor force only, was slightly above 7 percent last year. Meanwhile, however, the internationally standardized unemployment rate, based on a labor force survey and a new microcensus since 1994, rose only marginally to some 4½ in 1997 ((Figure I-A1).

Figure A1.
Figure A1.

Austria: Different Measures of the Unemployment Rate

Citation: IMF Staff Country Reports 1998, 107; 10.5089/9781451802313.002.A002

Sources: WIFO; OECD, Economic Outlook and Labor Force Statistics.1/ Based on administrative data; registered unemployment from Labor Office; dependent employment from social security; and WIFO estimate for setf-emptoyment2/ Based on labor force survey; standardized unemployment and employment from microcensus as of 1994.

97. The differences between administrative data and those from the microcensus are mostly due to different statistical definitions, since the former are based on an income concept while the latter rely on the standard internationally accepted labor force concept (Biffl, 1997) The number of unemployed people registered by the AMS exceeds the number measured by the microcensus by a large margin, but this difference mostly reflects workers who have been laid off only temporarily, e.g., seasonal workers, and—to a lesser extent—workers employed in casual jobs, both of whom are included in the former but not in the latter (Table I-A1). Conversely, the measure of registered employment turns out to be significantly lower than that of the microcensus, as it excludes casual workers without social security coverage and indicates a much lower estimated number of self-employed workers.

98. Transposed into the standard labor force concept, the registered unemployment rate turns out to be much closer to the standardized unemployment rate derived from the microcensus. The growing divergence between the two measures thus seems to be largely associated with the rise in casual forms of work, as the number of individuals working on a contract basis or in other forms of casual employment has substantially increased since the early 1980s. However, there are also significant differences in the results from the microcensus and those from a full census that is carried out every 10 years. These differences cast doubts on the sampling properties of the former and suggest that it could be underestimating the level of unemployment.

Table A1.

Austria: Employment and Unemployment Based on Administrative Data and Microcensus, 1995

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Source: Biffl (1996).

Registered unemployment from Labor Office; dependent employment from social security; and WIFO estimate for self-employment.

Microcensus labor force survey by OSTAT.

Seasonal workers mostly.

APPENDIX II Austria: Implementing the OECD Jobs Strategy—An Overview of Progress

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Source: OECD (1998a)

APPENDIX III The Social-Partnership System and the Wage-Bargaining Framework

99. Social concertation among the representatives of labor and capital has had a decisive role in the formulation of labor market and economic policies in post-war Austria. This social partnership is formed by a complex web of institutional arrangements that is rather unique. On both sides of the labor market, there is a parallel group of self-governing bodies called chambers with compulsory membership (Kammer) and more traditional voluntary organizations, such as trade unions and industrial associations.

100. The chambers are financed mainly through contributions on the wage bill. The different chambers are hierarchically organized in two federal chambers for workers and employers—while farmers have a separate chamber. The chambers represent their members in industrial and administrative committees and are consulted by the government on draft bills.

101. The Austrian federation of trade unions (ÖGB) consists of 14 different unions that are organized along industrial sectors, with the exception of the Union of Salaried Workers which represents all white-collar employees in the private sector. Union membership declined from 47 percent in 1980 to 42 percent in 1993 (excluding retired members). Individual trade unions have some autonomy, but the concentration of authority in the OGB appears higher than in most other industrial countries.

102. The institutional centerpiece of the social partnership is the Parity Commission for Wages and Prices, in which the federal chambers, the government, and the OGB participate. Four subcommittees are responsible for the centralized surveillance of sectoral wage agreements, price developments and competition policy, wider issues of a social and economic character, and international issues.

103. Wage bargaining is organized at both a centralized level and at the enterprise level. While individual trade unions negotiate their own settlements, the OGB formulates general guidelines for wage claims that generally take into account aggregate productivity growth and inflation, as well as labor market conditions and the external balance of the economy. Despite the large number of wage contracts, wage bargaining at the central level appears quite coordinated, with informal forms of coordination and the effective leadership of some unions. In particular, the metal workers union tends to set the tone for collective agreements in other sectors. Three of the largest negotiations cover about one-half of the dependent labor force; and overall, 95 percent of wage and salary earners are covered by collective agreements.

104. A second round of negotiations also takes place at the enterprise level, between management and the work council, on additional wage increases and other work aspects. These negotiations deal, in particular, with effective wage increases over and above the minimum wage rates negotiated at the central level. While enterprise-specific wages below those stipulated in the collective agreement for the sector concerned are illegal, sector unions and the ÖGB have reportedly refrained from appealing lower wage bargains in the labor courts in a few recent cases.

105. The social partnership and the wage bargaining framework are described in greater detail in OECD (1990, 1997a) and Biffl and Pollan (1995).


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Prepared by Antoine Magnier.


Appendix I presents in greater detail the different measures of unemployment—including the traditional national indicator based on registered unemployment and the dependent labor force only—and discusses the reasons for their divergence.


Social security registrations suggest that, on average, one worker out of four changes jobs every year, while evidence from the labor force survey would put the job turnover rate at only one out often. With seasonal workers responsible for about one third of registered unemployment, cumulated monthly outflows from unemployment still amounted to 720,000 in 1997.


In recent years, less than 10 percent and 20 percent of men and women, respectively, remained employed in the year preceding their statutory retirement age.


Citizens of other EU countries are exempt from these restrictions. However, their number (some 25,000) has remained small in comparison with labor from non-EU member countries.


See, for instance, Layard et al., 1991; Bean, 1994; and OECD, 1994; and the more recent contributions of Lindbeck, 1996; Blanchard and Katz, 1997; Nickell, 1997; and Siebert, 1997.


The main institutional features of the social-partnership and the wage-bargaining systems are described in Appendix III


Sunday work remains generally prohibited in Austria.


Incentives for later retirement have been also strengthened.


The latter were, however, increased again by the family support package adopted in early 1998.

Austria: Selected Issues and Statistical Appendix
Author: International Monetary Fund