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Chapter 3: overcoming labour market segmentation.

Austria has an inclusive and well-performing labour market which has traditionally secured high aggregate employment rates and well-balanced and competitive wage levels. Success is also due to strong human capital formation in the education system, with a high share of graduates in the labour force with at least upper secondary education, notably through high quality vocational training, even if enrollment in tertiary education is lower than in other high-income OECD countries. This system continues to deliver good outcomes in the core labour market of prime-age skilled workers, but has recently shown growing weaknesses in more marginal segments involving older, less-skilled, and less-well educated young and immigrant workers. Employment of mothers with small children is also traditionally low. This chapter describes the new challenges raised by the emerging segmentation in the labour market and authorities' efforts to strengthen both labour supply and demand in the vulnerable segments. Against these policy objectives, measures which may lead to strong increases in minimum wages, in minimum social incomes, and in incentives for early retirement could prove counterproductive. The chapter offers further policy recommendations, including in the education system, in order to overcome any entrenchment in labour market segmentation.

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Austria has a strong labour market performance with comparatively high employment and low unemployment. The employment rate of the working age population is almost 70%, against EU15 and OECD averages of 65%. The unemployment rate is about 5 1/2 per cent, against 8% in the EU15 and 7% in the OECD as a whole. (1) Labour mobilization is therefore an area of strength of the Austrian economy and contributes to its high GDP per capita performance. (2)

However, labour market performance has not improved over the last decade (Figure 3.1). Unemployment has worsened slightly, while it declined in the rest of the OECD. There are signs that this relatively subdued performance of the recent period may reflect shortcomings in the policy environment. A recent re-assessment of the OECD's "Job Strategy" identified Austria among Member countries where the relative stagnation of labour market performance was predictable in the light of prevailing policies and institutions. According to this study the policy framework has fallen short of more reform-minded countries in two main areas: i) persistingly high labour tax wedges, which were substantially reduced in other high wedge countries; and ii) slow product market reforms which hindered output growth and labour demand in highly regulated sectors. According to econometric estimates by the OECD, these two factors explain a large part of the relative stagnation of Austria's employment performance (Figure 3.2).

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Austria's high average employment rate is in fact the result of distinctly superior performance in a large core segment of prime age male and female workers. The majority of these workers are well-educated, with at least upper secondary education. In contrast, the older workers, the less-well skilled, the immigrants and the new entrants to the labour force clearly do less well. This divide between a well-performing core and weaker segments in the labour market periphery is common in all OECD countries, but seems to have become deeper in Austria than in the more reform-minded countries (Figure 3.3).

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The following sections review the employment performance of different groups of workers and discuss the key factors contributing to outcomes in the core and more peripheral areas. The chapter then reviews recent government policies to upgrade the weaker segments by enhancing work incentives and workforce skills in order to increase labour supply, and by reducing employment costs and enhance job creation in order to increase labour demand. The latent potential for further job creation in the service sectors is also discussed. The chapter concludes with a number of policy recommendations.

Employment of skilled prime-age workers remains vigorous

The employment rate of prime age male and female workers between 25-54 is clearly above OECD and EU averages, at remarkably high rates of 90% and 80% respectively, and they have remained at these high levels throughout the past decade. Correspondingly, their unemployment rate remained well below OECD and EU averages, with the unemployment rate of male workers between 25-54 at 4% and of female workers at 5%, after a slight increase through the past decade. This small increase in the unemployment of prime age women arose partly from a substantial acceleration (of 10 percentage points) in their labour force participation between 1995 and 2005, while for male workers it mainly reflects job losses in the relatively narrow group of less-skilled workers. Few OECD countries have succeeded in consistently preserving such a high rate of average labour mobilization of their prime-age population and three key factors seem to account for this performance: (3)

* Skill level. Among OECD countries, Austria has the highest proportion of workers who have completed upper secondary education. (4) Most of them have graduated from well-resourced vocational schools and the majority (80% of all vocational school graduates and 50% of all workers) completed formal education with lengthy practical apprenticeship programmes. Only a limited share of vocational school graduates proceed to tertiary education (5) but the skills acquired in the upper secondary level have generally been highly responsive to labour market needs as of now. (6) Prime age workers also receive significant adult training support. (7) Due to these robust basic and updated skills, they are easily re-employable when they lose their job. Only one jobless person among five remains unemployed after a year of search, as against one among two on average in other EU15 countries--a remarkable difference.

* Effective wage bargaining. Austria has genuinely non-confrontational wage bargaining institutions centered on "social partnership". (8) These have proven particularly effective to date in cleating the prime labour market. Employment protection legislation (EPL) is not rigid, (9) and yearly negotiations between employer and worker representatives provide inclusive procedures for minimizing conflicts and adjusting wage and employment conditions to domestic and international economic circumstances. (10) Statutory wage agreements at branch level help settle wages according to each individual sector's international competitive position. These procedures have helped to avoid employment-unfriendly wage drift to date and have reduced the detrimental effect of high labour taxes on employment costs as workers appeared to bear a good share of the labour tax burden by accepting lower net wages. The system also provides for generous unemployment insurance for seasonal activities such as tourism, at low (and publicly subsidized) costs for employers and employees. A minimum wage is agreed in yearly branch negotiations for different occupations, implying hundreds of negotiated minimum wages, traditionally at affordable rates.

The new government established in January 2007 has in its programme the objective of raising all monthly minimum wages to at least 1 000 [euro]. By early 2007, about 50 occupations had minimum wages below 1 000 [euro] a month, and 20 occupations had minimum wages below 900 [euro] (the lowest minimum wages are for newspaper deliverers at 670 [euro] and pedicurists at 705 [euro]). About 2% of full-time working men, 7% of full-time working women and 3% of all wage earners were earning less than the proposed new minimum wage. (11) Nonetheless this initiative creates concerns because it will likely make the employment of the presently unemployed low-skilled even more difficult, and may put minimum wages on a more rapidly increasing path in the future. This may happen in particular if the ongoing shift to a national minimum wage puts it de facto on a centralised path. The authorities consider that the implications of the planned increase in the minimum wage will be very limited because: i) the small share of workers which will be directly affected are mostly located in service sectors, which are not exposed to international competition; ii) the wage-elasticity of demand is low for low-skilled workers, hence employment demand for them will not be significantly affected; and iii) there is no intention to politicise the minimum wage by excluding it from the social partnership process. Nonetheless, the government should pay attention to the risks. According to other OECD countries' experiences, concerns about poverty at work are best addressed with in-work benefits. The reduction of the very high tax wedge for low-skilled workers should also be a priority, in order to increase their prospects of employment. However, such wedge cuts should not be used as a relief (a sweetener) for minimum wage increases, because this would have only a temporary and one-off effect and the permanent fiscal cost of the measure would generate only short-term and temporary benefits.

* Stable employment relationships and flexible employment forms. Austrian workers have one of the highest average tenure rates in OECD economies (Figure 3.4). Wage flexibility has facilitated these stable employment relationships, while seniority has also gained more influence on wage determination than in other countries. Stable employment reflects flexible contracting between employers and employees (wage adjustments playing a more important role than quantitative adjustments in the labour market), notably in the many family-owned medium-sized enterprises, rather than regulatory constraints. Long tenures contribute to the accumulation of enterprise-specific human capital; however, as needs evolve, more flexible employment forms could also be introduced without social tensions (Figure 3.4, Panel D).

* As employment protection legislation is lighter than in many other OECD countries, and is determined by decentralized branch collective agreements as much as by law, issues of legal duality in employment contracts have until recently been less controversial in Austria than in many other OECD countries. However, as the new contract forms spread to more mainstream economic activities and tend to circumvent a number of standard provisions of labour law, collective agreements, pay schedules, and certain aspects of the social security system, they are giving rise to more concerns and even legal litigation (12) (Box 3.1).
Box 3.1. Challenges of new employment forms

So-called "atypical" forms of employment concern labour contracts other
than standard full-time wage earning agreements. They are not governed
by the standard provisions of labour law, are not subject to
compulsory branch collective agreements, and are not covered by the
full set of social security benefits. Participation in pension and
health systems is compulsory but not all new employment forms are
covered by unemployment and bankruptcy insurance and by individual
severance accounts (i.e. the new system of "portable" severance
benefits).

These forms of employment diffused more slowly and at a more limited
scale in Austria in the past than in other OECD countries. However,
their adoption has accelerated in the 2000s. According to certain
estimates, more than 30% of all newly created net job positions may
have involved this type of contracts in the most recent period. The
first two types of contracts concerned are common in OECD countries
with flexible labour markets, while the latter two categories seem
to find a particularly supportive market in Austria:

1. Fixed-term work: Temporary employment contracts are common
internationally but have been atypical in Austria until very
recently. Even seasonal activities such as tourism and construction
had limited recourse to them (as they have sector-specific employment
and unemployment coverage arrangements). While less than 10% of all
wage earning contracts were temporary in Austria in early 2000s, they
have diffused more rapidly in the most recent years.

2. Part-time work: Less than 5% of male workers were employed
part-time in 2005, much less than in other OECD countries. * However,
the rate is on the increase, notably after the liberalisation of the
retail trade sector. About 33% of all employees in retail trade now
work part-time.

3. "Manpower leasing": Workers are employed by manpower agencies
which "lease" them to customers. Customer enterprises manage the
leased labour force more flexibly, while supplier agencies run their
workforce across a portfolio of customers. This form of employment
represented less than 1% of the labour force in 2002, but has expanded
more recently. As an extreme example, one of the major car firms
raised the proportion of its "leased" workforce from 5% to 18%
between 2001 and 2006 (Biffl, 2006).

4. "Dependant self-employment (Scheinselbstandigkeit--paper
self-employment)": Firms hire legally "self-employed" workers for
specific tasks, on contracts which may be regularly renewed. The latter
have only one customer and are in the position of a dependant employee
in practice, without a durable contract. As self-employed, they are
exempt from employment protection and are not covered by bankruptcy,
unemployment and severance insurance. This type of employment
represented less than 1% of total employment in 2002 but seems to
have expanded strongly through the 2000s.

* Part-time workers represent 7.2% of total employment of men in EU15 in
2005, 15.3% in Netherlands and 12% in Denmark. Differences are smaller
for female workers except in Netherlands: 29.6% in Austria, 32.3%
in EU15, 24.9% in Denmark and 60.9% in Netherlands.


The new government declared its objective to "eliminate the current fragmentation of Labour Law and promote a single employment contract, on the basis of proposals by social partners". (13) This objective, sound and legitimate as an ultimate target, should however not undermine the job creation capacity of the economy in a new environment, by excessively reducing the flexibilities currently available to employers and employees.

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Groups at the margin of the labour market do less well

Contrasting with the strong employment performance of generally highly skilled prime-age workers, more peripheral groups in the labour market have been doing less well. These divergences in performances appear to have deepened through the past decade. They affect mainly the older workers, the less-skilled and the new entrants to the labour force, including immigrants.

Older workers have weak work incentives

Austria has one of the lowest mobilization rates among all OECD countries of workers aged between 55 and 64. The employment rate of this group has remained below one third throughout the last decade (14) while the OECD area average is 52% and the EU15 average is 44%. Austria's rate is only about one half of that in Sweden, Switzerland and Denmark, where it varies between 60 and 70%.

The low degree of employment of older workers is primarily caused by their massive withdrawal from the labour force: The labour force participation rate for men between 55-64 is only 40% and for women 20%. Generous early exit avenues from the labour force, and weakened incentives for active work due to pension, early retirement and disability benefit schemes underpin these withdrawals: 10% of the working age population receives either old-age, early retirement or disability transfers--the highest rate observed among OECD countries--and over one-third of those retiring in 2005 did so on "disability" grounds (Figure 3.5). Although benefit conditions for these schemes were tightened in the 2000s, notably with the important pension reform, (15) the impact will materialize with long lags as the stock of early retirees will not be affected by these recent changes. Early retirement loopholes also persist in the "heavy work" and disability schemes, (16) with the new government announcing in early 2007 a more comprehensive definition of "heavy work" giving access to early retirement. (17) The implicit rate of taxation on continuing to work after eligibility for retirement also remains high by international standards, even after the latest reform. Moreover, the new government intents to reduce the penalty on early retirement, by lowering the applicable discount rates on benefits. (18) Furthermore, a recent econometric assessment found that the rate of withdrawal from the labour force by age cohorts 55-59 and 60-64 goes beyond the "predicted" withdrawal rates (estimated econometrically on the basis of international data), revealing an additional social preference for early retirement in Austria. (19)

The higher long term unemployment rates observed in the labour force between 55-64--against lower average long-term unemployment rates in the economy (20)--reveal that the few job seekers above 55 also face limited demand for their services. Nevertheless the unemployment rate for older workers has decreased since 2001, and the "exit rate from unemployment to work" increased, mainly due to a package of targeted measures (reduction of non-wage labour costs, intensified activation). However the reintegration of older job seekers remains a challenge. Half of job seekers between 50-64 have been out of employment for more than one year. This results from a combination of high, seniority-based wages--which may exceed the productivity level of the older workers--and their human capital shortages. Further training opportunities are limited for the older workers, and early withdrawals from the labour market reduce incentives for adult training. (21) In these circumstances, a worker becoming unemployed after 50 has low prospects of returning to work, and only half of unemployed men and women above 50 exit unemployment through work. For workers between 55-59 the rate declines to 30% for men and 20% for women, and for those between 60-64 to 17% for men and 10% for women. (22) These figures confirm the very low prospects of becoming employed for the small minority remaining in the labour force after 55.

Demand for low-skilled workers is low

The unemployment rate of less skilled workers is on the increase in Austria, while several countries have succeeded in reducing it. The unemployment rate of workers with less than upper secondary education increased from 5% in 1994 to 8% in 2004, while in Denmark it decreased from 15% in 1995 to 8% in 2004, in Finland from 22% to 12%, and in Sweden from 10% to 7%. As discussed in Chapter 2, the recent regional integration with Central and Eastern Europe has accelerated the outsourcing and the relocation of many low-skilled jobs to these countries. Disadvantages in terms of employment costs and human capital shortages seem to accumulate in this labour market segment:

* Employment costs are high. The high labour tax wedges--mainly social security contributions and payroll taxes--bear particularly heavily on the employment costs of low-skilled workers. Despite decentralized settlement of sectoral and occupational minimum wages there are signs of downward wage rigidity at the low end of the labour market, which appears to put a floor on effective employment costs and may hinder market clearing. Austrian workers earning 67% of the average wage face one of the highest tax wedges in the OECD at about 42%, whereas for those in the lowest income bracket the wedge declines to about 36% but no international comparisons are available for this group (Figure 3.6, Panel B).

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* Skill shortages may be becoming further entrenched. The skills mismatch at the low end of the labour market may be worsening. The divergence of unemployment rates for workers with different educational backgrounds is an indicator. (23) Prime-age, young and older workers with only compulsory or low level secondary education such as polytechnics and special schools appear to face more difficulties in finding jobs. Also, on-the-job learning does not help dissipate these skill divergences: a worker with less than upper secondary education receives less than 200 hours of formal adult education in a typical working life, against more than 800 hours for a tertiary graduate. This gap is larger in Austria than in comparable countries such as Netherlands, Denmark and Finland.

The Beveridge Curve, the standard indicator of supply-demand mismatch in the labour market--even if its construction raises some technical difficulties in Austria (24)--appears to confirm this gap. Its recent shift hints at a higher structural rate of unemployment, reflecting most likely the decreased employability of low-skilled workers (Figure 3.7). Another indicator is the higher number of applications by employers for the immigration of "key personnel", while the unemployment rate and the average length of job search by new entrants to the labour market are on the increase. (25)

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New entrants to the labour force face more employment difficulties

Only 10% of lower secondary education graduates can find a job in the year following graduation, against 80% of upper secondary graduates and 70% of tertiary graduates. In aggregate, the employment rate of the youth (between 15-24) decreased from 60% in 1994 to 53% in 2005. During the same period it also decreased in the OECD on average, starting from a lower base but also falling at a slower pace, from 46% in 1994 to 43% in 2005. It stagnated for the EU15 as a whole at 40%.

Young Austrians' higher enrolment in upper secondary and tertiary education played only a marginal role in this decline of activity, even if the relatively long duration of university studies is a traditional factor delaying students' entry age to the labour force in Austria. Indeed, the labour force participation rate of cohorts at education age decreased only slightly, from 63% in 1994 to 59% in 2005. In contrast, there has been a troubling increase in unemployment. Austria is one of the OECD countries where the youth unemployment rate increased rapidly over the past decade, from 5% in 1994 to 10% in 2005, while it declined in comparable countries such Denmark and Finland where total unemployment was also falling. (26)

As in the labour market as a whole, educational records bear more and more on the employment performance of the youth. The labour market relevance of education streams vary strongly, not only between but also within different streams. Within tertiary education, demand for the graduates of the Universities of Applied Sciences is for instance very strong, while the graduates of certain social science departments of universities have clearly weaker prospects. There is also a deep difference in the market relevance of different types of vocational education, which vary highly in length and standards. The Berufsbildende Hohere Schulen (BHS) and the Berufsbildende Mittlere Schulen (BMS) graduates are highly rewarded in the labour market, while demand is more limited for the graduates of Polytechnische Schule. Graduates from secondary schools for children with special difficulties (Sonderschule) face very severe difficulties in the labour market. (27) These qualitative differences within both general and technical secondary education reflect on Austrian secondary students' performances in international academic tests (Box 3.2).
Box 3.2. Austrian secondary students' PISA performances

Austrian pupils' recent performances in international PISA tests
have somewhat undermined the public's perception of possessing an
excellent school system. Throughout the pedagogical community in
particular, these results appear to have caused a "small shock". (1)

Average performances are close to OECD averages but remain below
the (statistically) expected levels, after adjusting for the GDP
per capita level and per student spending on public education. They
are clearly below benchmark countries such as Denmark and
Switzerland (Figure 3.8).

[FIGURE 3.8 OMITTED]

Scores were highly dispersed among pupils and schools, with a
larger variation than in benchmark countries. One fifth of the
pupils could not reach beyond the so-called "Level 1" (the lowest
level in PISA tests). This disturbing underperformance was more
concentrated among boys.

Socio-economic factors such as parents' profession and income level
bore more on pupils' performances than in other countries.

Authorities stress that PISA tests gauge only parts of student
skills, hence of educational outcomes. They nonetheless recognize
that these results reveal a quality and efficiency problem in the
school system. Higher scoring countries' performances made them
aware in particular that "efficiency and equity do not necessarily
conflict in the school system". (2)

(1.) Austria is the PISA-participating country where the discrepancy
between actual and test sample populations is, however, the largest.
The sample is biased toward public school students (who nonetheless
represent the majority of the student population).

(2.) Austrian Ministry of Education comments to the OECD Secretariat,
December 2007.


There is wide evidence that pupils' social and primary school backgrounds bear on their academic performances and their capacity to join premium education streams. Austria is one of the OECD countries where the mobility of students away from their parents' social and school background is particularly low. These factors underpin a distinctly low upward mobility across generations and may entrench the handicaps of the disadvantaged groups. Among these, immigrant families experience a disturbingly persisting underperformance in educational achievements.

Few immigrants with weak backgrounds overcome labour market handicaps

Austria has a particularly large immigrant population, which has further increased in recent years. (28) Dependently employed workers of foreign origin increased by 12 000 in 2005 (+3.3% over 2004) and by 15 200 (+4%) in the first five months of 2006. The share of foreign-born workers in the labour force, at 13%, and that of workers with foreign nationality, at 9 1/2 per cent, are the second highest in the EU after Luxembourg. Immigrants from former Yugoslavia (30% of all immigrants) and Turkey (15%) are the two largest migrant groups and include mainly people with low skills. More recently, waves of immigration from Germany and Central and Eastern Europe raised the share of these regions in the total labour force. (29) These groups have stronger educational backgrounds and are generally employed in more skilled activities.

Despite their having migrated initially for productive activity, the employment rate of immigrants as a whole has become lower than that of the native Austrian population. Indeed immigrant groups face increased labour market pressures in all OECD countries, reflecting growing international competition from low wage competitors and off-shoring (which threatens primarily low-skilled manufacturing workers). Low-skilled immigrants remain employable in services but these prospects depend on the rate of growth of service sectors and a minimum degree of skills, such as language knowledge.

There are important differences in the human capital endowment of immigrants from earlier waves (from former Yugoslavia and Turkey) and the recent inflows from Germany and Central Europe. Differences in the educational and cultural legacy of these different groups are perpetuated across generations, as a result of the pre-school and school systems' limited capacity to promote human capital convergence. Immigrant families' children attend generally lower quality primary and secondary education streams and the PISA results of secondary school students of immigrant origin remain obstinately low across generations, and to a greater extent than in comparable countries (30) (Figure 3.9).

[FIGURE 3.9 OMITTED]

As a result of these educational gaps, the unemployment rate of foreign born workers between 15-24 was 16% in 2004 against 8% for the native population. The divide between the immigrant and native youth in Austria appears to be the highest among all OECD countries--even if countries such as Sweden, Denmark and the Netherlands also have high differentials. Moreover, the average school drop-out rate reaches 30% for the children of immigrant families, while it is only 8% for the native population.

One impact is the particularly high rate of "teenagers neither in education nor in employment" (the NEET rate). At 10% in 2003, this is significantly higher in Austria than in comparable countries, and has worsened since 1997. (31) It may be an early warning for the future employability prospects of the 15-19 cohort. Although NEET rates are not published separately for natives and immigrants, the latters' educational and employment achievements hint at their likely over-representation in Austria's high NEET rates.

At the other end of the immigrant labour force, top-skilled foreign workers--researchers, engineers, managers, etc.--form a group growing in size in Austria but, due to less liberal immigration policies than in other countries, appears to fall short of the more rapidly growing demand in the business sector. This is reflected in the number of applications for immigration permits in certain "key professions" exceeding available quotas. This restriction may restrain economic performance below its full potential.

The female labour force, which faces various labour market handicaps in most OECD countries, has a good aggregate performance in Austria. Female participation and employment rates are above EU averages, and female unemployment rates below them. Yet, the income gap between genders is intriguingly large, with a difference of 27% between the average annual income of men and women working full time. This difference probably reflects long interruptions in the careers of women rearing children and foregoing career development. Indeed, the gap between employment rates of women with and without children is larger than the EU average, as a result of an extensive maternity leave system, shortcomings in childcare facilities (32) and employment-discouraging features of the tax-benefit system for this group.

The particularly small inter-regional differences in labour market performance should also be noted. No region is marginalized in Austria in terms of employment performance. There was some recent acceleration of territorial divergences at the lower NUTS 3 level, (33) but the authorities reacted energetically with a new "Regional Growth and Employment Initiative". Austria wants to preserve the regional balance as a traditional strength.

The government has responded to performance gaps

The respective weights of labour market segments have evolved through the last decade. The share of skilled prime-age workers increased from 51% to 54% of the working age population from 1997 to 2004, while the share of prime age workers with less than upper secondary education fell from 15% to 11%. The share of older workers between 55-64 and that of young workers between 15-24 remained constant and comparable at around 18% each. Immigrant workers of first and second generation appear to account for a non-negligible share of less skilled and young workers. Overall, what can be termed "core" and "vulnerable" (non-core) labour market segments accounted for 66.3% and 33.7% of total employment in 2004, and for 65.5% and 34.5% of the labour force (Figure 3.10).

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Government authorities acknowledge that in order to improve Austria's aggregate labour market performance and converge with the best performing OECD economies, significant progress is needed with regard to the weaker segments at the margin of the labour force. In the 2000s, they have introduced a range of policy measures to strengthen labour supply by enhancing work incentives and skills, and labour demand by reducing employment costs and improving the job creation incentives of potential employers.

Policies to strengthen labour supply

Policy initiatives aimed at strengthening labour supply are being pursued through two channels: i) reinforcing work incentives of older workers, but also of other less active groups; and ii) upgrading the labour-market skills and the employability of the less well educated. The full range of recent measures devoted to strengthening labour supply and additional initiatives announced in the new government's programme are comprehensive. They are summarized in Annex 3.A1. This section provides a discussion of the broad lines of this new policy orientation.

Reinforcing work incentives

Important measures were taken to strengthen the work incentives of less active groups of working age. These concern chiefly, but not exclusively, the older workers of working age, i.e. those aged between 54 and 65. Other targets of the initiatives were second-income earners in households, and the long-term unemployed:

* Reforms in the old-age pension, early retirement and disability benefit schemes aimed at reducing the large numbers of working age beneficiaries of these schemes. The pension reforms 2003-2004 raised benefit deductions for early retirement to 4.2% per year, and the bonus for working beyond the statutory retirement age to 4.2% per year. The minimum age for early retirement was raised from 60 to 62 for men and from 55 to 60 for women in the short-term, and the statutory retirement age was raised to a uniform 65 for both genders. A subsidized old-age part-time employment programme was implemented to keep old workers in employment. (34) This scheme was reformed in 2004 in order to tighten access and inflows as well as stocks have decreased since then. These measures are all in line with earlier OECD policy recommendations. (35) Nonetheless, work incentives for older workers still remain weaker than in many OECD countries and additional reforms inspired by OECD best practices should help achieve further progress in the mobilization of the elderly (Box 3.3). In this respect recent decision by the Parliament to cut the discount rate for early retirement by half (from 4.2% to 2.1% per year of early retirement) will decrease work incentives.
Box 3.3. OECD recommendations for the further activation of the elderly

An in-depth OECD report in 2005 investigated the principal
challenges faced in relation to population ageing and the
employment of older workers in Austria. * As a result of declining
mortality, and persistently low fertility, the share of the
population over age 65 is projected to double by 2050 and the
working-age population could decline from 2018 onwards. The decline
in labour supply will lower economic growth while public social
expenditures will continue to grow. The report stresses that the
authorities have become more aware of these challenges since the
mid-1990s, and the 2000 pension reform is the most important sign
of change in the policy stance. Other measures have also been taken
to improve employment opportunities for older workers, including
incentives for employers to retain and hire older workers and
efforts by the Labour Market Service to improve the employability
of older workers. Despite these reforms, attitudes of employers and
employees are changing very slowly and existing pathways into early
retirement are still used extensively. Many Austrians continue to
withdraw from the labour force well before reaching the statutory
or even the early retirement age.

Recommendations for further reform

A comprehensive approach is needed to encourage older workers to
continue working longer. The pension reform needs to be
complemented by a re-design of the disability pension scheme. This
is particularly important as one in two older men and one in three
older women leave the labour force on grounds of disability. New
active labour market policies are also required to enhance the
employability of older workers. OECD puts forward the following
policy recommendations:

** Adjust the retirement age in line with demographic developments.
As large increases in life expectancy are likely, the statutory and
minimum age of retirement should be automatically adjusted.

** Ensure that disability pensions are only used for people unable
to work. Currently, workers over 57 can receive a disability
pension if they are unable to perform their former job--though they
may actually be able to perform other jobs. As in most other OECD
countries, such "own-occupation" restrictions in determining
disability should be abolished.

** Decouple medical and vocational rehabilitation from disability
benefit application and vest vocational rehabilitation with the
public employment service, to facilitate return to the labour
market. This can help reduce the increasing number of rejected
disability benefit claims and therefore reduce the problem of
shifting unsuccessful benefit recipients from unemployment to
pension insurance.

** Target the payroll tax cuts. Social security contribution cuts
for older workers should be targeted on groups with low chances of
reintegration, i.e. those with low or obsolete skills. More
significant tax cuts can thus be granted and employment costs can
be further reduced.

** Improve the coherence of adult education and training. Training
programmes offered from a variety of sources should be made more
coherent. Better co-operation between different training layers is
needed and joint provision of information and guidance should be a
first step.

** Strengthen financial incentives for employers to invest in better
quality workplaces. Safe workplaces should pay lower work injury
premiums than more dangerous ones.

* OECD (2005), Austria: Ageing and Employment Policies.


* Active Labour Market Policies (ALMP) introduced in the 2000s aim at motivating and empowering the beneficiaries of social transfers for productive employment. Budget resources available for these schemes were further increased after the adoption of the Employment Promotion Act in 2005. As described in detail in Annex 3.A1, a large variety of measures using a wide range of support instruments and serving specific groups (such as the young, female, older, low-skilled or general job seekers), aim at stimulating either the supply or demand of labour in vulnerable labour market segments. Across the large diversity of schemes one of the top priorities appears to be the employment of less-skilled youth, in particular very young workers starting to claim benefits before obtaining their first job. ALMP measures are planned to enhance gradually the Public Employment Service's counseling and support capacity for all potential beneficiaries.

An assessment of the Austrian active labour market policy is difficult as many measures have been implemented only very recently, and schemes are extremely varied. According to the Public Employment Service's hands-on experience, programmes co-funding the probatory hiring of programme participants by private employers have often been effective in catalyzing their more durable employment. Fully subsidised apprenticeships are often important for motivating young school leavers by providing them with a starting job and preempting a premature exclusion from the labour market, even if their actual contribution to market-relevant human capital building can be improved. A few studies recently reviewed by IHS (36) tend to indicate that, despite their multiplicity, the schemes may not yet be fully fine-tuned to the circumstances of specific groups. (37) There is also some indication that certain programmes which succeed in triggering a first entry into employment (for 50 to 80% of participants according to schemes) may also have a somewhat temporary effect, as some beneficiaries go back to unemployment after a relatively short period.

A recent international overview by the OECD revealed that Austrian ALMP initiatives are relatively sophisticated in certain key areas but not yet in others. Further progress could be made through wider recourse to competition between private organisations in various labour market-related services, (38) and in the field of an overall systematic evaluation procedure for all programmes. (39) International experience indicates that there is no "one size fits all" model of successful ALMPs. These programmes can easily become too costly relative to their benefits. On the other hand, if properly designed, they may offer durable employment and income gains. (40) In these circumstances, impact assessments of highest quality are needed at regular intervals, in order to shift resources from less effective to more effective schemes. Since Austria has made considerable progress in the area of e-government, information technologies can help with impact assessments through individual tracking of programme participants and their short and long-term labour market achievements. (41) Box 3.4 summarises the most recent research bearing out the case for an evidence-based re-focusing of ALMP schemes.
Box 3.4. Recent research on the impact of ALMP programmes

Two recent Austrian assessments of international and national
experiences with ALMPs provided important insights:

* Rudolf Winter-Ebmer (Winter-Ebmer, 2006) reviewed the most recent
international assessments of active labour market programmes, which
have come to disillusioning conclusions. Most programmes are found
to have only marginally positive impacts, which is disappointing
given the large amounts of resources invested in them. The results
are also somewhat surprising from a human capital theory point of
view. As most ALMP programs are in fact manpower training programs,
their returns should in principle be compared to formal education
programs which, in many OECD countries, have rates of return
between 7 and 10% per year of schooling completed. The question
boils down to: why is it that manpower training programmes are not
equally productivity enhancing? One reason could be the age
structure of participants. The international literature shows that
skill formation and retraining is more difficult for students
beyond the prime learning age. Another reason may be the actual
design of the programmes.

This study then investigated the employment and earnings gains from
an innovative re-training project: the Austrian Steel Foundation.
The Steel Foundation was considered an important and successful
ALMP in the late 1980s and the 1990s. Employment and earning
records of more than 2 000 participants with different age and
personal characteristics were tracked, over five years following
their participation in this multi-monthly program. Performances
were compared to a control group of more than 15 000 individuals.
The research concludes that over five years trainees gain higher
earnings and achieve longer employment spells. However, while
employment impacts are observed principally among older workers,
earning gains are found only for the young and low-wage workers.
The programme seems to contribute principally to matching and
job-search for the elderly, and additional human capital building
for the young. The distinct features of the Steel Foundation are:
it starts from a particularly thorough review of personal
qualifications; it provides close interaction between training,
occupational re-orientation, and job counselling; and its funding
and governance structure improves the motivation of trainees and
provides a more "self-determined" learning environment
(participants and potential participants--workers in the steel
industry--co-fund the scheme though monthly contributions). A full
costing of the programme is however not available and the study
cannot provide a cost-benefit analysis.

* Hedwig Lutz and Helmut Mahringer from the Austrian Institute of
Economic Research WIFO (Lutz and Mahringer, 2007) examined also
several types of ALMP programs on behalf of the Federal Ministry of
Economics and Labour. They used extensive administrative data and
applied microeconometric methods to analyse labour market outcomes
from various ALMP programs during three years after programme
participation. The results show that all ALMP schemes helped keep
trainees in the labour force during the period of observation and
had a positive impact on labour force participation. However, the
effect on employment rates has been much more disappointing.
Placement support (guidance, active job search) and training
programmes had positive impacts, but only on the employment of
women between 25 and 44, especially women re-entering the labour
market. They hardly had any significant effects on the employment
of men and older women. More encouragingly, temporary wage
subsidies to firms hiring older and long-term unemployed increased
their employment rates. Provisional job creation in "socioeconomic
enterprises" directed to the most "hard to place" enhanced also
employment prospects, notably for the older participants. The full
costs of individual programmes were not separately documented in
this study either, and conclusions are not available in
cost-benefit terms.

The authors comment nonetheless that there appears to be three
avenues to improve the effectiveness of ALMP schemes: i) tailoring
programs more closely to target groups; ii) downsizing the shortest
and the less intensive measures; and iii) better setting out the
professional objectives of the many training schemes, and more
purposefully orienting the participants to individual programmes.


* The new government established in January 2007 also plans to introduce a new measure which may have an unintended negative impact on work incentives at the low end of the labour market. It intents to increase the "means-tested minimum social income" to 726 [euro] per month, which represents the official line of poverty, i.e. 60% of the median level of income. Such a measure could reduce work incentives and generate an inactivity trap for low-income households. It may also reduce the incentives of part-time workers to shift to full-time work (depending on the withdrawal rate of social benefits). The authorities insist that stringent labour market participation requirements, which are planned to be administrated by the national employment service rather than sub-central authorities as previously, will help avoid such inactivity traps. Nonetheless, they should very closely monitor the actual impact of this increase on labour force participation and closely monitor the actual effectiveness of work availability tests.

Upgrading employability through upstream education reforms

The authorities started to react to the skill mismatches in the labour market with fundamental education policy reforms in the 2000s. This more "upstream" approach (complementing the active labour market programmes) was again emphasized in the programme of the new government in February 2007. It concerns simultaneously the university, vocational, secondary, and pre-school education layers. Most of these reform efforts are at an early stage of policy design and discussion, and some initial steps of implementation proved controversial and have met with some opposition:

* University reform. (42) Recent steps include more autonomy for the universities, the introduction of "performance based funding", and the introduction of student fees on a limited scale. As discussed in the following chapter, the introduction of student fees met with strong opposition and the new government announced measures which will in practice limit its scope. More Universities of Applied Sciences were authorized, which can select students and offer shorter and more practically oriented courses (which can be completed within the so-called Bologna structure: three years' Bachelor + one or two years' Master studies). University reform should be pursued with close monitoring of outcomes from successive reform steps, with more student selection by all Universities and with economically significant tuition fees associated with income-contingent loans (see Chapter 4). Increasing the share of private funding would increase resources available for all tertiary education programmes, help increase quality, encourage more labour market relevant training and motivate students to optimize course choices and length of study.

* Adjustments in vocational education. While the performance of the main streams of vocational education continue to be very strong with excellent employment and earning outcomes for graduates, there are also areas of weakness which call for assertive action. The authorities recognize these shortcomings. There are challenges associated on the one hand with the difficulty of foreseeing the evolving labour market needs for technical professions, and on the other hand some inertia in the already existing vocational education capacity. As an illustration, the capacity of agricultural vocational colleges (without being excessive in level terms) remains above needs. In contrast, there are shortages in vocational areas involving information technologies. The less labour-market relevant vocational education streams should be identified and adjusted and resources should be shifted to areas more in demand.

* Reducing segmentation in secondary education. The general secondary education system, even if it has catered traditionally, and successfully, to selected students with good basic background and developed a reputation of good quality, also faces adjustment problems. More children than in the past, from more heterogeneous backgrounds, would prefer to engage in this stream which gives access to higher education but capacity is limited. Willing and successful students from lower ranked streams also claim bridges to shift upwards if they meet performance conditions. These demands are congruent with the government objective to increase tertiary enrolment. However, increasing the general secondary education system's capacity's to respond to these needs without jeopardising the quality of education is challenging. In particular, the training, certification and remuneration of teachers, and the development of school facilities and equipment for general and vocational education, raise uneven operating and capital costs. Moreover, being managed under different federal and sub-central government responsibilities, they have been very difficult to rework to date. The new government's plan to reduce the number of pupils below 25 per class in the entire primary and secondary education system will also raise additional challenges, firstly because the pedagogical relevance of such a quantitative rule is questioned in the light of international experiences, and secondly costs will be very high if resources are not rationalized across the many schools and classes where the number of pupils per class is much lower than 25.

* Upgrading pre-school education. (43) The network of publicly-funded pre-school facilities--Kindergarten--is fairly extensive, but pedagogical quality is uneven and admittedly generally weak. Most kindergartens also fail to address the special language and cultural socialisation needs of immigrant children, a group especially in need of good pre-school education. Sub-central government layers, which are currently in charge of pre-school education, appear to have heterogeneous views and different priorities in resource allocation, as well as professional staffing ambitions concerning their kindergartens. In these circumstances, and on the basis of other OECD countries' experiences, the introduction of a compulsory pre-school year of education appears desirable, and a second year of compulsory pre-school education could be envisaged for children most in need of help in integrating into the wider society.

Austria's policy efforts to strengthen the entire formal education system could draw on ongoing OECD work on the institutional and policy determinants of educational performance. (44) Such international assessments are still exploratory and do not yet permit to reach firm normative conclusions, but they hint at specific areas where Austrian educational policies appear to diverge from the practices of the better performing OECD countries. Shortcomings identified tentatively include, in primary and secondary education, the limited recourse to: i) need-based resource allocation (funding of education institutions by taking into account the handicaps of their students); ii) performance benchmarks; iii) formal teacher qualifications; and iv) user (parental) choice in the selection of schools. In tertiary education the Austrian system is also characterized by a limited recourse to: i) student selection; ii) student fees and income-contingent loans; and iii) shorter labour market-relevant programmes. As also mentioned in Chapter 4 on innovation policies, the authorities should pay closer attention to these areas in their efforts to comprehensively strengthen the education system.

Policies to stimulate labour demand

The already started but yet to be completed liberalization reforms are expected to increase labour demand in areas where price competition, output and employment were previously restricted. Two main directions of relevant policy initiatives are: i) changes in the effective employment costs of low-skilled workers; and ii) competition reforms triggering output and employment growth in service industries. Annex 3.A2 provides a summary of recent and announced policy measures in these areas. This section provides a broad discussion of this policy orientation.

* Cutting actual employment costs. Several initiatives were taken to reduce the actual employment costs and the tax wedges for disadvantaged groups, as described in Annex 3.A2. It is too early to assess their impacts, but similar schemes applied in other OECD countries show that such measures generally help with the employment of target groups. (45) However, they may also induce deadweight costs which should be minimised (as for instance with the subsidy scheme for the older workers who take part time jobs). The fiscal costs of cuts in the tax wedge may become very large if beneficiary groups are not strictly limited. Narrow delineation of beneficiaries is desirable in Austria because the incidence of high tax wedges falls mainly on wage earners so that the overall flexibility of labour costs is not impaired. The key point is that efforts to improve the employment prospects of low-skilled people through reduced labour taxation are not neutralized by off-setting increases in their effective employment costs through minimum wage increases (see discussion above).

* Freeing-up labour demand in services. Market entry and competition reforms have a high potential to increase output growth and labour demand in service sectors. Liberalisation reforms in such areas have already started and should stimulate further price competition, output growth and job creation. The challenge in economic terms is to shift from predominantly monopolistic (price and margin maximizing, and output and employment rationing) to more competitive (price and margin minimizing, and output and employment maximizing) operation of these sectors, and of their labour markets (Figure 3.11). Such measures will stimulate labour demand if work incentives are also strengthened, and reservation wages remain subdued. As there are already some signs that reservation wages may have become already too high at the low end of the labour market, (46) wage expectations and developments should be carefully managed to harvest the benefits of competition.

[FIGURE 3.11 OMITTED]

* Further job creation potential associated with product market liberalization may be seen as speculative at this stage, because it has not been quantified. Still, Austria's existing employment deficit in service sectors (when compared to other higher income countries, as discussed in Chapter 1 and as shown on Figure 1.10) hints at an obvious potential. The room remaining for additional liberalisation in service sectors is significant. While EU initiatives for further liberalization of these sectors are important, their ultimate impact may be limited unless supported by domestically driven initiatives (Table 3.1).

Policy recommendations

Box 3.5 summarises the policy recommendations of this chapter:
Box 3.5. Policy recommendations for overcoming labour market
segmentation

Strengthening education

Pre-school education: Assess the quality of kindergarten education
on offer through the country and set minimum pedagogical standards
for all kindergarten. Introduce one year of compulsory pre-school
education. Consider introducing a second year for children from
families with difficult social background.

Primary and secondary education: Enhance the quality of all primary
and secondary schools by applying national performance benchmarks.
Shift from early to later streaming of pupils across different
secondary education systems. Facilitate the shift of
well-performing students between the different systems.

Vocational education: Identify and address pedagogical weaknesses
in the lower ranked streams such as Polytechnische Schule, and
schools for pupils with special difficulties (Sonderschule). Adjust
vocational education capacity according to changing labour market
demands. The less labour market relevant vocational education
streams should be identified and adjusted and resources should be
shifted to areas more in demand.

School funding and administration: Consider introducing
"needs-based" funding by taking account of the special
characteristics (and needs) of student populations in different
schools. Provide school managements with adequate administrative
and pedagogical autonomy to help them attain the assigned
performance benchmarks in different social and cultural
environments.

Class-size rules: Reconsider the rationale for capping the number
of pupils by class to 25, taking account of international
pedagogical experiences. If the objective is maintained make sure
that costs remain reasonable. Mergers between the many classes and
schools where the number of pupils by class is lower than 25 should
be considered.

University education: University reform should be pursued with
close monitoring of outcomes from successive reform steps, more
student selection by all universities, and economically significant
student fees associated with income-contingent loans.

Lifelong education: Monitor the quality of further training
provided with the (large set of) publicly sponsored lifelong
education and active labour market programmes (see also policy
recommendations in Box 4.4). Make training programmes offered from
a variety of sources more coherent. Keep the labour market outcomes
of programme participants under close scrutiny (also using the
detailed individual data available in the/-Austria information
infrastructure) and conduct high quality impact assessments.
Concentrate resources on well-performing programmes.

Strengthening work incentives of less active groups

Pension system and early retirement: Keep phasing in all provisions
of the pension reform. Do not reduce the discount rates applicable
before the legal retirement age. Administer "heavy work" criteria
for early retirement purposes very parsimoniously. Automatically
adjust the legal retirement age in line with demographic
developments.

Disability pensions: Ensure that disability pensions are only used
by people unable to work. Keep claimants of disability benefit who
can perform other jobs than their initial profession in the labour
force Coy dismantling "own-occupation" restrictions in the
disability scheme). Decouple applications for medical and
vocational rehabilitation and vest vocational rehabilitation with
the public employment service.

Family benefits: The implicit marginal taxation of mothers of young
children returning to work should be minimised. Family support
schemes should remain neutral and not discourage activity. The
replacement of child care allowances by child care vouchers and
kindergarten services, especially for children under three, would
encourage activity.

Social income and inactivity trap: The authorities should closely
monitor the impact of the planned increase of the "means-tested
national minimum social income" on labour force participation.
Part-time workers should not be discouraged from shifting to
full-time work. The authorities should strictly enforce the planned
work availability tests and monitor their efficiency.

Reducing employment costs

Minimum wages: The government should pay close attention to the
risks raised by the planned increase of minimum wages. The
settlement of the minimum wage should not be put on a centralised
and politicised path. Concerns about poverty at work can be better
addressed with in-work benefits.

Labour taxes: Social security contributions should be reduced for
vulnerable groups in the labour market. Cuts should be targeted on
groups with low chances of reintegration, i.e. those with low or
obsolete skills. They should not be used as a one-off sweetener for
minimum wage increases.

Enhancing job creation incentives

Start-ups and self-employment: The ongoing administrative reforms
facilitating the start-ups and reducing their cost should continue.
The convergence of the income tax regime for the self-employed and
for corporations should be envisaged for their neutral tax
treatment and in order to encourage entrepreneurial activities.

Liberalisation of services: Further job creation in services should
be facilitated with competition reforms facilitating new entries
and output and employment growth. There is room for additional
competition reforms in government dominated services such as public
utilities, transportation, health and social housing; and private
market services such as retail trade and liberal professions.

Immigration: Ease restrictions on entry of highly-qualified
immigrants to meet the needs and demands of domestic enterprises.
This should help increase output and complementary demand for
labour.


ANNEX 3.A1

Recent and planned measures to foster labour supply

Recent measures

Work incentives

Labour supply by older workers was enhanced by a set of measures reducing early withdrawals. First, the pension reform, introduced in several steps since 2000, raised the retirement age and increased the contribution period required for pension eligibility. (1) However, the "stock" of early retirees will of course be reduced only gradually. Second, conditions and benefits for disability were tightened, and this started to curb the many withdrawals under this scheme. Still, a number of loopholes for early exits remain, notably for "heavy workers" entitled to early retirement.

Labour supply by women was stimulated by the recent "Five Points Programme for Female Employment". This package aims at helping women to better reconcile family life and work. It offers women part-time training opportunities, tax deductibility of childcare expenses, demand-based opening hours of childcare facilities and affordable care during holidays. Women's work incentives were also enhanced by allowing parents to cumulate earned income and child benefits. In addition, an "Austrian Family Alliance" was founded in 2005 "to pool the interests of politics, enterprises, interest groups and scientific community" in promoting new instruments for a family-oriented work environment.

Employability and skills

The total budget for active labour market programmes (ALMPs) more than doubled from 760 million [euro] in 1999 to 1.6 billion [euro] in 2005 (more than 0.6% of GDP). Such programmes represent one third of the entire labour market policy budget. This places Austria in the midfield of EU countries in terms of fiscal resources dedicated to ALMPs but, given the relatively low unemployment rate, spending per unemployed person is already relatively high. (2) Several schemes fall under ALMPs, but their core (in Austria) is made up of a large set of training and further training programmes for the unemployed. These "qualification" schemes account for 60% of the total budget of the National Employment Service, and 80% of the individuals and cases that it supports. (3)

As an additional preventive measure, support to multi-employee training for persons threatened by unemployment is also offered by the National Employment Service (AMS), in co-operation with the European Social Fund. Two thirds of tuition fees are subsidized and only one third is paid by the employer. These programmes are offered to employees over 45, women and low-skilled people.

Lifelong training costs, such as fees for courses, for course material and travel expenses have been made tax-deductible for enterprises. Educational or re-training expenses related to an occupation or for conversion to another profession by self-employees and private individuals were also made tax-deductible in 2003.

Workers employed for more than three years can now agree with their employer to take from three months to one year of unpaid training leave. During this leave they are entitled to a lifelong training allowance (in the amount of the childcare benefit).

"Target group-specific training measures" were dedicated to immigrants in addition to general labour market programmes. These include language classes for persons whose mother tongue is not German, and certification of basic qualifications, as many immigrants possess lower secondary school leaving certificates which have limited labour market relevance. Additional courses are now offered to strengthen and document the qualification content of this diploma as well as special technical courses to improve immigrants' access to more qualified labour market segments. In 2005, nearly 40 000 non-nationals were granted such special support. Young workers with a mother tongue other than German and second-generation immigrants have also participated in large numbers in measures taken under a new Youth Training Consolidation Act (Jugendausbildungssicherungsgesetz).

The "Giving Young People A Chance" programme was launched jointly in 2005 by the Austrian Federal Economic Chamber and the National Employment Service to provide young job seekers with a personal coach and to advise and help them in their job search. In the first year of the programme 1 600 young people participated and 500 of them found a job within a few months--even if there are some recent signs that not all these jobs were long term.

The "Quality Initiative for Vocational Schools" programme aims at improving the quality and labour market relevance of vocational education. It will be based "on a systematic planning of objectives, regular evaluations and outcome-based reviews" involving all management levels in the education system. The explicit link with performance-based public spending management is a distinct and valuable feature of the programme.

A new "Employment Promotion Act" adopted in 2005 re-emphasized all these measures and provided a more comprehensive framework for their implementation. Both the "qualification" and "work incentive" driven measures reviewed in this Annex, and others devoted to strengthening labour demand and described in Annex 3.A2, are involved. The new Act also introduced new support instruments such as the so-called "Jobs for Youth" package, which provides additional apprenticeships and qualification courses to the youth, and the "Blum Bonus" which subsidises employers creating new apprenticeships with an additional 150 million [euro] for more than 30 000 new positions.

A new Strategy Paper was announced for developing a "coherent lifelong learning policy". The authorities declared that "the traditional linear paradigm of thinking" in this area will be abandoned and "discrete stages in an individual's working life will be recognized and focused on". New teaching and learning methods (such as e-learning, self-controlled learning, etc.) will be emphasized. New "competence portfolio instruments compatible with the European Qualifications Framework (EQF)" will be promoted. (4)

Measures announced in the new government's programme in February 2007

Work incentives

The quality of active labour market policies (ALMPs) will be improved in order to better satisfy job seekers and employers.

Private service providers earning performance-related fees will also be called for in the implementation of ALMPs and closer links should be established between private and state labour exchange services.

Employability and skills

The quality of education will be boosted with additional public funding, by reducing the number of pupils per classroom to 25, and making kindergarten more like educational facilities.

A group of experts will propose a new pre-school education programme embracing all 5-year-olds. Children whose native language is not German will be better integrated.

The 9th school grade (the last year of compulsory education) will be reformed with strengthened courses of basic knowledge and career orientation.

The curricula of vocational schools will be re-assessed with a view to strengthening foreign languages, information technology and other key skills. "Industry-wide training workshops" will be expanded.

A new "lifelong education strategy" will be prepared in cooperation with social partners, and a new model of adult education will be created with more professional vocational advising, training and skill certification.

An "education monitoring system" will be set-up, to generate feedback on pedagogical outcomes, and the quality of education services.

Other measures

A minimum full-time wage of 1 000 [euro] per month is planned to be implemented by social partners through a general collective agreement.

A new minimum social income of 720 [euro] will be instituted, providing a floor for pension benefits and for social assistance.

Selective immigration of "key workers" and of "specialist workers in high demand" will be facilitated, and the labour market will be prepared to cope with full mobility of workers within the EU after the current period of transition.

Notes

(1.) For a detailed description of this reform see the OECD Economic Survey of Austria, July 2005, and Chapter 5 in this survey.

(2.) In 2005 Austria ranked 12th among 19 reporting EU Member States in terms of the share of ALMP spending in GDP, but ALMP spending per unemployed personas a share of GDP per capita was 5th at 20%, following Netherlands at 60%, Sweden at 55%, Norway at 45% and Denmark at 40%.

(3.) The European Commission stated recently that "the substantial increase in spending on active labour market measures has had a positive impact but the effectiveness of some measures could be enhanced even further" (European Commission, 2006).

(4.) This is a policy response to a recent European Commission criticism that in the area of lifelong learning "the dispersion of responsibilities in the government structure in Austria results in the lack of a coherent and effective approach." (European Commission, 2006).

ANNEX 3.A2

Recent and planned measures to stimulate labour demand

Main recent measures

Reducing employment costs

Several new measures, aimed at promoting "flexicurity", will provide more flexibility and hiring incentives to employers without excessively reducing the security and the guarantees of employees: i) a portable severance payment scheme (Abfertigung Neu) was put in place in 2003, with individual severance payment accounts held at staff provision funds; ii) the concept of "reasonability" was simplified and clarified in 2005 in employment protection and unemployment insurance regulations, facilitating a person's employment in a different occupation than the one for which he/she was trained; and iii) working hours were made more flexible in most of the collective agreements signed in 2005, with longer calculation periods in industries such as electrical machinery and electronics, metal products, graphic design, savings banks and freight carriers.

Cuts in non-wage labour costs of older workers: The hiring and firing of workers above 50 were excluded from bonus/malus calculations in unemployment insurance and unemployment insurance fees for women above 56 and men above 58 were entirely eliminated. As a follow-up to a recent administrative court decision, the threshold-age for men was reduced to 56.

Subsidies to part-time work of old workers: If enterprises reduce working hours of older workers by 40 to 60%, the total employment costs of remaining hours are now subsidized. The objective is to help keep older workers in employment (this is often threatened because older workers' employment costs are high due to seniority-based pay systems). Yet, the actual impact of this measure in terms of "keeping people at work" vs. "shortening the number of hours supplied" is still debated.

With the "Combined wage model", if a jobless person takes up employment at a lower wage than his/her previous job, he/she preserves the assessment basis of his/her future unemployment insurance allowance on the basis of this previous employment. (1) This measure aims at reducing disincentives against accepting employment at lower wages.

Cuts in non-wage labour costs of apprentices: From 2006, companies employing apprentices receive a bonus of 1 000 [euro] per apprentice, and are totally exempted from accident insurance contributions during the entire period of apprenticeship.

A subsidized wage scheme was introduced in 2006 to stimulate employment in low-wage sectors by reducing the effective employment costs of targeted young and old unemployed workers. According to some early assessments few employers have made use of the scheme. (2)

Fostering activity and labour demand, notably in services

Since January 2006 "Service cheques" (Dienstleistungscheck) can be used to pay employees for simple tasks in private households. Assignments should be shorter than one month and fees paid below 330 [euro]. The cheque offers publicly subsidized accident insurance and the employee can top it up with voluntary health and pension insurance.

A "Regional Employment and Growth Initiative" was launched in 2005. It aims at "promoting investments that secure jobs in the long run", with a total budget of 1.2 billion [euro] which will be distributed through Federal and Lander subsidies and guarantees, and European loans. (3) Some 70% of the funding will be directed to small and medium-sized enterprises and a total additional investment of 3.3 billion [euro] is targeted. According to early estimates more than 100 000 jobs were already created under this scheme but it is difficult to assess the proportion of actual additional investments and jobs created (which would not have been created without these subsidies).

With the "Intensified Early Intervention Strategy" announced in 2004 the National Employment Service AMS was required by law to see that "unemployed persons under 25 and over 50 would be offered a reasonable job, a training, or a reintegration measure within three months of unemployment". The government reiterated in 2006 that by the end of 2007 "each unemployed school leaver will be offered a workplace, an apprenticeship, further training opportunity or some other job preparing measure within six months of unemployment".

In the "Labour foundations" scheme older workers are temporarily employed in subsidized non-profit projects and organisations. At its inception in the 1980s this measure was hailed as an important initiative and met with wide international interest. It continues to be an important instrument although on a moderate scale (average stock of participants around 5 000 since 2003).

Federal and Lander governments agreed on a national certification procedure for social care workers which will be applicable from July 2007 and should create a unified labour market for them as well as greater demand for their services.

The Social Partners and the Austrian Labour Inspectorate sponsor "Age-based working", projects helping companies adapt and design their working environment according to the special conditions of workers above 40 and job seekers above 50.

Measures announced in the new government's programme in February 2007

Reducing employment costs

The new government will study "the possibility of reducing non-wage labour costs as part of the next fiscal reform".

The law on working hours will be made more flexible and less rigid work-time models will be promoted in cooperation with social partners. A first agreement was already concluded between social partners in May 2007.

The current fragmentation of Labour Law will be eliminated and a "single employment contract" will be promoted on the basis of proposals by social partners.

Social partners are invited to negotiate a cross-sectoral minimum wage of 1 000 [euro] (about 3% of full-time workers--2% of men and 7% of women working full-time--earn less than this at present, with some lowest branch- and occupational minimum wages staying still at about 640 [euro]).

Fostering activity and labour demand

The restrictions presently placed on competition will be reduced, for example in liberal professions, "not only for promoting competition but also for boosting labour demand".

Shop opening hours will be extended on the basis of agreement by social partners.

Investment in less dynamic regions will be encouraged with additional measures, notably in the tourism sector.

It is considered to merge the competencies of the Federal Cartel Attorney and Federal Competition Authority in order to strengthen efforts to promote competition. Furthermore, the latest amendments and reforms of competition and cartel law will be evaluated.

Boundaries will be maintained between commercial and public services, and the government will oppose further liberalization in health, education, water, culture and local transportation services in the context of World Trade Organisation negotiations.

Notes

(1.) Allowances are available at 80% of the previous average earnings for 120 days, before falling to 75%.

(2.) See European Commission (2006).

(3.) European Recovery Programme (ERP) loans.

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Conway, P., V. Janod and G. Nicoletti (2005), "Product Market Regulation in OECD Countries: 1998 to 2003", OECD Economics Department Working Papers, No. 419, Paris.

Eurofond (2006), "Flexibilisation in the wholesale and retail trade sector", Brussels.

European Commission (2006), Austria: Commission Assessment of the National Reform Programme, Brussels.

IHS (2006) (Helmut Hofer and Andrea Weber), "Active Labour Market Policy in Austria", Institute of Advanced Studies, Vienna.

IHS (2007) (Walter H. Fisher, and Christian Keuschnigg.) "Pension Reform and Labor Market Incentives", Institute of Advanced Studies, Vienna.

Hedwig, L. and H. Mahringer (2007), "Wirkt die Arbeitsmarktfoorderung in Osterreich (Do Labour Market Promotion Programmes Work in Austria?)", WIFO Monatberichste, 3.

Martin, J. and D. Grubb (2001), "What works and for whom: a review of OECD countries' experiences with active labour market policies," Working Paper Series, No 14, Institute for Labour Market Policy Evaluation, Stockholm.

Ministry of Economics and Labour (2005), "Labour Market and Labour Market Policy in Austria", Vienna.

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OECD (2006b), Boosting Jobs and Incomes, Chapter 7, OECD, Paris.

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OECD (2006 f), Where Immigrants Students Succeed: A Comparative Review of Performance and Engagement in PISA 2003, OECD, Paris.

Quintini, G. and S. Martin, "Starting Well or Losing their Way? The Position of Youth in the Labour Market in OECD Countries", OECD Social, Employment and Migration Working Papers, No. 39, OECD, Paris.

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WIFO (2007b) (Warner Holzl et al.), "Start-ups, Closures and Growth of Enterprises. Evidence for Austria", Sub-Study to White Paper on Growth and Employment, Vienna.

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Notes

(1.) According to ILO standards and compiled by the OECD. The "national" measure of unemployment includes seasonally unemployed workers, particularly numerous in Austria in tourism, construction and agriculture. Their inclusion as well as of other groups like unemployed who work in mini jobs raises the average unemployment rate to 6.8% in 2006. According to Eurostat the unemployment rate in 2006 was 4.8%.

(2.) The number of hours worked per employee is however below OECD and euro area averages. In 2005, employed Austrians worked a total number of 1 636 hours in average, against 1 804 in the US, 1 775 in Japan, 1 645 in the euro area (except Finland) and 1 601 in Scandinavian countries.

(3.) The other top OECD countries, which have attained a similarly high prime age employment rate, are Sweden, Denmark, Finland, the United Kingdom and Switzerland.

(4.) 62% of the population in Austria against 58% in Germany, 54% in Switzerland, 49% in Denmark, 43% in Finland. The proportion for the 25-34 cohort in Austria is now 87%.

(5.) In standard measurements and according to the latest data available, only 18% of the Austrian population aged 15-64 has attained tertiary education, comparing with 25% for the OECD as a whole and 32-34% for Scandinavian countries. The so-called "tertiary education graduation rates", which measure the share of new tertiary education graduates per year in the total population aged 20-29, which reflect more recent developments, remain also low, at about 3% in Austria against 4-5% in Scandinavian countries. Yet, if graduates from vocational upper secondary schools--which in many respects provide professional education of undergraduate-level quality--are included, the tertiary enrolment rate of the population rises to 27%, slightly above the OECD average but still below Scandinavian countries. Such an adjustment may however overestimate the true academic background of these graduates. Chapter 4 provides a further discussion of university education.

(6.) This is why the majority of secondary education graduates do not proceed to tertiary education, even following the 1997 reform which facilitated transition from secondary vocational to tertiary education.

(7.) Austrian workers between 25-34 accumulate one the lengthiest on-the-job training time among OECD countries: about 190 hours of adult training for a typical 25-34 years old worker, against 180 hours in Germany, 150 hours in Sweden, 140 hours in the United States, 130 hours in Netherlands.

(8.) Box 1.1 in Chapter 1 provides a description of the social partnership system. Branch-level wage negotiations are held each year, mostly in autumn and winter, between branch Unions and sectoral branches of the Federal Economic Chamber. No formal centralization mechanism exists between 500 branch agreements but they are informally co-ordinated. Negotiations cover 98% of wage earners even though only 36% of them are unionized.

(9.) Austria ranks middle in the OECD index of employment protection legislation (EPL) (at rank 14 among 29 countries). The reform of the severance payment system in 2003 replaced lump-sum payments with portable individual severance accounts and facilitated flexibility of employment.

(10.) Austria has one of the lowest numbers of industrial disputes and numbers of working days lost because of strikes.

(11.) Secretariat calculations on basis of Statistics Austria data.

(12.) Labour law court cases did not arise in big numbers in Austria in the past and this was a strength of the system. The majority of collective redundancy cases used to be resolved in benefit of enterprises, but 85% of individual cases were resolved in favour of employee plaintiffs.

(13.) As announced in the new government programme made public in February 2007. See also Box 3.4.

(14.) The ratio was 28.8% in 2004 and increased to 31.8% in 2005, probably as a result of new measures tightening eligibility for early retirement and possibly of subsidies to the part-time employment of workers above 55. In 2005 it was 41.3% for men and 22.9% for women.

(15.) The disability pension scheme was not reformed. However, as early retirement conditions were tightened (with higher benefit deductions) and as the same deductions apply to early retirement and disability pensions, disability benefits were reduced. At the same time access to disability benefits became easier for some groups. The authorities are aware of the need to reform disability benefits and have established a reform commission. One objective of the reform will be to replace the eligibility criterion "remaining work capacity in the current job" (own-occupation based assessment) with "remaining capacity for any job" or "remaining income-generating capacity", like in other OECD countries.

(16.) Austria has one of the highest rates of incapacitation among older workers due to the "own occupation-based assessment of disability" (Berufsschutz). This implies that a worker can claim disability benefits after age 55 if the capacity to work in one's normal occupation is undermined. In contrast, most other OECD countries grant disability in case of general incapacitation. Austrian social partners remained committed to this provision while other countries which used to have similar rules such as Germany, Italy, Norway and Netherlands abolished them in the 1980s and 1990s (See Biffl, 2006).

(17.) The new definition of "heavy work" for early retirement purposes is provided in footnote 5 of Chapter 5.

(18.) See Chapter 5 for a detailed discussion of this intended measure.

(19.) See Dural and Bassanini, 2006.

(20.) The average long-term unemployment rate was 1.2% in Austria in 2005 against 3.3% for EU15.

(21.) Few elderly workers participate in adult training. In 2003, an average Austrian worker between 55-64 will have received less than 25 hours of adult training in his working life, versus nearly 150 hours for the 25-44 cohort. The gap between age groups is much smaller in Netherlands, Ireland and Sweden, but remains equally high in Finland and Denmark (although at higher absolute levels: Danish workers between 55-64 receive as many hours of adult training as Austrians between 35-44).

(22.) A recently-introduced subsidy scheme for part-time work by old workers (see below) may have helped increase the "exit rate from unemployment through work" from below 10% in 2000 to nearly 17% in 2003. On the other hand, the low de facto employability of older workers undermine their participation rates: the share of inactive persons who declare that they would indeed prefer to work is particularly high in Austria (8.4% in Austria against an EU25 average of 5.2% and an EU15 average of 5.1%).

(23.) In 1995, the unemployment rate of workers with less than upper secondary education was 5.7%, while the rate for upper secondary graduates was of 2.9%. In 2004, they increased respectively to 7.8% and 3.8%.

(24.) Underlying data is issued by the Public Employment Service (AMS), which publishes monthly job seeker and job vacancy numbers. However, only part of actual vacancies are advertised through AMS and there is some evidence that the gap between AMS-registered and actual job vacancies may have increased (according to a recent estimate more than 20% of Austrian firms have unfilled vacancies and many do not advertise through the public employment service). This divergence between actual and registered vacancies hints at a sharper shift in the true underlying Beveridge Curve.

(25.) Only 10% of lower secondary education graduates can find a job in the year following graduation, against 80% for upper secondary graduates and 70% for tertiary graduates.

(26.) The youth unemployment rate declined from 14% to 13% in the OECD area as a whole and from 21% to 17% in the EU15 accompanied by a decrease of total unemployment--remaining at a higher absolute level than in Austria. The ratio between youth and average unemployment rates is 1.98 in Austria against an average of 2.25 in the OECD and 2.12 in the EU15.

(27.) This is also reflected in the increased mismatch between apprenticeship positions on offer and on demand. By mid-2006, more than 7 000 school graduates failed to find apprenticeships, while 4 000 new apprenticeship positions created by enterprises remained vacant.

(28.) Family reunifications increased substantially in the second half of 1990s as a consequence of naturalization of refugees inflows from the regions of former Yugoslavia of the early 1990s, before a new Immigration Act tightened conditions in 2006. Having acquired an Austrian passport used to enable immigrants to bring their family into the country irrespective of any immigration quota. The new Immigration Act of 2006 introduced a minimum salary threshold of immigrants to ensure that their family members would not have to depend on social assistance when coming to Austria. "Non-economic" immigration is estimated to have accounted for 60 to 70% of all new immigrants between 2000 and 2005, having sharply declined since the beginning of 2006.

(29.) Workers from Germany and Central and Eastern Europe (CEEC) represented respectively 9% and nearly 15% of the total immigrant labour force in 2004. Immigration from new EU Member States has accelerated since the enlargement in May 2004, and the number of workers from these countries has increased by more than 8% in 2005 alone. The law was changed again in 2005 with the introduction of a new "Foreign Nationals Law Package", which affected only the status of family members of Austrian nationals, of EU nationals, and of nationals from the new Member States.

(30.) Comparison is made here with immigration-absorbing countries in Continental Europe (such as Germany, Switzerland, Netherlands, Sweden, Denmark). Educational and labour market achievements of immigrants in non-European OECD countries such as Canada, Australia, New Zealand are higher and is not a benchmark for Austria as their immigrants have stronger human capital and a higher socio-economic status. In Austria, too, detailed PISA results indicate that immigrant children's academic performances depend highly on their parents' educational background (see OECD 2006f, Annex B 3.5).

(31.) The NEET rate remains at about 5% in Germany, Sweden and Denmark and has decreased since 1997. The only OECD countries where it is higher than in Austria are Turkey, Mexico, Slovakia and Italy.

(32.) The share of children in out-of-home care facilities was 13% for the 0-2 years old in 2005, 85% for the 3-5 years old, and 20% for the 6-9 group (outside school hours). According to recent survey by Statistics Austria, 18 000 new child care places are needed outside of Vienna alone, and opening hours should be adapted to the needs of working parents.

(33.) There are 35 NUTS 3 regions in Austria with in average 230 000 inhabitants (ranging from 20 000 to 1.6 million). The coefficient of variation of regional unemployment rates at NUTS 3 level slightly increased from 30.9 to 40.8 between 1999 and 2005, but remains much lower than EU averages, where the dispersion of regional unemployment rates decreased (from 60.7 to 55.4).

(34.) This scheme was criticised as subsidising the stepping-down of older workers from full-time to part-time work. Supporters emphasize that in the absence of these subsidies, these job positions would simply disappear, given their relatively high costs due notably to the seniority of workers. No assessment is yet available on the detailed observed outcomes of this scheme.

(35.) See OECD (2005), Austria's Ageing and Employment Policies; OECD (2005), Economic Survey of Austria; and OECD (2006, 2007), Going for Growth.

(36.) See IHS (2007). The available impact studies are generally effected on the basis of descriptive information on short-term labour market outcomes of programme participants provided by the agencies administering the programmes.

(37.) This feature of Austrian programmes was notably stressed in European Commission (2006).

(38.) In particular, the need to diversify providers of training services beyond the entities run by social partners, and in a way to fully include commercial competitors, has been stressed in policy discussions.

(39.) An international peer-review-based evaluation of the Austrian active labour market programmes was launched at the end of 2006.

(40.) According to a recent evaluation by the European Economist Advisory Group (EEAG, 2007), many active labour market programmes do not raise regular employment opportunities for participants, as locking-in effects during programme duration seem to dominate the small increases in transitions to regular employment that occurred after their completion. Instead, ALMPs may have significant ex ante threat effects, by changing the behaviour of the unemployed prior to programme participation. There is also evidence that the "training-centered" ALMPs may durably improve the employability of participants. According to a still earlier assessment by the OECD (Martin and Grubb, 2001), the effects of training and re-training programmes may be positive, depending on target groups. The strongest effects have been recorded for prime age females, while results have been more mitigated for prime-age males and young workers. This assessment identified four design features which enhance the effectiveness of the programmes: i) narrow targeting of participant groups, ii) keeping programmes' scale small, iii) leading to a recognised qualification certificate, and iv) preserving a practical on-the-job component.

(41.) The extensive "i-Austria" programme which encompasses all citizens and residents and provide them with interconnected electronic files (under privacy protection), lending itself to a large variety of e-government applications, was recently elected Europe's leading e-government programme (See Cap Gemini, 2006).

(42.) The University reform is also discussed in Chapter 4, and in more detail in the OECD Economic Survey of Austria, 2005.

(43.) OECD has reviewed Austria's pre-school education system in OECD, Starting Strong, 2005.

(44.) Most recently the OECD Economic Policy Committee has also undertaken internationally comparative research on institutions and efficiency in primary, secondary and university education.

(45.) OECD (2006a) provides a review of these policies.

(46.) Around 10 000 job positions around Austria remained unfilled as of early 2007, because of the low level of the proposed wages (information from the national employment service).
Table 3.1. Remaining room for liberalisation in service industries

                           Remaining obstacles to competition and
Sectors                    liberalisation tasks

Passenger transportation   Railway services for passengers remain
                           closed to competition. In air passenger
                           transportation, openness to competition
                           should be closely monitored as the Vienna
                           airport is congested and new market entries
                           are difficult.

Freight transportation     The road freight sector remains highly
                           regulated. Licences and other administrative
                           requirements make new entries difficult.

Electricity                Electricity generation and distribution
                           facilities remain largely government-owned
                           and vertically integrated.

Retail trade               Market entry conditions in retail trade
                           have recently been facilitated. Nonetheless,
                           licensing rules and shopping hours remain
                           one of the most strictly regulated in OECD.
                           New entries and employment growth in the
                           past decade have fallen short of OECD
                           trends.

Food and catering          Licensing and facility opening rules are
                           very strict.

Liberal professions        Austria continues to have high levels of
(medical professions,      entry regulations in most of these liberal
lawyers, accountants,      professions. Certain price regulations,
civil engineers,           access requirements and advertising bans in
architects)                liberal professions were recently abolished.
                           However, the regulations destined to
                           maintain the quality of services and the
                           trust of customers remain very demanding
                           and may hinder competition. The EU
                           Commission stated recently that in liberal
                           professions "there is no evidence that a
                           substantial reform process is in
                           progress". (1)

(1.) European Commission (2006).

Source: OECD Secretariat.
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Publication:OECD Economic Surveys - Austria
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Date:Jul 1, 2007
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