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Implementing structural reform: a review of progress.

Previous Surveys have recognised that the Austrian labour market is relatively well functioning, exhibiting a comparatively low level of unemployment and a high degree of aggregate wage flexibility. Indeed, the relatively moderate wage increases and steady employment growth seen in 2000, at a time of significant oil and import price hikes, validate this finding. On the other hand, labour utilisation of females and older workers has been found low, held down, in particular, by generous early retirement schemes. Previous OECD recommendations have therefore emphasised the need to improving the job generating capacity of the economy, and labour utilisation more generally, by wide-ranging measures designed to facilitate the operation of labour, goods and financial markets and to raise the efficiency of the education system. The need for reform is reinforced by the quick deterioration of Austria's old-age dependency ratio and the opening up of a mismatch between qualifications demanded and supplied. Furthermore, p otentially large welfare improvements for consumers and contributions to productivity gains warrant further regulatory reform, notably in network industries.

Austria's structural policies continue to be broadly based, largely within the framework of the National Action Plan for Employment (NAP)30 that covers various policy initiatives not only in the labour market, but also in the education system and product markets for the purpose of fostering employability, entrepreneurship, adaptability and equal opportunities. The new government has particularly emphasised the need to increase incentives in the labour market and effectiveness of job placement to improve the efficiency and reduce the burden of the tax and transfer system, and foster competition in product markets and network industries. Significant policy initiatives have already been implemented or are in preparation. This is true with respect to the pension reform measures, although they cannot prevent a further secular increase in pension contribution rates (see Chapter II above). Measures to reduce non-wage labour costs and improve the targeting of social transfers have also been implemented, notably some tightening of eligibility rules for receipt of unemployment benefits. Moreover, significant steps are under way in regulatory reform, notably in terms of sharpening general competition legislation and stepping up competition in the electricity and gas markets. Despite this progress, in various areas further policy action appears to be warranted and in some fields measures do not appear to be consistent with underlying goals. This chapter highlights important recent developments and reviews the policy measures which have been introduced since the last Survey, highlighting fields were the Secretariat would recommend further action. Issues relating to fostering sustainable development are dealt with in more detail in Chapter IV.

Progress in labour market and education reform

Increasing wage and labour cost flexibility

Collective wage outcomes in the past couple of years have been in line with preserving low rates of unemployment, and first steps have been made to introduce a higher degree of wage flexibility on the plant level. In the metal industry a collectively agreed opening clause has been renewed that allows companies to deviate from collectively agreed wages under certain conditions (Verteilungsoption). Recent empirical work also hints to a trend towards a larger dispersion of wages across branches. However, no correlation is found between movements in relative wages and in relative employment shares across branches, and this could indicate rigidities in the wage formation process. (31) To the extent sectoral shifts in employment are labour demand induced, they should coincide with relative wage gains in the sectors with increasing employment.

Severance pay

Austria's system of severance pay has come under criticism because of both its negative implications for labour mobility and its non-neutrality with respect to sectoral employment. At present, employees are entitled for severance pay if their employment spell lasted for at least three years without interruption and was not terminated by the employee. Accrual of rights increases in steps with seniority within the company, ranging from two months salary (after three years of employment) to one year's salary (after 25 years of employment). Severance pay is taxed at a very low rate. For employees this type of severance pay reduces incentives to change employers. The government is now planning to reform the system such that entitlements become portable across employers and commence earlier than presently. Moreover, the instrument shall be transformed into a company based pension scheme with financial support of the government being conditioned accordingly.

Reducing labour mobility via severance pay might be justified to the extent that it allows firms to recover investment in training, which would be lost if the employee quickly changed jobs. However, it is questionable whether the present system of severance pay is an efficient tool for raising the qualification of the labour force, given that entitlements accrue independently of the degree to which the provision of company-based training would be optimal and of the costs for employers associated with such training. (32) Similarly, for low-qualified jobs the system provides an incentive for employers in favour of an early termination of employment spells so as to avoid accumulating severance pay claims that are not matched by productivity gains. Indeed, empirical research indicates that the propensity of employers to terminate employment peaks immediately prior to employment durations that are associated with discretionary hikes in accumulated claims for severance pay. (33) Moreover, the present form of sever ance pay is systematically biased against labour supply in sectors that are subject to over-proportionate employment fluctuations due to structural change or seasonality as in tourism and construction. Seasonal employment patterns, in turn, account for a high share in Austria's employment dynamics. (34) Overall, the system is associated with costs, while its benefits are ambiguous. Abolishing the system in its present form and using it as a base for the introduction of company-based funded pensions would be warranted (see Chapter II above). This would require that rights start to accumulate in an early phase of the employment spell and that portability be introduced. (35) Implied increases in labour cost would reinforce the need to reduce other non-wage labour costs. But a trade-off between pension accruals and current wages paid would also have to be incorporated into wage contracts, and this might include revisions of wage profiles with respect to seniority. Extending company based pension schemes would als o allow for collective contracts that could reduce transaction costs in comparison to individual contracts.

Increasing working time flexibility

In some sectors collective agreements between the social partners have widened the scope for shifting work over a pre-assigned period. The collective contract for the IT and the telecommunication sectors allow flexible working time allocations over a period of one and three years, respectively. For the purpose of lengthening the employment period in the winter in construction flexible working time arrangements based on collective contracts are in force since 1997. The evidence suggests that these arrangements have been effective in reducing seasonal unemployment. Collective contracts for the purpose of lengthening employment periods are now being extended to other sectors that are subject to seasonal variations in employment. Notably this is the case for tourism where an arrangement has been made.

Part-lime employment and training leave

Part-time employment has continued its trend increase, with its share in overall employment having risen from 16.8 per cent in 1999 to 17 per cent in 2000. (36) While this development is broadly based across several sectors, it is particularly pronounced for the service sector, notably in retailing, enterprise-related and financial services, health care and tourism. Similar trends in favour of part-time employment are also observable in other OECD economies. (37) The growing importance of part-time and related forms of employment in Austria is also apparent from the fact that small hours jobs (geringfugige Beschaftigung) and work commissioned by firms from self-employed (freie Dienstvertrage) expanded vigorously in recent years, although the social security tax advantage associated with such jobs relative to regular employment has been reduced. Until the end of 1997 both small-hours jobs and commissioned self-employment were largely exempted from the obligation to pay social security contributions, but since then employers are subject to contributions. While the expansion of small-hours jobs decelerated sharply in 1998, following the introduction of the social securi ty charges, it quickly recovered thereafter (Figure 13). (38)

In 2000 legislation came into force which financially supports working time reductions from full-time to part-time employment of older employees by subsidising compensation of those claiming part-time work (Altersteilzeit). Initially, the provision required new hirings for working time reductions to be financially supported. While utilisation of this instrument has been low prior to the revision, take-up rates have significantly increased since. In combination with more restrictive conditions for early retirement (see Chapter II above), this instrument is intended to increase financial incentives for older people to stay in the labour force. It is questionable, however, that the measure contributes to reaching this goal in an economically meaningful way. To some degree the financial incentives will induce employees to reduce their working time who otherwise would have preferred working more hours. Hence, there is a risk that subsidised Altersteilzeit might even diminish overall labour utilisation of the old er people at the expense of a higher tax burden.

Subsidised training leave, designed to foster job sharing and the employability of the workforce, is now no longer available for women after parental leave, following evidence that benefits have been taken up by women for the purpose of effectively lengthening their parental leave rather than improving their skills. This revision is thus likely to improve the targeting of the instrument. There is little evidence, however, that the training leave has led to new hirings, which are required for leaves associated with very general training goals. (39) Outlays for training the older people - for whom preferential support rates supply - would become more economically viable the longer the older people stayed in the labour force. This reinforces the need to abolish disincentives for continued labour force participation. While both the bonus for hiring older people, paid by the labour office, and the malus for making them redundant have been raised, the impact of these measures on employment are not clear.

Reducing the distortions arising from unemployment insurance and related benefits

The social insurance system has contributed to higher non-wage labour costs in Austria, reducing labour demand, while benefits do not always set appropriate incentives for re-employment of the unemployed and labour force participation. Some measures were recently introduced that lower non-wage labour costs. In the health care system, this is true for the abolishment of the spouses coinsurance for couples without children (see Chapter II above). On the other hand, the regulations for the employers' sick pay for salaried employees have been extended to blue-collar workers. This entails dropping the two-week waiting period and prolonging the duration of sick pay to between six and 12 weeks annually, depending on the workers' seniority. This measure leads to a significant increase in non-wage labour costs although reduced outlays by the workers' health insurance imply lower contributions. Regulations governing the pay for vacation in case of employment termination were simplified and reformed, leading to a subst antial reduction in unit labour costs.

Unemployment benefits

There have been a number of changes with respect to the provision of unemployment benefits, most of them aiming at increasing incentives for job search. Major measures, which became effective at the beginning of 2001, have been:

- A single basic replacement rate (55 per cent of former net earnings), with basic income replacement being topped up for low-income groups, replaces the previous system of several income dependent replacement rates (up to a ceiling of 80 per cent of former net earnings). For unemployed younger than 45 years the level of unemployment benefits is now determined by earnings in the last job preceding the unemployment spell, rather than by earnings in a higher paying occupation dating further back.

- A four-week waiting period for receipt of unemployment benefits has been introduced for unemployed who have terminated their employment.

- The minimum employment period for renewing eligibility for unemployment benefits has been extended from 26 weeks to 28 weeks.

- The maximum duration of unemployment benefits has been temporarily extended to 78 weeks for unemployed aged 60 and older (subject to a certain contribution period) for a transition period up to the end of 2003.

Most of these measures should improve incentives for the unemployed of taking up new employment, and are common practice in other OECD countries as well. (40) In sectors subject to seasonal employment patterns, the extension of the minimum employment period required for re-establishing eligibility following unemployment provides incentives for prolonging employment periods by introducing a higher degree of working time flexibility. In contrast, the lengthening of the maximum eligibility period for receiving unemployment benefits - intended to increase labour force participation, in particular for older people - might turn out to be counter-productive for fostering employment. Econometric evidence for Austria indicates a significantly negative effect of extended eligibility periods for unemployment benefits on the transition out of unemployment for the long-term unemployed, both male and female. (41)

The government has also prepared legislation for the purpose of tightening job acceptance criteria for recipients of unemployment benefits. At present a job offer is defined as "acceptable" if the required qualification is in line with 'the learned profession" (erlernter Beruf) of the unemployed. On current planning this shall be modified such that jobs be considered acceptable if they do not significantly render more difficult future employment that is in accordance with the learned profession. The planned new provision has been criticised in the public debate as instigating a dequalification process of the unemployed. Indeed, efficient job matches require a correspondence between qualifications demanded and offered. It is not efficient, however, to dismiss as unacceptable job offers that do not strictly match the unemployeds' past qualification profile. This is particularly true for periods of structural change which are characterised by shifts in qualifications required. Moreover, unemployment of extended duration frequently coincides with a considerable depreciation of skills, while taking up new employment can improve subsequent re-employment chances in internal and external labour markets. Tightening job acceptance criteria therefore appears warranted and the tightening should be increased with increasing employment duration. This would be in line with common practice abroad. (42)

Child benefits

As has been outlined in Chapter II, child benefits will be extended in 2002. In contrast to the regulation up to now the new programme provides benefits to all parents, independently of whether or not they have worked prior to the birth of the child. Also, the period has been extended by one year to three years while earning caps have been raised. (43) On the one hand, raising the earnings allowance provides an incentive for extending part-time work. But the income effect associated with the extension of the eligibility period and the waving of the pre-work requirement for receiving the benefits will tend to reduce labour supply. The financial burden associated with extending the transfers would also tend to negatively influence employment. While the net effect of the measure on labour supply is ambiguous, studies point to the importance of the availability of childcare institutions for parents' labour force participation. Indeed, while subsidising childcare facilities would also be associated with a positive income effect for parents, it would strengthen the substitution of labour supply for homework. Allocating funds in this field might therefore be a more effective mean of increasing labour utilisation.

Improving the services of the Labour Office and active labour market measures

Improving the efficiency of job placements

The government is also preparing institutional reform of the Austrian public employment service (AMS). Key points of the envisaged reform are:

- Integration of the activities counselling, job placement provision of active labour market measures and provision of unemployment benefits in one hand at the regional level.

- Differentiation of the job searchers into groups of persons that are easily to mediate and those that are difficult to mediate.

- The government also planned the outsourcing of the financing of the Labour Market Office from the federal budget. For this purpose the government plans incorporating the AMS and dropping its financing guarantees for the service. Concrete steps are under consideration.

There appears to be scope for efficiency improvements in the system of employment services. While most successful job matches are based on advertisements or other search channels that do not involve mediation agencies, the share of the AMS in successful job matches has been estimated to amount to less than 10 per cent (excluding the utilisation of the AMS' self-servicing facilities). Private job agencies account for a share that is even lower and also appears to be small by international comparison. The latter finding is likely to be related to the fact that private agencies are subject to certain restrictions. Also, empirical research suggests an increasing skill mismatch between the clients of the AMS on the labour demand and supply side. While the heterogeneity of unemployment with respect to skills and occupations has increased over the last years little has changed with respect to the structure of registered vacancies, reflecting the fact that firms use the AMS primarily as a recruitment channel for uns killed labour and skilled workers with apprenticeship training. (44)

The government's plan to integrate the various activities of the Labour Office on the regional branches of the PES is likely to contribute to increasing the effectiveness of the public employment service. Indeed, experience in other OECD countries suggests that the search intensity of the unemployed and the efficiency of the job matching process increases with the interaction between these functions in the placement process. (45) But a better integration of the system should extend beyond the boundaries of the Labour Office. At present unemployment related benefits of potentially unlimited duration are extended by both the Labour Office and local authorities. The former provides means-tested unemployment assistance benefits (Notstandshilfe) for insured persons whose eligibility for unemployment insurance benefits (Arbeitslosengeld) is exhausted. The latter grants means-tested social assistance benefits (Sozialhilfe) that are paid to the unemployed if their income (including unemployment assistance) falls sho rt of some subsistence level. Eligibility and benefit regulations for social assistance differ substantially between the nine states, and this introduces a lack of coherence between the two systems. Moreover, the fact that for a certain subset of the unemployed the financial burden of granting unemployment related benefits is dispersed between the Labour Office and provincial governments implies that at the margin both authorities face reduced incentives for bringing these unemployed into employment. Close co-ordination between the provision of social assistance and job placement agencies is therefore required.

Moreover, in view of the increased heterogeneity of labour demand and supply, the flexibility of effective placement channels should be widened by increasing the scope of private placement agencies. Several regulations specific to private agencies have been found to constitute serious impediments to lob mediation. (46) Persons have the right to sue private placement agencies where the job offered does not conform to perceived promises made. On the other hand, private placement agencies have no means to instigate sanctions when unemployed refuse job offers. Revisiting such provisions is likely to foster the efficiency of the placement system overall.

An option for continued reform along these lines for the purpose of increasing the efficiency of employment services more generally would be requiring the delivery of PES services to become contestable in a market environment. The planned incorporation of the AMS could form part of an institutional base that allows developing the system in this direction. Indeed, many countries within the OECD have introduced contestability of some PES functions, notably in the training area. While the degree to which contestability has been introduced varies, Australia has gone furthest by tendering job brokering and reintegration services. In this system public and private service agencies compete under equal terms and payments are made to them on the basis of outcomes with placement premiums increasing with the degree of the placement risk (higher price tag to difficult-to place job seekers). First experience suggests that it is possible to realise substantial efficiency gains by moving in this direction, while much depend s on the appropriate design of such systems, which need to preserve the integration of the various employment services. (47)

Active labour market measures

The National Action Plan for Employment (NAP) assigns an important role to active labour market measures (ALMPs) - as opposed to the "passive" provision of unemployment related benefits - for the purpose of raising employability. Consequently, since 1998 the government has increasingly put more emphasise on ALMPs: in 1999 outlays for ALMPs increased by 291/2 per cent, remaining roughly constant in 2000 despite higher economic growth. Enterprises and institutions obtain financial support for the purpose of improving the qualification and integration of the unemployed. Unemployed found eligible for participation in active labour market schemes can also obtain financial aid covering expenses for training, commuting and child minding. These programmes are designed to prevent long-term unemployment - defined as unemployment spells exceeding six months or a full year depending on age - and to foster re-integration of persons with particularly unfavourable labour market characteristics. In 2000 participants in activ e labour marked measures accounted for almost 15 per cent in terms of unemployment (Figure 14). The government now envisages putting more emphasis on training measures - in particular within-company schemes - at the expense of work provision schemes.

To assess the effectiveness of labour market policies with respect to reducing long-term unemployment, the NAP targets reductions of transition rates into long-term unemployment. For 1999 the NAP aimed at reducing the transition rate into spells exceeding one year to 5.8 per cent, from an observed rate of 6.6 per cent in 1998, and for the 2002 the programme envisages that this rate be cut to a half. The actual transition rate undercut the government's target in both 1999 and 2000. However, these outcomes, as well as the over-proportionate drop in long-term unemployment and unemployment of older people, cannot be considered meaningful indicators for the effectiveness of ALMPs. Firstly, movements in the stock and flows of unemployment depend heavily on the evolution of the business cycle and policy instruments such as early retirements. Secondly, any ALMPs of a minimum duration of four weeks necessarily reduce both the length of completed unemployment durations and the stock of the long-term unemployed, even if such measures were not effective at all in improving re-employment prospects. Indeed, in 1999 the observed reductions in transition rates into long-term unemployment are not matched by corresponding increases in transitions into employment (which would also fail to prove the effectiveness of ALMPs). On the contrary, in 1999 exit rates out of unemployment durations of six and 12 months into employment have even declined. (48) Moreover, with respect to the type of ALMPs to be applied these stock and flow indicators provide incentives to expand short-term measures at the expense of measures with longer durations irrespective of their relative effectiveness, because at the same cost the former can be used to interrupt unemployment spells of more people.

Proper evaluation of ALMPs is therefore crucial to determine the intensity and type of their application. Most programme evaluation studies for Austria consider the shares of participants found in employment or not being unemployed following a certain time span after the termination of the measure. (49) The general conclusion is that programme participation is associated with substantial success rates, although some work points to the important role of general labour demand conditions to absorb the unemployed, and work elsewhere suggests that ALMPs might raise the reintegration of participants at the expense of non-participants. Few econometric studies on individual programmes are available, which compare the labour market outcomes of participants in ALMPs with those of non-participants while controlling for heterogeneity in socio-economic characteristics and selectivity in programme participation. Such research is necessary for proper programme evaluation. Indeed, while evaluation studies in OECD countries indicate that active labour market measures can be useful instruments to support job mediation, they produce very mixed results on the effectiveness of ALMPs. (50) Some studies point to participation in work provision and publicly sponsored training measures reducing re-employment prospects rather than increasing them. (51) In particular, standardised work provision and training schemes extended on a large scale and provided outside of companies often do not have a positive impact on transition probabilities into employment. Common other problems include a considerable circularity of the unemployed between different programmes and potentially high crowding out and deadweight costs. Company survey information in Austria on the impact of wage subsidies on hirings also indicates that there might be substantial deadweight costs. In one study some 45 per cent of the sampled firms responded that they would have hired without financial support, and another 15 per cent did not exclude such an effect. (52)

There is some evidence that short spells of training might be helpful to separate those unemployed willing to work from those who are not. (53) Within the OECD, participation requirements in ALMPs are increasingly used as a screening device to arrive at more efficient job placements. In such systems, entitlement for unemployment benefits is frequently reduced if participation is rejected.

Empirical investigations for several countries suggest that for work provision and training schemes to be effective instruments for re-integration they should be tightly targeted in favour of narrowly defined problem groups. The effectiveness of programmes appears to increase the more they are designed so as to address specific unfavourable labour market characteristics of the participants, which reinforces the importance of "profiling" the unemployed with respect to relevant characteristics. Programme efficiency also appears to be related to the degree programmes accommodate demands for training profiles of regional employers. Regional Alliances for jobs", as they are increasingly established in Austria, might have a role to play in this respect and should be monitored. (54) A devolution of competencies for designing active labour market policies and channelling participants into ALMPs is also observable in several other OECD countries. Care should be taken, however, that the regionalisation of labour marke t policies does not lead to a segregation of the different services for the unemployed. There is also a risk that financial support for firm-specific training leads to a substitution of labour demand in favour of programme participants that reduces employment chances for non-participants in regional labour markets. Moreover, such measures can be associated with considerable dead weight costs in that they can provide incentives for firms to drop company based training programmes that are not financially supported. These risks reinforce the need to focus more extensive work provision and publicly sponsored training schemes on a relatively small group of participants with particularly unfavourable labour market characteristics.

Improving skills and technological know-how

The high importance of skilled human capital within an increasingly "knowledge based" economy underlines the need of revisiting key aspects of Austria's education system, and policy initiatives in this field are being prepared. The government is also preparing legislation to increase immigration to Austria of skilled workers. (55) Indeed, there are already reports that in some fields enterprises find it difficult to fill vacancies for highly qualified labour. A recent study suggests that, under the assumption of a sustainable growth rate of around 2 1/4 per cent, the mismatch between qualifications demanded and supplied will substantially increase within the next five years. (56)

Vocational training

As has been outlined in previous Surveys, Austria's dual apprenticeship system - which at present absorbs more than 40 per cent of an age cohort after completion of compulsory schooling - has been hitherto successful in providing applied skills, and this has contributed to holding down youth unemployment to comparatively low levels. (57) But previous Surveys have also hinted to the need to broaden the field of application of specific training schemes and introduce new curricula. Since the middle of the 1990s increasing efforts have been made to adapt apprenticeship curricula to new demands, and this policy has continued in 2000 and into 2001. Between 1996 and the beginning of 2001 46 new curricula have been introduced and another 60 have been reshaped, out of 240 vocational curricula at present. The broadening of curricula over the last years included a higher level of general education (particularly in German and foreign languages), and a path was introduced leading to a matriculation qualification for tert iary studies. New vocational training schemes are mainly established for occupations in the service sector and in information technology. Application for training in new fields appears to be high: by spring 2001 50 per cent of all training contracts were in areas which have been either newly introduced or modified. At present policy makers are shifting their focus from creating new trades to monitoring and supporting the implementation of the newly created or reshaped schemes. In particular, the government is aiming at intensifying the training activities of small and medium sized enterprises, especially of newly founded enterprises in the services and IT fields. For this purpose the government is considering to increase financial incentives for training along with adaptations in legal framework conditions.

The special rescue network' for youths who do not find training places has been terminated but was reopened recently in view of deteriorating labour market conditions. Under this programme financial assistance is given to institutions (which usually do not provide training) to set up ten-month vocational courses (see the 1999 Survey). Reconsidering this measure appears to be appropriate to the extent the supply of training places offered by private firms improves relative to demand. Moreover, training in public sector institutions is likely to be less effective as those within companies.

Non-apprenticeship training within firms might have an important role to play to upgrade the skills of the workforce within the context of 'life-long learning". While the unions repeatedly demanded educational sabbaticals from work (one week per year), progress in this field was hampered in that the employers were not ready to fully finance such sabbaticals, and demanded confining such spells to those that, in their view, would improve vocational qualifications. At present the discussion between the social partners has evolved into the direction of accepting a cost sharing arrangement between the employers and the employees, while establishing decision rules about the choice of admissible training is still unresolved.

Tertiary education

Since 1993 steps have already been made to increase the effectiveness of tertiary education. The most significant step was the introduction of Fachhochschulen (polytechnics), which provide praxis oriented tertiary education in four years studies. The establishments of these institutions turned out to be a success as judged from both industry's increasing demand for graduates from Fachhochschulen and the increasing share of students enrolling in these institutions. Efforts have also been made to increase the degree of autonomy of the universities. (58) Moreover, to support the comparability of Austrian degrees with those granted within the EU, since 1999 universities have the right to grant bachelor and master degrees.

Nevertheless, Austria's university system has increasingly come under criticism of being expensive and not well adapting to changing demands for new skill profiles. Indeed, cumulated costs per tertiary student are the highest within the OECD, totalling almost twice the mean. (59) Relatively high remuneration for university teachers and long effective durations of studies explain the largest part of the cost overhang. While the ratio of students to teachers totals about the average, compensation accounts for 57 per cent of current expenditure as opposed to an OECD average of 46 per cent. Moreover, with 6.4 years the average duration of tertiary education in Austria is the longest within the OECD. At 47 per cent, drop-out rates are also high by international comparison. For example, on an annual basis, spending per tertiary student in Austria is about the same as in the Netherlands. With average duration of tertiary studies being more than one third longer in Austria than in the Netherlands cumulated costs per student exceed the Dutch level by more than 50 per cent (Figure 15). To some extent this finding is attributable to longer statutory study durations due to differences in the degree structure. However, virtual absence of tuition fees and few restrictions on the length students are allowed to spend at universities are further extending effective education periods inducing students to regard universities as a free resource. Moreover, once tenure has been granted there are few incentives for university teachers to deliver adequate teaching and research.

Hence, revisiting the efficiency of the university system should rank high on the policy agenda. It is therefore welcome that the government is preparing legislation to continue university reform. Although certain details are still being elaborated, key features of the planned reform are:

- From autumn 2001 onwards, students will be charged study fees the proceeds of which will be redistributed to the universities. In the present phase of reform the proceeds are planned to be used for investment in the university system. (60)

- Funding of the universities will be based on a contract between the state and the university. Universities will have to introduce a system of cost accounting, and university funding will be subject to performance-related elements. A system of quality control will be established.

- To raise the mobility of staff, contracts for university teachers will no longer entail life long tenure. Moreover, compensation for staff shall contain performance-related elements.

- From 2003 onwards universities will become fully autonomous from the state with respect to setting their agenda of teaching and research. This shall foster developing own profiles of universities. Studies might then be re-allocated to increase cost effectiveness. From this stage on tuition fees will accrue directly to the universities.

Reforms In the product market

Product market reform has continued to progress in Austria. General competition legislation is currently being improved with the planned establishment of an independent competition authority, although its effectiveness may be hampered by insufficient resources and competencies. While regulatory reform in the telecommunication market started later than in the United Kingdom and the Nordic countries the achievements up to now are significant. The liberalisation of the electricity market -- effective since 1 October 2001 -- is much more rapid than required by the relevant EU directives, although important issues remain. Similarly, the full opening of the natural gas market, envisaged for autumn 2002, makes Austria one of the first EU countries committed to full liberalisation although important regulatory issues remain. On the other hand, little progress can be observed in other network industries, such as railway and postal services, where only the minimum requirements of the relevant EC directives have been i mplemented. In other competition related areas, such as more uniform public procurement rules and the extension of shop opening hours, initiatives have been taken, which potentially could enhance the general environment for competition.

The general framework for competition policy

The current regulatory system for general competition issues (particularly mergers and cartels) is based on a cartel court that has limited legal powers to instigate actions independently, but acts on the recommendations of the social partners with the Minister of Economic Affairs and Labour representing the state before the court. In 1998--in connection with a merger between two of the largest retailers -- doubts surfaced concerning the system's ability to enforce competition and its conformity with EU regulations (see OECD Survey 1999). A similar situation arose in early 2001 as the final ruling of the cartel court allowed the merger of two of the largest weekly political magazines to proceed, despite the fact that the court's own assessment appeared to suggest the contrary. A major shortcoming of the system is that the involvement of the social partners poses potential conflicts of interest which makes the system vulnerable to pressure from particular interest groups. In both cases mentioned, the parties intending the merger as well as their competitors have been mandatory members of the Chamber of Commerce, which itself is participating in the cartel court proceedings. In summer 2001, the government presented a draft proposal for reform of the Austrian Competition Law. It aims at establishing both an independent Federal Competition Authority acting as an investigator (with a staff of 20-40 persons) and a Cartel Prosecutor, under the Ministry of Justice, with the right to initiate procedure before the Cartel Court. By establishing a Cartel Prosecutor in addition to the independent Competition Authority the government aims at gaining a degree of freedom in initiating competition investigations. The composition of the latter, as well as of the Supreme Cartel Court, will be changed so that judges will have the majority instead of the nominees from the social partners, removing potential risks of interest conflicts. The decisions of the Cartel Court, in turn, can be referred to the Supreme Cartel Court.

Establishing an independent competition authority with investigative powers is an important prerequisite for creating a framework of competition enforcement in line with practices within the EU. However, the creation of two authorities with powers to instigate legal proceedings may lead to a duplication of work and a diffuse allocation of competencies. (61) This, in turn, may jeopardise coherent enforcement of competition regulation and imply unnecessarily high costs, unless a clear separation of responsibilities is put in place. (62) The Competition Authority will have significant investigating powers, including the right to issue information requests and to obtain search warrants from the Cartel Court. The former right is further supported by the possibility to impose sanctions for non-compliance with fines up to [euro] 35 000. (63) On the other hand, the Competition Authority cannot issue administrative fines to companies found to violate the regulations, as is the case in some other EU countries. In cont rast, within the framework of sector-specific regulation in the telecommunications and electricity sectors such fines can be issued. (64) In general competition matters the Cartel Court can issue fines of up to 10 per cent of aggregate turnover (as in most other EU countries), reflecting the severity of the infringement. In this context, it is worth noting that experience in other countries points to the importance of fines being sufficiently large to deter anti-competitive behaviour. Moreover, in some countries the effectiveness of cartel prosecution was improved by adopting a "leniency programme" whereby the first firm to divulge the existence of a cartel and to co-operate fully in its prosecution is eligible for reduced sanctions. (65) Although the competition law proposal does not contain an explicit leniency programme, there is a legal provision for the Cartel Court to consider the firms' co-operation in cartel cases when it determines fines. The resources given to the Competition Authority appear to be rather limited. Its staffing appears low by international comparison and compared with the sector-specific regulators in Austria. The Elektrizitats-Control GmbH and the Rundfunk und Telekom Regulierungs-GmbH (RTR GmbH, former Telekom-Control GmbH) have staff levels of some 50 and 60 persons, respectively. In Denmark, the Netherlands and Sweden the staff of the competition authorities amounts to 90, 170 and 100 persons, respectively. However, differences in staffing levels reflect to some degree differences in competencies, although all three countries have sector-specific regulators as well.

Designing the best framework for promoting and preserving competition involves inter alia setting institutional incentives to undertake effective and appropriate regulation. As long as competition in certain market segments has not been established sector-specific regulation is of particular importance. This would favour establishing independent sector-specific regulators, as specific technical in-sight is needed to implement pro-active regulation for the purpose of promoting competition. On the other hand, a competition authority with economy-wide responsibilities is less subject to the risk of "regulatory capture", and may be more willing to eventually phase out regulation in a particular sector. (66) In smaller countries, there might also be a need to concentrate limited resources and expertise within one organisation (see below). All in all, this suggests a continuous adaptation of the regulatory framework to market developments with specific regulation being phased out once competition has been establis hed so as to ensure uniform regulatory treatment of all competition issues. (67) Whichever set of agencies are charged with regulatory functions, it needs to be insured that they are independent of the interests being regulated. Also, as long as regulatory functions are divided between a general competition authority and sector regulators close co-operation between these bodies needs to be ensured.

Energy markets are being liberalised

The Austrian government fully opened the electricity market in October 2001 and is aiming at fully opening the gas market by October 2002. This would imply that Austria is opening up these markets well ahead of most other EU countries. Both network industries are similar in that vertically integrated companies dominate market structures, although the main difference is that the number of parties involved in the gas market is much smaller than in the electricity market and gas -- unlike electricity -- is mainly imported. Consequently, the regulatory reform considerations are rather similar for the two markets.

Electricity market

The opening of the electricity market was commenced as part of the EU programme for liberalising the European electricity market. Large consumers (with a consumption of more than 20 GWh/year) are already allowed to conclude supply contracts with any electricity supplier, implying that about a third of the electricity delivered to the market comes from a freely chosen supplier. (68) The full opening of the electricity market was completed by 1 October 2001. Given that the EC directive only requires market opening for consumers with an electricity consumption of above 9 GWh by 2003, this places the Austrian liberalisation process well ahead of those in most other EU countries. The opening to competition includes the generation, trade and distribution of electricity, while the transmission is considered a natural monopoly. (69) The consumers' free choice of electricity supplier is technically secured by separating actual consumption of electricity from the supply to the grid. (70) Importantly, this implies that household consumers are not required to install additional measuring equipment, allowing for the cost-free change of supplier and thus enhancing competitive pressure on suppliers.

A considerable degree of vertical integration can still be found in the regional distribution networks -- dominated by state and municipal-owned utilities, which generate and distribute electricity as well as being the owner of the local grid. (71) Until October 2001 grid access charges are being proposed by the grid operators on the basis of cost estimates and the Ministry of Economic Affairs and Labour is responsible for approval. In May 2001 the grid charges exhibited a considerable variation, with a 65 per cent difference between the lowest and highest charges (Table 11). This variation partly stems from the guaranteed feed-in-tariffs for promoting electricity generated by renewable energy sources, as grid operators are allowed to recuperate the associated cost through increases in the grid access charge (see Chapter IV for details). (72) However, observed electricity prices vary inversely with the grid charges, such that the variation in the final consumer prices is much smaller and this indicates some cross-subsidisation of electricity, reflecting a monopolistic market structure. Indeed, the difference between the highest and lowest electricity price is more than 200 per cent, which is difficult to explain by differences in technology and the guaranteed feed-in tariffs. Thus, high grid access charges effectively prevent new entry into some of the regional electricity markets, as new entrants would have to charge below-cost prices for electricity to become competitive with the local incumbent. The sector regulator took charge in October 2001. Already earlier, in spring 2001, it announced its intention to reduce grid access charges and narrow their range, and in September the responsible minister reduced the two highest grid charges. A more consistent solution would be for the regulator to use a common framework for determining access charges. More importantly, however, preventing pricing strategies for grid access that do not discriminate against electricity suppliers would require complete unbundling of th e existing vertically-integrated utilities into legally independent entities. (73) The present requirement of a mere accounting and management separation does not suffice in this respect. (74)

The substantial public ownership of the vertically integrated companies increases the risk of cross-subsidisation from non-competitive to competitive segments of the market. Moreover, privatisation helps establishing the size of stranded costs (costs of non-competitive fixed investment) and shifts the risk of utilities becoming uncompetitive to the private owners. In summer 2001, the EU accepted the Austrian application for financing stranded costs. Between 1999 and the opening of the electricity market, the financial burden of estimated stranded costs for brown coal powered generators was distributed to consumers through an additional [euro] 0.44 per 1 000 kwh surcharge on the electricity price. Since 1 October 2001, with the full opening of the electricity market, the consumers pay a stranded cost fee totalling between [euro] 0.004 and [euro] 0.872 per 1 000 kWh in line with their energy consumption from the national grid company (Verbundgesellschaft) in 1997. Indeed, experience in other OECD countries ind icates that regulatory reform of the electricity markets in the OECD raises efficiency, but translating this efficiency gain into lower consumer prices depends crucially on the ability of regulatory policies to control market power, further underpinning the need for removing public ownership. (75) An indication of the price reduction potential of the liberalisation of the electricity market can be obtained by comparing electricity prices with those in other EU countries. In mid-2000 the pre-tax electricity price for smaller industrial users in Austria was at least one-third higher than in liberalised markets like Finland, Sweden and the United Kingdom, and for larger household users a similar, although less pronounced, picture emerges (Table 12).

Gas market

The liberalisation of the Austrian gas market is planned to be complete by October 2002 when all consumers will have the free choice of supplier, well ahead of the requirement in the relevant EU directives. Today, the market is characterised by relatively few companies with vertical integration of transmission and distribution of gas (distribution is almost entirely undertaken by the nine Lander gas utilities and 16 regional gas utilities) and a substantial share of public ownership. Also, a specific characteristic of the gas market is a prevalence of long-term "take-or-pay" contracts -- contracts with gas producers (of which 86 per cent are located in Russia, and the rest mostly in Germany and Norway), obliging the gas importer to pay for the gas regardless of whether it can be sold or not. The liberalisation process has already allowed large consumers (with a consumption of at least 25 million [m.sup.3] per year, encompassing 24 industrial companies and the gas power stations) to freely choose their supplier, implying that about half of all supplied gas comes from freely chosen suppliers. The scope for reducing prices through a liberalisation of the market is potentially rather large (although less than for electricity prices) as Austrian gas prices, despite being lower than in most countries, are between 10 and 25 per cent above the levels in the countries with more competitive gas markets, such as the United Kingdom (Table 13).

As with electricity, the gas market can be separated in areas with little scope for introducing competition, notably (high-pressure) transmission and the (local) distribution of gas, and areas which are potentially competitive like gas supply, gas storage, and gas retailing and marketing.(76) However, the liberalisation law only stipulates separate accounting for transmission, distribution and storage activities within vertically integrated companies, raising similar competition concerns as in the electricity market.(77) The regulatory authority is currently the Ministry of Economic Affairs and Labour, a task which is envisaged to be transferred to an independent authority by October 2002, possibly to the electricity regulator, to exploit synergy effects and available professional knowledge. While this is a very significant step towards opening the market to competition complete unbundling of vertically-integrated companies and withdrawal of public ownership also remain an issue as in the electricity market.

Substantial progress has been made in the telecommunication market

The opening up of the Austrian telecommunication market has progressed rapidly. The number of nation-wide fixed-line telephony providers has increased to more than 30 and since May 2000 there are four mobile phone operators offering their services. Policy actions to promote competition within the telecommunication sector have included the establishment of an independent regulator - the Telekom-Control-Commission and the Telekom-Control GmbH, which later became part of the Regulatory Authority for Broadcasting and Telecommunications (RTR) - the introduction of full number portability (since spring 2000), and carrier pre-selection (since March 2000) for fixed line services. (78) Also, the incumbent (Telekom Austria) was further privatised lowering the government ownership share to below 50 per cent. Consequently, there has been a marked decline in most telecommunication prices. For example charges for fixed line calls are now only a fifth of their level in 1997 with local and long-distance charges converging to the same level. Notwithstanding this progress, prices for a given basket of telecommunication services for both household and business users remain above similar baskets in countries with earlier liberalisation of telecommunication markets, such as Denmark, Sweden and the Netherlands, indicating a scope for further reduction of prices (Figure 16). Interconnection charges fell more than in any other EU country since 1997, and were further adjusted downwards in spring 2001. But they remained above the EU average in 2000 and nearly twice as high as the best practice for local level interconnection. (79) The telecommunication providers are expected to reach a mutual agreement on interconnection charges. Only when this does not materialise the telecommunication regulator will set charges so as to reflect the cost of interconnection, based on a "forward-looking long-run incremental costs model" (FL-LRAIC model).(80) Reductions in interconnection charges could be supported, like in Denmark, by comparison with the be st practice in the EU. Charges for local and long-distance calls -- particularly during peak time -- were higher than in other EU countries in early 2000, although recent policy action may bring these charges down. (81)

The mobile phone market compares well with those of other countries. The market is well developed with high penetration rates. (82) Moreover, usage charges for mobile phones are low in European comparison, although the fixed charges for consumers bring total costs above the EU average. (83) The high penetration can partly be explained by the large subsidies providers have given to handsets. However, number portability is lacking in the mobile phone market and contract periods are long, extending up to one year, and this raises consumers switching costs thus creating important lock-in effects. The current regulatory framework has been instrumental in developing the mobile phone market, but as the market is maturing competition is likely to benefit from imposing number portability. However, such a pro-active unilateral measure is currently not possible as the regulator is restricted to act on the request of market participants. Thus, an adaptation of the regulatory framework would be required to allow for such proactive measures.

The prices for calling from a fixed line phone to a mobile phone and "roaming charges" -- denoting the interconnection fees charged by foreign service providers for using the mobile phone outside Austria -- are substantially higher than the associated costs of providing the services. As in other EU countries, little competitive pressure exists that would lower the cost of calling from a fixed-line phone to a mobile phone as the mobile phone customer is mostly interested in the cost of outgoing calls and the caller has little choice. The cost of calling from the incumbent's fixed-line system to networks of various mobile phone providers may vary up to 33 per cent within the same time band and 60 per cent overall, with the most expensive service being more than four times more expensive than the reverse call for a business user. Regulatory steps have been taken that could lower such prices with the imposition of standard termination and origination fees. In mid-2000 the regulator imposed in steps -- within fiv e dispute settlements -- fixed fees for termination and origination of calls in the mobile network for all mobile phone service providers (except for a new entrant into the mobile phone market) at the same level, defined by the fees which the provider with SMP (substantial market power) is obliged to apply. (84) This led to fee reductions of more than 50 per cent. However, this decision has been challenged before the Courts. Roaming charges are much higher than domestic calls of similar distance. Regulating such charges is not easy, as it requires the involvement of other countries' regulators, and should not be necessary once competition has broadened sufficiently. In mid-2001 the European Commission began an investigation into possible collusion in the setting of roaming charges by German and English mobile phone providers. A supplementary measure could be to improve information dissipation by publishing roaming charge benchmark tables similar to the EU's present benchmarking of interconnection charges. (85)

Telekom Austria is obliged to provide unbundled access to its local loops and associated facilities with related fees determined on a cost basis by the regulator. Such fees have been reduced by a total of more than 10 per cent in spring 2000 and early 2001. Also, the regulator can impose penalties on the incumbent if it fails to meet the deadlines for providing such access. However, competitors have complained that the incumbent has refused to negotiate with operators not yet granted a license and that the incumbent has discriminated between operators with respect to the provision of collocation facilities. (86) The regulator has gradually reduced the monthly rental fees for leased lines from [euro] 12.35 in 1999 to [euro] 10.90 in 2002. Moreover, growth of the Internet has been rather strong with a penetration rate of 40 per cent by the end of 2000. This development can largely be explained by a relatively high broadband penetration in Austria, which is the fourth highest in the OECD area and the highest in Europe, although it still accounts for a low share of overall network capacity. (87) This, in turn, is related to a widespread availability of cable television networks, which has forced Telekom Austria to quickly upgrade its network to provide digital (DSL) services. The cable television networks also represent a potential for introducing competition between fixed-line networks more generally, although at present only few companies offer network services for voice telephony via the cable TV networks. An additional measure for developing the Internet is the 'Signature Act" (effective from 1 January 2000), which created the legal basis for the use of electronic signatures. (88)

Little progress in opening the markets for railway and postal services

Railway services are still mostly provided by the publicly-owned Austrian Rails. In January 2000 an independent regulators were established (Schienen-Control GmbH and Schienen-Control Kommission) with a similar structure as the electricity regulators, although staffing (six experts and a four-member supervisory board) is considerably smaller. There has been a separation of transport services and infrastructure in accounting terms as stipulated in the relevant EC directive. However, no additional steps have been made to create business identities for each of the two activities, in contrast to several other OECD countries. (89) Indeed, experience suggests that establishing a contestable market for transportation services requires complete separation of the network and transportation services in mutually unrelated companies. (90)

There is also a lack of regulatory progress in the market for postal services. In 1999, the mail and post bus portfolios were split off from telecommunications and incorporated in a separate state-owned company (Osterreichishe Post AG) which has a monopoly for all services related to letters up to 350 grams for the purpose of financing its universal postal service obligation of mail delivery. While the limit of 350 grams is in accordance with EC directives, many EU countries have set lower limits (Germany, Denmark, Spain, the Netherlands, Italy, Sweden and Finland). (91) Liberalising the market for letters can be expected to generate substantial welfare gains for customers. In contrast, the granting of monopoly rights is no adequate measure to finance universal postal service obligations. The Swedish Post (the former monopolist) regards this obligation as a competitive advantage due to network effects and is not compensated for providing universal services. (92) Even if the costs of providing such services a re higher than the value of the competitive advantage, universal services could be commissioned from Austria Post, or any other postal operator, rather than granting a monopoly position on the market for letters. (93)

Public procurement rules

Public procurement rules at the non-federal level of government are not uniform across Austria, except for the cases where the size of the contract requires EU-wide tendering and thus follows EU procurement rules. The differences in public procurement rules may potentially increase administrative costs for bidders and is at variance with ensuring a "level playing field" for competitors. Currently there is a consultative process (expected to be terminated in summer 2002) under way to unify public procurement legislation, and this might lead to an increase in the low share of public procurement effectively open to competition. (94) In addition, a 'Federal Procurement Company" was recently established - which administers the largest share of federal procurement - and new administrative measures have been put in place to streamline procedures, such as replacing paper work with electronic information exchange and the Internet publication of all public tenders. (95)

Retail sector regulation

The last extension of shop opening hours took place in 1997, allowing shops to remain open a maximum of 66 hours a week between 6 a.m. and 7.30 p.m. every weekday and until 5 p.m. on Saturdays. While the Minister for Economic Affairs and Labour proposed a further liberalisation of shop opening hours, plans for further reform were abandoned due to the opposition of the social partners and the states. A survey carried out by the Chamber of Commerce indicated, however, that the 1997 liberalisation of shop opening hours increased turnover for shops with longer opening hours, significantly raised consumer satisfaction, and had only little effect on employment. Econometric studies elsewhere show positive employment effects of liberalising shop opening hours, and identified Austria as one of the countries in the OECD with the most stringent regulations overall in the retail sector. (96) Thus, deregulation of the sector more generally, including markedly more liberalised shop opening hours, is likely to improve empl oyment creation as well as to increase consumer welfare.

In a similar vein, the rules governing permission to open out-of-town shopping centres (larger than 800 [m.sup.2]) have been eased. This follows complaints about ambiguities of the previous regulation, which required that permits only be given if the local supply of the population with consumer goods and services were not at risk. The precondition is now that the granting of such a permission should not endanger the local population's access for "everyday consumer goods needed at short notice". By ordinance the Ministry of Economic Affairs and Labour has designated that "everyday consumer goods" include foodstuffs as well as detergents. cleansing agents, stationary products and textiles. The local permission process is expected to take between three and six months. Although the new rules appear less restrictive, such regulations also shelter smaller outlets from competition, leading to higher prices and more restricted choice for consumers. To the extent policy makers aim at securing local access to certain types of consumer goods, this could be obtained in an alternative manner - for example by obliging and compensating the retail industry to provide home deliveries - without the need to restrain competition.

Measures to improve entrepreneurship

Some progress has been made in introducing measures to improve the framework for promoting entrepreneurship. The fee for the mandatory membership of Chamber of Commerce has been abolished and founders of new enterprises have become exempted from all taxes and fees in connection with the foundation. The potential personal costs associated with bankruptcy have been lowered. The penalty code has been changed so that debtors can only be charged with gross negligence (punishable with up to two years in prison) in connection with a bankruptcy as compared with the previous stipulation of simple negligence (punishable up to three years in prison). In addition, the list of possible negligence offences has been narrowed down and made exhaustive. On the other hand, the implementation of the one-stop permission process has still not been finalised, although permission procedures should become easier with the planned electronic interchange of documents between the applicants and the authorities involved. This would estab lish a "virtual" one-stop shop where applicants only have to communicate with one authority, which then co-ordinates the bureaucratic organisation of the permission process.

Financial market developments and regulation

Traditionally, large segments of Austria's financial markets are based on banks offering "universal" services as financial intermediators. Since the EU accession in 1995 the landscape of financial institutions has become more diversified. Several measures have been taken so as to both integrate Austrian financial markets into those of the EU - partly driven by the EU's Financial Services Action Plan - and develop non-banking financial services. In this context special attention has been given to raise the international comparability of financial investment instruments, and to making equity investment more favourable through changes in the tax system. The changing framework for financial regulation includes a unified financial market supervisor authority. The rest of this chapter highlights major developments in financial markets and recent policy initiatives.

Financial market developments

In the mid-1990s, when Austria joined the EU, the volume of investment funds amounted to about one-fifth of the volume of saving deposits. The subsequent quadrupling of assets in investment funds combined with little growth in saving deposits marked a change in the focus of private savings with assets in investment funds reaching three-quarters of the holdings in saving deposits. This coincided with a sharp increase in indirect share ownership, with about one-third of the assets in investment funds invested primarily in foreign equity. Substantial parts of the investment insurance and pension funds are managed by banks and this has led to an adjustment of the banks' income in favour of fees and commissions at the expense of on-balance sheet bank lending. Moreover, the banking sector is subject to ongoing consolidation, involving mergers across the border while expanding its business to Central and East European countries. At the same time, the central government has sharply reduced its holding of bank shares following the sale of the Austrian Postal Savings Bank in mid-2000. This is an important development towards ensuring a level playing field. At the regional level, the state mortgage banks -- fully or majority owned by the Lander - pay a commission to the public sector for their guarantees. (97) However, the size of the commissions vary considerably and the relation to the value of the public guarantee is not uniform across banks. In cases where banks have lost their public guarantee their credit rating appears to have worsened, potentially raising refinancing costs. (98) Another factor that may change saving patterns and thus affect the banking industry in the coming years is the abolishment of anonymous bank accounts in November 2000, although the savings behaviour has so far only changed little with total deposits in such accounts remaining at just below 60 per cent of GDP. The identification process of the accounts is still under way with about two-thirds of the holders having been identified by mid-2001. (99)

The Vienna stock market has a very small market capitalisation, equivalent to less than 16 per cent of GDP as compared with an average EU market capitalisation of nearly 110 per cent of GDP. In addition, the part of the shares floating freely totals some 45 per cent, only about two-thirds of the factor in the EU. This makes the market relatively illiquid and reduced the international investors' interest in Austrian stocks. A number of policy measures aim at developing an equity culture and fostering across-the-border capital market integration, as intended in the EU's Financial Services Action Plan. The government's privatisation programme should expand the availability of shares on the stock market, and the sale of a stake of nearly 30 per cent of Telekom Austria in November 2000 was partly directed towards private households. (100) Measures introduced for the purpose of improving the condition for share trading comprise the abolishment of the stock exchange turnover tax in autumn 2000 and the incorporation of the Vienna Stock Exchange as welt as a reorganisation of the organised stock market into three separate market segments. In addition, the Vienna Stock Exchange is expanding its international co-operation, having established mutual trading of shares with the Deutsche Borse through the XETRA trading system and with the creation in November 2000 of the NEWEX stock exchange for trading of Central and East European shares. Moreover, to enhance investor protection stricter rules concerning equal access to information and the operation of the stock exchange are planned. (101) To further stimulate the international interest in Austrian shares, the Capital Market Promotion Act of 2000 permits Internet publication of prospectuses in English. (102) However, a significant impulse for trading at the Vienna stock exchange did not yet emerge from these initiatives.

A particular concern has been the development of a venture capital market and some success has been achieved in this area with a doubling in 2000 to 84 venture capital firms, although in terms of financing resources the venture capital market remains relatively modest with a combined capital of [euro] 0.2 billion. Most of the venture capital firms are backed by government guarantees and subsidies with, on average, about half of the venture capital coming from the public sector, although recently the private share has increased somewhat. The government-owned Finanzierungs-Garantiegeselfschaft (FGG) issues capital guarantees of up to 50 per cent for venture capital funds and BURGES issues project-related guarantees for private individuals of up to 100 per cent (with an upper ceiling of [euro]20 000) and for all other capital providers for up to 50 per cent (without any upper ceiling) of the capital invested. (103) Moreover, venture capital funds under certain conditions are subject to preferential tax rules in that individuals are exempted from withholding tax on returns from income invested in such funds (upper limit of [euro]14 535) and certain funds are exempted from paying corporate income tax. But medium-sized enterprises (SMEs) hardly cover their capital requirement through issuing stocks (a number of IPOs have even taken place abroad) and the Austrian Growth Market, established in 1999 on the Vienna Stock Exchange, to finance SMEs was dissolved in February 2001. Also, low effective taxation of owner-occupied housing is likely to bias investment in favour of real estate. (104)

Financial market supervision is being unified

A new law for a unification of financial market supervision passed Parliament in mid-2001 and will come into force on 1 April 2002. (105) Currently the Ministry of Finance is responsible for supervision of the banking and insurance industries as well as of pension funds - a substantial part of the banking compliance monitoring is carried out by the Austrian Central Bank Oesterreichische Nalionalbank (OeNB) - and the Federal Securities Authority (Bundeswertpapieraufsicht) is in charge of securities supervision. (106) The supervisory activities concerning banking, insurance and securities are planned to be unified in a Financial Market Supervisory Authority (FMSA), with the operational costs shared by the supervised institutions and -- to a lesser extent -- the federal government. (107,108) A number of OECD countries have already established such single supervisory authorities, including Denmark, Hungary, Iceland, Japan, Korea, Norway, Sweden and the United Kingdom. (109) To enhance the enforceability of super visory measures, the FMSA will be equipped with powers to impose administrative penalties. The unification of financial market supervision might lower the cost of supervision, although this would appear to depend on the integration of existing resources currently employed by theOeNB. (110) However, such an integrated regulatory approach should also be seen in connection with the regulatory challenges presented by the continued integration of financial markets and the emergence of financial conglomerates.

Overview and scope for further action

Since the last Economic Survey on Austria there have been a large number of significant policy initiatives -- some of which have been implemented and others still being in a preparatory state -- that can be expected to improve the functioning of the labour and product markets. The general thrust has been to reduce non wage labour costs, foster labour force participation, improve the efficiency of job placements and raise the effectiveness of the education system. Furthermore, important progress is being made towards a greater degree of competition in network industries. An overview of the original Jobs Study proposals, subsequent developments and recommendations for further action is shown in Box 3.

While several policy measures with respect to the social transfer system are likely to increase work incentives and labour utilisation, important fields remain where further action would be required. In some cases the introduction of new benefit entitlements does not appear to be consistent with the goal of improving the allocative efficiency of labour markets. The following aspects concerning social benefits and the job placement system deserve particular attention to support the ongoing reform process:

- Plans to widen the definition of acceptable Jobs" with respect to the skill profiles for recipients of unemployment related benefits should be implemented. The acceptability criteria should be progressively broadened with unemployment duration.

- The lengthening of the eligibility period for unemployment benefits does not appear to be consistent with other measures designed to improve the incentive structure of unemployment related benefits. Extended durations of unemployment benefits for older people should be abolished. For similar reasons, the difference in replacement ratios between unemployment insurance benefits and unemployment assistance should be reconsidered for the various groups of unemployed persons and widened if necessary.

- Financial support for working time reductions from full-time to part-time employment for older employees (Altersteilzeit) do not seem appropriate to increase labour force participation of the older people and should be reconsidered.

- The system of severance pay should be replaced by portable company-based funded pensions.

- The planned increase in child benefits (Kindergeld) is likely on balance to reduce working hours supplied by parents. If increasing social support for families is desired, it would be more promising to allocate funds for the purpose of extending child care facilities.

Initiatives to better integrate the different functions of the public employment service are welcome. Similarly, the provision of social assistance should be closely co-ordinated with job placement. Moreover, the scope for private placement agencies within an integrated employment service should be widened and contestability of PES services introduced. Active labour market measures play an important role in the government's employment strategy. Within a framework of improving the "profiling" of the unemployed, ALMPs should be better utilised to test the readiness of benefit recipients to take up work. To secure the effectiveness of training and work provision schemes, measures should be tightly targeted on problem groups. In general there is a risk that private sector entrepreneurial activity is crowded out by public work programmes, and deadweight costs are often substantial. Appropriate evaluation of the effectiveness of the measures utilised with respect to increasing employment chances and minimising dea dweight and crowding out effects is therefore imperative and should be stepped up. A promising strategy for "activating" unemployment-related benefits and social assistance schemes is to put more emphasis on in-work benefits that ease marginal effective taxation associated with the transition into employment.

The increasing importance of skilled human capital in a "knowledge based society" reinforces the need for reforming Austria's education system. Tertiary education is costly and its allocational efficiency needs to be improved to cope with an opening gap in skills provided and demanded. Plans for university reform go in the right direction and should be carried through. In particular, while the introduction of tuition fees is welcome raising the financial endowment of the universities is not sufficient for improving performance. Rather, it is important that reform quickly moves on implementing a higher degree of competition between universities and establishes a link between the universities' performance and their funding. Financial support to training enterprises must not introduce a bias in favour of certain occupations or sectors. In general, adapting the pay scales for apprentices to secure the viability of training is preferable over public sector financial support.

Product market reform is progressing in Austria, both with respect to improving general competition enforcement as well as introducing a higher degree of competition into network industries. Progress is uneven, however, and important regulatory issues remain.

The present regulatory system for general competition issues depends on the action of particular interest groups and is vulnerable to outside pressure. Against this background, the establishment of an independent competition authority marks important progress towards a system of effective competition enforcement. There is a risk, however, that an unclear division of executive powers between the competition authority and the newly-established prosecutor, and a lack of effective enforcement powers will hamper the effectiveness of the new competition authority. Thus to secure effectiveness the institutional design of competition enforcement needs to be streamlined. In a similar vein, the government should consider endowing the competition authority with the right to issue administrative fines -- eventually subject to the final legal rulings -- if firms are found to violate the regulations. More generally, fines should be sufficiently large to deter anti-competitive activity. Adopting a "leniency programme shoul d be considered, whereby the first firm, which provides evidence on the existence of a cartel and fully co-operates with the competition authorities in prosecuting the collusion, would be eligible for reduced sanctions. Also, it needs to be monitored whether the competition authority is not under-staffed, and the endowment with personnel needs to be quickly increased if necessary in order to avoid long decision delays. Also, the transparency of the regulatory framework overall would increase if the institutional structures of the general competition enforcement on the one hand and of sector-specific regulation were better aligned. In the sphere of general competition enforcement this reinforces the suggestion to establish a competition commission endowed with similar powers as the sector-specific commissions -- that have already been established in the electricity and telecommunications sectors -- rather than introducing the planned cartel prosecutor.

Regulatory reform in network industries can be expected to generate potentially very substantial welfare improvements for consumers and to contribute to increasing productivity growth in the economy. In telecommunication regulatory reform led to sizeable price cuts and a widening range of services, Significant price cuts have also been observed in the electricity sector. The government fully opened the electricity market by 1 October 2001 and has scheduled the full opening of the gas market for 1 October 2002, well ahead of the requirements stipulated in the respective EU directives. In contrast, regulatory reform in the postal sector is not particularly advanced, and little progress has been made in the railways system. International experience suggests that incumbents tend to exploit their market power, thus preventing the evolution of competitive markets. This includes adopting a strategy where obstruction of competition instigates legal action that may be time-consuming. Hence, opening network industries to competition must pay attention to a number of key factors to be successful. (111) Given the overriding importance of ensuring unrestricted access of competitors to the respective network, independence needs to be established of the grid from the service providers. In the same vein, the regulatory system needs to be sufficiently pro-active to ensure that existing incumbents do not follow an entry blocking strategy. Further action is necessary in Austria to firmly establish these principles in the ongoing reform process. Major outstanding issues regarding competition in network industries are:

- In telecommunications the regulatory framework should be extended so as to allow pro-active measures of the telecommunications regulator on its own initiative. In the mobile phone market number portability should be imposed. This would reduce the consumers' switching costs and is thus likely to increase competitive pressures in the market for mobile telephony.

- The introduction in the electricity and gas sectors of freedom for consumers to move between suppliers, scheduled for this year and the next, respectively, denotes a major achievement, but with vertically integrated utilities dominating these markets effective non-discriminatory access to networks is not fully secured. Thus, to strengthen competition in the electricity and gas markets grids need to be completely unbundled from distribution and generation. At the minimum, this requires a separation of networks and generators into different legal entities. This should be reinforced by privatising utilities.

- In the postal sector the monopoly rights for letter delivery should soon be reduced and terminated. To the extent universal service obligations in the delivery of mail are associated with additional costs, financing such services by granting monopoly rights is not adequate. In a competitive market, such services could be commissioned by the government and paid for out of the general budget. Opening the postal market to competition should be fostered by transferring the regulatory competence from the Ministry of Transport, Innovation and Technology to a strong independent regulator.

- In the railway sector entry of private providers of transportation services should be fostered. This requires, in particular, that independence be established of the grid from the provider of transport services.

Important regulatory issues also arise with respect to non-network sectors. The regulation of shop opening hours should be liberalised further. To level the playing field for competitors in public procurement, the relevant rules should be made uniform across the different layers of government, based on open tendering. Such action, by putting downwards pressure on procured goods prices, would also aid the process of consolidating general government finances. Several measures have been introduced over the past years to strengthen Austria's financial markets. To some extent, this has been a success, reflected in increased product variety, but equity capital financing of companies still plays a relatively small role. Introducing a funded layer into the pension system should aid the further development of equity capital markets, provided the rules defining admissible pension plans are not too restrictive for investing in pension instruments to be attractive. Furthermore, continued privatisation of public sector c ompanies should contribute to increasing the share of stocks in the portfolios of private households. Privatisation should be extended to the remaining state-owned banks at all levels of government, which would contribute to levelling the playing field in the banking sector particularly in the mortgage segment. However, low effective taxation of owner-occupied housing biases investment decisions in favour of real estate, and this should be corrected.

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Table 11

Household electricity prices in Austria

May 2001

                        Grid access
Electricity supplier      charges     Energy price  Total

                         [euro]/1 000 kWh (excluding taxes, electricity

BEWAG (Burgenland)           86             44       129
Salzburg AG (Salzburg)       92             26       118
EAG (Upper Austria)          84             31       114
STEWAG (Styria)              97             15       113
KELAG (Cornithia)            69             40       109
TIWAG (Tyrol)                59             50       109
EVN (Lower Austria)          65             43       108
Wienstrom (Vienna)           61             41       102
VKW (Vorarlberg)             64             37       101

Highest/lowest ratio       1.65           3.28      1.28

                                                 Electric bill
                        Total (including    (electricity levy [euro]
Electricity supplier    electricity levy    0.015/1 000 kWh, 20 per
                        and VAT) in euro      cent VAT) per year,
                                             consumption 3 500 kWh

                          [euro]/1 000 kWh             [euro]
                         (excluding taxes,
                         electricity levy)

BEWAG (Burgenland)             173                     606
Salzburg AG (Salzburg)         159                     557
EAG (Upper Austria)            155                     542
STEWAG (Styria)                153                     536
KELAG (Cornithia)              149                     521
TIWAG (Tyrol)                  149                     521
EVN (Lower Austria)            147                     515
Wienstrom (Vienna)             141                     493
VKW (Vorarlberg)               140                     487

Highest/lowest ratio          1.24                    1.24

Note: Ranking of suppliers following the total annual electric bill.
Regional discounts are not considered.

Source: Oesterreichische Nationalbank, Elektrizitats-Control GmGH.
Table 12

Electricity prices in EU countries (1)

Austria = 100

                Industry prices         Consumer prices

                             Level of consumption

                     Small       Small     Medium    Large

Belgium              112.1       129.1      125.3    116.4
Denmark               57.5       132.9       82.6     71.6
Germany              119.1       160.9      130.7    119.2
Greece                74.9        59.8       59.6     66.5
Spain                 87.3        93.4       90.9     82.8
France                76.1       108.2       96.5     92.8
Ireland              112.8       116.9       84.1     80.3
Italy                 77.5        69.0      167.0    161.1
Luxembourg           106.3       173.7      118.6    107.0
Portugal              94.0       103.4      127.0    111.9
Finland               47.7       100.7       67.3     56.0
Sweden                35.9       135.3       66.3     60.8
United Kingdom        81.4       163.5       92.0     90.3

(1.) Without taxes, January 2001.

Source: Eurostat and OECD.
Table 13

Natural gas prices in the EU countries (1)

Austria = 100

                       Consumer prices            Industry prices

                               Level of consumption

                Small     Medium    Large     Small     Medium

Belgium         112.6      107.6    106.9     103.5      118.1
Denmark            ..         ..       ..     153.8      108.3
Germany         124.9      115.2    117.7     115.6      137.1
Spain           111.8      126.0    102.6      86.1      100.2
France          100.6       96.1     92.5      88.4      107.4
Ireland         121.5       82.9       ..      83.0       84.1
Italy            92.4      127.0    147.2     113.9      119.0
Luxembourg      100.6       86.9     99.1     102.5      124.6
Netherlands      90.4       71.9     76.4      82.0       97.6
Finland            ..         ..       ..     128.4      128.0
Sweden           91.7      104.0    119.1     145.9      172.3
United Kingdom   64.7       73.6     79.8      72.6       72.5


                 Level of


Belgium         103.8
Denmark          89.3
Germany         119.3
Spain            97.3
France           97.0
Ireland            ..
Italy            99.6
Luxembourg      119.5
Netherlands        ..
Finland          86.1
Sweden          131.8
United Kingdom   65.1

(1.) Without taxes, January 2001.

Source: Eurostat and OECD.
Box 3

Implementing the OECD Jobs Strategy - an overview of progress

Since the last review a number of policy measures in the spirit of the
OECD Jobs Strategy have been implemented, although in some fields
progress has been mixed. This summary reviews progress since the Jobs
Strategy recommendations were made for Austria in 1997

Job strategy proposal              Action taken since 1997

I. Increase wage and labour
cost flexibility

* Encourage wage                   Greater flexibility agreed by
  differentiation, greater         the important metal sector.
  plant-level bargaining           Changed wage profile for
  and opening clauses              white-collar workers.

* Facilitate the                   Subsidies introduced for
  employment of older              employment of older workers
  workers and reduce               and fines for dismissals.
  incentives for early             Relaxation of conditions for
  retirement                       part-time pensions.

II. Increase working-time
flexibility and ease employment
security provisions

* Reform regulations               Law governing hours of work
  underpinning inflexible          liberalised allowing more
  working practices                flexible organisation of
                                   working time for industries
                                   taking advantage of this
                                   (e.g. metal). Greater flexibility
                                   agreed in some collective

* Liberalise terms for             Restrictions reviewed and
  renewing fixed-term              assessed to require no action.

* Facilitate part-time and         Extension of obligation for
  casual work                      employers to pay social
                                   security contributions
                                   extended to self-employment
                                   and to casual jobs. Benefits
                                   given to employees for
                                   working-time reductions,
                                   Subsidised training leave
                                   tighter targeted. Restrictions
                                   for part-time employment in
                                   the public sector eased.

* Reform dismissal                 Existing regulations reviewed
  protection                       and assessed to require
                                   no action.

III. Reduce the distortions
arising from unemployment
insurance and related benefits

* Reduce the incentives for        Early retirement restricted.
  early retirement                 Incentives for early retirement
                                   pensions reduced.

* Reduce unemployment              Eligibility conditions tightened.
  benefits to seasonal
  workers in the tourist

* Reduce disincentives             Unemployment benefits and
  to take up work in social        assistance are now gradually
  assistance programmes            decreased for temporary
  and develop in-work              employment, rather than
  benefits                         immediately withdrawn,
                                   For unemployment insurance:
                                   waiting period introduced, the
                                   required minimum employment
                                   period lengthened, maximum
                                   duration of benefits increased.

* Give greater emphasis            Subsidies now paid to employers
  to active measures               for employing those on
  and less to passive              unemployment assistance.
  measures                         For those on leave, a subsidy
                                   is paid if an unemployed is hired
                                   to fill the job or if training is
                                   taken up. Subsidies introduced
                                   for working time reductions
                                   which lead to hirings of

                                   Financial aid to firms and the
                                   unemployed for training and
                                   integrating the unemployed
                                   is being expanded. Employment
                                   in social and health
                                   occupations to be promoted.
                                   Subsidies for employment
                                   associated with regional
                                   infrastructure investment.

IV. Improve labour force skills

* Preserve and restore             Curricula for some
  the attractiveness of            apprenticeships revised and
  the dual vocational              new occupations introduced.
  training system, clarify         Health insurance contributions
  its relationship to higher       for apprentices waived and
  education.                       work hours of apprentices
                                   liberalised. Procurement
                                   contracts to be linked to
                                   training. Tax break granted
                                   and injury insurance
                                   contribution waived for
                                   companies taking on
                                   apprentices. Financial
                                   assistance to institutions
                                   organising additional
                                   vocational training.

* Shorten and reform               New university law which
  higher education and             allows for shorter study
  focus it on more                 periods. Tuition fees
  occupational-oriented            introduced for students.
  studies. Extend role of
  new higher level schools
  (universities for applied

V. Enhance creation and diffusion
of technological knowhow

* Foster venture capital           Stock exchange merged with
  markets and reduce               options and futures markets.
  regulatory barriers              Vienna exchange now to link
                                   with Frankfurt. New single
                                   regulator for financial
                                   markets. Voluntary take-over
                                   code introduced. Programmes to
                                   encourage venture capital and
                                   business angels.

* Stimulate the                    Technology package being
  diffusion of                     implemented which seeks to raise
  technology                       level of R&D. Clusters to be
                                   promoted in basic research and
                                   employment of scientists in
                                   industry subsidised. Competence
                                   centres being established.

VI. Support an

* Facilitate                       Regulations governing
  the                              commencement of a trade
  establishment                    liberalised (Gewerbeordnung).
  of new                           Relaxed restrictions on opening
  enterprises                      large-surface shopping centres
                                   to protect local shops. Costs
                                   of establishing SMEs lowered.

                                   Abolishment of stock exchange
                                   turnover tax. Establishment of
                                   unified financial market supervisor.

* Reform                           Reform to bankruptcy law,
  bankruptcy                       changing govemance incentives
  law to                           and powers of individual creditors
  facilitate                       including a lowering of potential
  reorganisat-                     personal costs associated with
  ion                              bankruptcy. Re-organisation
                                   procedures established with
                                   financial sanctions for directors
                                   if bankruptcy follows.

* Planning                         Approval procedures simplified
  approval need                    and in some states down to three
  to be                            months.

VII. Increasing
product market

* Encourage                        Telecommunication liberalisation
  competition                      laws in force. Complete opening
  in the net-                      of the electricity market by
  work sectors                     autumn 2001 and of the gas
                                   market by autumn 2002.

                                   Accounting separation of railway
                                   services and tracks.
                                   Establishment of an independent
                                   railway regulator.

* Barriers to entry in             No major changes although
  the provision of local           a number of entities have
  services to be lifted            been taken off budget.
  and public and private           Public procurement rules
  suppliers placed on              are being reviewed.
  an equal basis

* Pursue privatisation             Postal savings bank (fully)
                                   and Telekom Austria (partly)
                                   privatised. Creditanstalt
                                   privatised. Tobacco monopoly

* Establish independent            Proposal to establish an
  competition authority            independent competition

Job strategy proposal              OECD assessment/recommendations

I. Increase wage and labour
cost flexibility

* Encourage wage                   Encourage the next step toward
  differentiation, greater         genuine opening clauses within
  plant-level bargaining           the collective bargaining
  and opening clauses              framework.

* Facilitate the                   Encourage wage negotiations
  employment of older              which seek to take account
  workers and reduce               of the special situation of older
  incentives for early             workers. As a complement to
  retirement                       this reform, make
                                   unemployment benefits for
                                   older workers more closely
                                   follow market wages.

II. Increase working-time
flexibility and ease employment
security provisions

* Reform regulations               Review effects of regulations
  underpinning inflexible          and, when necessary, open
  working practices                possibilities for flexible

* Liberalise terms for             Keep situation under review.
  renewing fixed-term

* Facilitate part-time and         Review the introduction of
  casual work                      social security contributions for
                                   casual jobs and self-
                                   employment with a view to
                                   supporting the transition from
                                   unemployment to
                                   employment. Liberalise
                                   restrictions on working time by
                                   occupation. Reconsider
                                   subsidies for part-time
                                   employment of older people.

* Reform dismissal                 Keep situation under review.

III. Reduce the distortions
arising from unemployment
insurance and related benefits

* Reduce the incentives for        Consider further means to curb
  early retirement                 early retirement in the short
                                   term and strengthen longer-
                                   term measures (stricter
                                   eligibility criteria, higher
                                   actuarial discounts for pension
                                   benefits). Abolish institutional
                                   segmentation of pension
                                   system. Reduce replacement
                                   rates of the pay-as-you-go
                                   system. Replace severance pay
                                   by company-based funded

* Reduce unemployment              Monitor and proceed with
  benefits to seasonal             reforms.
  workers in the tourist

* Reduce disincentives             To lower marginal effective tax
  to take up work in social        rates at lower income levels,
  assistance programmes            further examine possibilities to
  and develop in-work              raise earnings disregards while
  benefits                         simultaneously lowering
                                   benefits rapidly as people
                                   approach full-time employment.
                                   Develop in-work benefits
                                   in the context of greater wage
                                   differentiation. Widen job
                                   acceptance criteria with
                                   respect to skills. Abolish
                                   extended durations of
                                   unemployment benefits
                                   for older people.

* Give greater emphasis            Monitor to see whether
  to active measures               the restriction to take
  and less to passive              on unemployed is
  measures                         administratively feasible
                                   and that leave is not abused
                                   and becomes costly for
                                   the economy.

                                   Focus the measures narrowly on
                                   problem grop. Evaluate
                                   effectiveness of schemes.
                                   Embed support for social and
                                   health sector employment in
                                   wider reforms which encourage
                                   efficiency and sound finance.
                                   Ensure efficient
                                   infrastructure investment.

                                   Better integrated the various
                                   employment services, including
                                   the provision of social
                                   assistance. Widen the scope
                                   for private placement agencies
                                   and introduce contestability
                                   of PES-services.

IV. Improve labour force skills

* Preserve and restore             Continue to revise vocational
  the attractiveness of            training curricula and
  the dual vocational              occupations. Avoid
  training system, clarify         attaching subsidies and
  its relationship to higher       procurement to training. In
  education.                       support programmes for youths
                                   who have not foud
                                   apprenticeships, ensure
                                   that market forces are
                                   important in determining the
                                   type of training to be

* Shorten and reform               Shorten higher education and
  higher education and             make it more occupationally
  focus it on more                 oriented. Continue with reform
  occupational-oriented            of universities. Link funding
  studies. Extend role of          to performance. Examine
  new higher level schools         potential for moving some
  (universities for applied        study fields to the new
  sciences)                        institutes of higher

V. Enhance creation and diffusion
of technological knowhow

* Foster venture capital           Lower effective taxation of
  markets and reduce               equity. Widen the potential
  regulatory barriers              for investment funds to take
                                   equity in enterprises. Focus
                                   public financial support
                                   programmes on complementing
                                   private funding.

* Stimulate the                    Continue with basic reforms of the
  diffusion of                     university and tertiary sector to
  technology                       encourage greater integration with
                                   the economy and increased
                                   productivity of research funding.

VI. Support an

* Facilitate                       Continue to examine regulatory
  the                              impediments and improve
  establishment                    procedures especially at Lander
  of new                           level. Further liberalisation of
  enterprises                      trades law and of hours of trade.

                                   Monitor effectiveness of new
                                   institutional structure.

* Reform                           Monitor effects of reorganisation
  bankruptcy                       law. Consider extending
  law to                           protection to companies under
  facilitate                       restructuring. Improve discharge
  reorganisat-                     procedures allowing faster
  ion                              re-entry to business life
                                   of an entrepreneur.

* Planning                         Monitor the effectiveness of the
  approval need                    new procedures and continue
  to be                            reform. Complete the one-shop
  simplified                       permission process.

VII. Increasing
product market

* Encourage                        Adopt a more pro-active policy
  competition                      stance in telecommunication
  in the net-                      regulation, including full number
  work sectors                     portability in the mobile phone
                                   segment. Monitor
                                   telecommunication prices.
                                   Continue with energy market
                                   reforms and secure complete
                                   unbundling of grids from
                                   distribution and generation,
                                   reinforced by privatisation
                                   of utilities. Set access fees in
                                   network sectors at competitive
                                   levels and insure network access
                                   of competitors.

                                   Establish legal identies for
                                   railway services and tracks and
                                   and ensure non-discriminatory
                                   access to tracks for third-party
                                   service providers. Reduce the
                                   the share of letter delivery
                                   reserved for the publicly-owned
                                   incumbent. Establish an independent

* Barriers to entry in             Abolish preferential treatment of
  the provision of local           public suppliers. Introduce
  services to be lifted            greater market testing.
  and public and private           Establishing common public
  suppliers placed on              procurement rules across different
  an equal basis                   levels of government.

* Pursue privatisation             Complete the privatisation
                                   programme, particularly in
                                   liberalised sectors.

* Establish independent            Proceed with reform. Secure
  competition authority            effectiveness by establishing clear
                                   competencies. Monitor if personal
                                   endowment is sufficient. Set fines
                                   sufficiently high to deter anti-
                                   competitive behaviour.

(30.) See OECD (1999a).

(31.) See Pollan (2001).

(32.) Moreover, general training by employees is partly financed by the labour office.

(33.) See Walther (1999).

(34.) See Mayrhuber (2000).

(35.) In 1997 231/2 per cent of all occupations in Austria were shorter than one year. See Mayrhuber (2000).

(36.) According to the 2000 micro-census. Part-time employment denotes employment with less than 36 hours worked per week.

(37.) See Evans et at. (2001). See also OECD (2001b).

(38.) Statistics on work commissioned by firms from self-employed (freie Dienstvertrage) are only available from June 1998 onwards, which precludes comparisons with their expansion prior to the increase in social security charges. Total social security charges for both small-hours jobs and work commissioned by firms from self-employed are still lower than for regular employment.

(39.) Other leaves with specific training programmes do not require new hirings, such as leaves for older people for whom preferential support rates apply.

(40.) It has been argued that conditioning unemployment benefits on the wage level in the last job might imply a disincentive for the unemployed to accept a lower-paid job. However, to the extent the old regulation has help up reservation wages this is not true.

(41.) See Winter-Ebmer (1998).

(42.) See OECD (2000b) and OECD (2001c).

(43.) The re-employment guarantee for formerly employed recipients was left unchanged at two years.

(44.) Biffl (2000).

(45.) See OECD (1994) and OECD (2001c).

(46.) See Biffi (2000).

(47.) See Riggs (2001); OECD (2001d) and OECD (2001e).

(48.) See Osterreichisches Institut fur Wirtschaftsforschung and Institut fur hohere Studien (2000).

(49.) Evaluation studies for active labour market measures in Austria include: Biffl et at. (1996). Lechner et al. (2000). Fehr-Duda et al. (1996). Bundesministerium fur Arbeit, Gesundheit und Soziales (1999). Lechner et al. (2000). Lassnigg et al. (1999). Blumberger (2000). Huber and Walterskirchen (1999). Lassnigg and Steiner (2000). Osterreichisches Institut fur Wirtschaftsforschung, Institut fur hohere Studien (2000).

(50.) See Fay (1996). Martin (1998). Mitteraueret at. (1999. Hagen and Steiner (2000). OECD (200 Ic).

(51.) See OECD (1999b and 2001f). Also, Hagen and Steiner (2000).

(52.) The share of hirings without financial support appears lower if the responses of the employees are also taken into consideration. See Mitterauer et al. (1999).

(53.) See Black et al. (2001).

(54.) Integration of local employers into territorial employment pacts appears to proceed sluggish, however. See Osterreichisches Institut fur Wirtschaftsforschung, Institut fur hohere Studien (2000).

(55.) In 2000, 10.2 of the dependent employees were foreigners. Some 10 percent of the foreign dependent employees are EU nationals. See Biffl (2001).

(56.) Walterskirchen and Biffl (2001).

(57.) At the age of 14 or 15 young people have the following options of upper secondary education: secondary high schools (at present absorbing some 20 per cent of an age cohort); secondary vocational schools designed to provide both a basic understanding of a particular field to skilled worker level and broader general education (some 15 per cent of an age cohort); secondary technical and vocational colleges designed to provide advanced general and vocational training to higher-skilled worker level (some 25 per cent of an age cohort); the dual apprenticeship system providing within-company training along with instructions at a vocational school.

(58.) The federal University Studies Act of 1997 entitled universities to develop new curricula in their own responsibility.

(59.) See OECD (2001 g).

(60.) The fee is [euro] 363 per semester (Sch 5 000). The government estimates that the proceeds - to be used for investment in the university system - will total more than [euro] 145 million per year.

(61.) In the United Kingdom the narrowing down of the multi-layered structure of the institutional set-up for competition policies is considered important to promote effective regulation. See OECD (2001 h).

(62.) The example of the United States shows that a multiplicity of enforcement institutions and enforcement methods poses a continual challenge for maintaining co-ordination and consistency. Despite no history of conflicts among the institutions the system is nevertheless considered costly. See OECD (1999c).

(63.) The size of such fines should be sufficiently large to ensure compliance in order to avoid firms - particularly large ones - to consider such fines as merely administrative costs. Several countries - Canada, Ireland, Japan and the United States and with the United Kingdom considering - have provisions of using prison terms to ensure compliance. Until now only the United States has used such provisions actively. Furthermore, such fines in the United States are normally on a per day of non-compliance basis, leading to cases with accumulated fines of several million dollars.

(64.) The electricity and telecommunication sectors have independent sector regulators, the Elektrizitats-Control GmbH and the Telecom Control GmbH. Their findings are referred to sector specific commissions (Elektrizitats-Control Commission and Telekom-Control Commission), which then can issue administrative fines if companies are found not to comply with the issued regulation. The decisions of the Elektrizitats Control Commission can be referred to the Cartel Court, while those of the Telekom Control Commission can be referred to the Administrative Court (Verwaltungsgerichtshof) or the Constitutional Court (Verfassungsgerichtshof). The split between regulator and commission has been introduced as the Austrian constitution allows administrative bodies to issue fines only to a limited extent.

(65.) See OECD (200li).

(66.) Regulatory capture refers to a situation where regulators - often inadvertently - advocate the interest of the producers they are intended to regulate. With or without the use of sector-specific regulators, risks of regulatory capture can be reduced by increasing the transparency and accountability of regulatory decision making.

(67.) For a discussion of appropriate roles for sector-specific regulators and general competition authorities, see OECD (1999d); and OECD 12001f).

(68.) For details, see Ministry of Economic Affairs and Labour (2001).

(69.) For a detailed discussion of the issues involved, see Steiner (2001).

(70.) While the consumer has the free choice of a supplier and is priced accordingly, "actual" consumption of electricity occurs from the pool of all suppliers delivering electricity into the net.

(71.) The national high voltage transmission grid (Verbund) is owned by a regulated monopoly with transmission charges set by the regulator.

(72.) Moreover, charges vary across the Lander and with different levels of grid loss costs, all factors combined adding to a diffuse picture.

(73.) Present rules for unbundling follow EU guidelines. See EU Commission (2001).

(74.) On 26 April 2001, the OECD Council adopted a recommendation encouraging Members to consider and balance the benefits and costs of structural versus behavioural measures in addressing problems likely to arise in situations in which a regulated firm is or may in future be operating simultaneously in a non-competitive activity and a potentially competitive complementary activity.

(75.) Steiner (2001) op. cit.

(76.) For examples, see OECD (2001j).

(77.) Bundesministerium fur Wirtschaft und Arbeit (2000).

(78.) A part of the Austrian telecommunication regulator -- the Telekom-Control GmbH -- formally ceased to exist on 31 March 2001 when it became part of the Austrian Regulatory Authority for Broadcasting and Telecommunications, which assumed, among other functions, Telekom-Control GmbH's function as an agent to the Telekom-Control Commission. The RTR is also responsible for broadcasting regulation.

(79.) EU Commission (2000a).

(80.) By mid-2000 there were more than 200 interconnection agreements and nearly 50 instances where the regulator determined interconnection charges.

(81.) ECB(2001).

(82.) The UMTS auction in November 2000 yielded [euro]828.5 million and allocated six licenses to six bidders in the paired segment, which should provide for increased competition in the mobile phone market, once the system has been developed.

(83.) OECD (2001k).

(84.) Such calls refer to a direct call from a fixed-line or mobile telephone to a mobile phone where it terminates.

(85.) For further discussion of the high fixed-to-mobile tariffs and roaming charges issues, see OECD (2001I).

(86.) See EU Commission (2000b).

(87.) OECD (200lm).

(88.) Five providers have been accredited for the use of electronic signatures and the monitoring body is the Telekom Control Commission.

(89.) Transport services and the network have been separately incorporated in Denmark, France, the Netherlands, Sweden and the United Kingdom. OECD (2001j).

(90.) See OECD (2001f).

(91.) The EC has proposed to lower the limit to 50 grams by 2007, see EU Commission (2000c).

(92.) OECD (1999e).

(93.) For a discussion of competition issues in the postal sector, including problems related to universal service obligations, see OECD (1999f).

(94.) Commission Recommendation for the 2001 Broad Guidelines of the Economic Policies of the Member States and the Community.

(95.) The text of public invitations to tender can be retrieved from the Internet pages of the newspaper Wiener Zeitung".

(96.) See Boyland and Nicoletti (2001).

(97.) Not all Lander continue to provide such public deficiency -- de facto insolvency -- guarantees.

(98.) The credit rating of Bank Austria (at the time partly owned by the City of Vienna) will be lowered from Aa2 to Aa3 in connection with the finalisation of its sale to the German HypoVereinsbank.

(99.) From mid-2002 onwards, previously unidentified owners of saving accounts exceeding [euro] 14 535 can access their accounts only after their identity has been reported to the Financial Intelligence Unit (FIU) and the latter does not object.

(100.) The following international correction of telecommunication shares also affected Telekom Austria shares, which fell by about a third in the first months after the privatisation, although the share has strengthened since.

(101.) Ministry of Economic Affairs and Labour (2001).

(102.) The act also creates a legal basis for the participation of the Austrian Securities Authority in international co-operation in the area of supervision and allows for the authorisation of new supervised markets based on alternative trading platforms.

(103.) Burges also issues undated tradable bearer securities with a minimum redemption period of 10 years to raise long-term capital for SMEs, although this instrument still has to attract market interest. Nevertheless, possible hurting household investor confidence in purchasing shares from new privatisation.

(104.) The Austrian property tax, measured as a share of GDP is the second lowest in the EU. See Joumard (2001).

(105.) In order to make the financial supervisor fully independent a qualified two-thirds parliamentary majority would have been necessary, but could not be reached.

(106.) The large involvement of Ministry of Finance in financial supervision is unusual compared with the practice of most other OECD member countries.

(107.) The Financial Market Supervisory Authority will have a managing board of two persons, a supervisory board of six persons and an advisory board of eight persons. Half of the members of the managing and the supervisory boards are nominated by the OeNB and the other half by the Ministry of Finance.

(108.) The institutions will be charged fees and the federal government will make a fixed annual contribution of [euro] 3 1/2 million.

(109.) In Germany, the government has tabled a draft law for the creation of a single supervisory body.

(110.) The FMSA may commission the OeNB to carry out on-site inspections in the fields of credit and market risks in OeNB's name and responsibility.

(111.) OECD (2001j).


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Title Annotation:Austria's labor market
Publication:OECD Economic Surveys - Austria
Article Type:Statistical Data Included
Geographic Code:4EUAU
Date:Dec 1, 2001
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