Lifting growth potential through further product and labour market reforms.
The macroeconomic policy response to the global financial crisis is key in the present circumstances, but the importance of structural policies in product and labour markets is undiminished. Product and labour market conditions will influence the path of the economy during the ongoing downturn, as well as the pace of recovery once the global economic landscape improves. Over the longer run, the economy's structural features remain essential determinants of living standards.
Austria has one of the highest GDP per capita levels in Europe, but the decomposition of the determinants of GDP per capita shows remaining productivity and labour utilisation gaps (Figures 2.1 and 2.2). In recent years, the productivity gap has widened, despite the manufacturing sector's strong performance. In contrast, the gap in labour force participation has diminished, notably as a result of an improvement in the participation rate of older workers. At the same time, Austria's relative position as regards the employment ratio (i.e. the ratio of employment to the labour force) has slightly weakened. This was due to both a slight decrease in the employment ratio of the skilled workers, and to the increase in the share of low-skilled workers in the labour force (with their significantly lower employment ratio). As a result of these developments, and stronger performance by other countries, Austria's relative GDP per capita level has lost some ground over the past decade, despite the impetus provided by its integration with the rapidly-growing economies of Central and Eastern Europe (CEE).
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Against this background, this chapter provides an overview of recent policies and developments in product and labour markets which are expected to affect potential output and trend growth.
Productivity growth has picked up, but the business environment could be more supportive
Two factors have stimulated productivity growth in recent years (Figure 2.3). First, the Austrian economy has been more exposed to international and regional competitive forces. Most prominently, the build-up of the technological and industrial capacity of GEE has made these countries both vibrant markets and strong competitors for Austrian manufacturing. The emergence of low-cost overseas suppliers has also compounded competitive pressures. In response, Austria's business sector has strived to contain its labour costs with the support of distinct social partnership arrangements and intensified innovation efforts, thereby succeeding in maintaining sizeable production capacities at home. Productivity, investment, employment and export performance in the exposed sector have remained strong and improved further (Figure 2.4).
Secondly, private-sector R&D activity has expanded faster in Austria than in other OECD countries (Figure 2.5) and international surveys single out Austria as a prominent innovator in recent years (European Commission, 2007). A relatively generous tax treatment of business R&D spending, direct subsidies to innovation projects and a variety of public-private co-operation schemes have been put in place, as reviewed in the previous OECD Economic Survey. Their rapid implementation might have entailed some inefficiencies, but they appear to have promoted technological awareness and to have contributed to a swifter diffusion of innovations. To make innovation policies more effective, an evaluation of existing measures was recently initiated by the authorities. (1)
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In contrast with the strong output and productivity performance of trade-exposed manufacturing, there is room for more competition, investment and productivity growth in services. Recent data confirm the findings of the previous OECD Economic Survey that productivity, output and employment performance in services fall short of the best-performing countries (Figure 2.6). As services account for the bulk of economy-wide employment and value-added, their relative lag is a drag on aggregate supply-side performance.
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The regulatory and competition framework of services does not seem to have kept pace with rapidly-evolving OECD benchmarks. According to the latest vintage of OECD regulatory indicators (OECD, 2008a), despite important liberalisation initiatives in large sectors such as retail trade and telecommunications (Figure 2.7), the market environment of services lacks the incentives and disciplines of trade competition and remains more restrictive than in many other countries. In certain professional services strict entry rules which have been put in place with an aim to preserve the quality of services have probably had anti-competitive consequences. In the area of retail trade, the Austrian Trade Act was amended in 2002 and 2008, facilitating market entry and making shopping hours more flexible. The number of retail outlets increased and the total retail trade surface on a per capita basis is, today, one of the highest in the OECD. Even so, some of the regulations in this sector remain stricter than in other OECD countries, notably under regional planning rules concerning outlet size enforced by the Lander and in terms of shopping hours. More generally, the rules governing market entry, the creation of new enterprises and sectoral regulations in network services are less supportive of competition, and, as a result, of innovation and productivity growth.
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The legal framework for competition is formally quite comprehensive, with very few sectoral exemptions from generally-applicable competition law. The 2005 reform of the Cartel Act, which entered into force in 2006, aligned Austrian law with the European competition law. However, competition policy does not appear to enjoy very wide support in society, and the Federal Competition Authority (FCA--Bundeswettbewerbsbehorde) is vested with limited resources and powers. This restricts its success in enforcement and its competition advocacy role and has limited, so far, its capacity to undertake more in-depth market studies in important areas where market power is believed to be associated with competition problems As an example, an in-depth investigation of the retail sector was delayed by a lack of investigative power to enforce presentation of documents by companies; nevertheless, the investigation was completed in June 2007.
In terms of regulatory conditions for market entry across all sectors, whereas starting up sole proprietorships is fairly easy and many have been created in recent years, high minimum capital requirements for the creation of limited liability enterprises inhibit entrepreneurship. Also, in certain sectors, Austria's federal structure tends to work against national market integration and against efficient and competitive markets (such as in construction, with differences in building regulations across Lander).
Greater use of the tools of modern competition policy, including close investigations of pricing and other behaviour on the sole initiative of the competition authority would be welcome, to promote competitive markets in all sectors. Such a competition advocacy function would help defuse some looming public pressures for the activation of less appropriate policy instruments to counter risks of abuse of market power, such as recourse to administrative price controls. Indeed, the 1992 Price Act (Preisgesetz) allows to administratively regulate prices under certain circumstances upon advice of a Price Commission, which would admittedly be a heavy-handed and practically unsustainable substitute to market competition. Nonetheless this mechanism has been invoked in recent public discussions as a possible device to improve price restraint in retail trade.
More competition in network industries such as energy, transport and communications is important for economy-wide real incomes and cost-competitiveness. These services are characterised by large vertically-integrated concerns with high government ownership--to a greater degree than in other OECD countries. Government ownership reportedly continues to enjoy large public support, being seen as a source of quality and security of supply, but cost and price performance fall short of OECD benchmarks. (2) For example, electricity prices for industry generally exceed OECD averages, and while fees in telecommunication services are generally lower than OECD averages, fixed-line communication fees remain higher than in Germany, Switzerland and Sweden. (3) Sectoral regulators and the FCA should monitor market structures, behaviour and prices in particular in the following areas:
* Wholesale and retail electricity. A recent investigation of the electricity industry carried out by the Federal Competition Authority and the Energy Regulatory Authority (E-Control) found that the unbundling of energy companies, notably at the level of certain Lander, remains insufficient. Their all-inclusive pricing practices are also not sufficiently transparent. Electricity companies recently took voluntary commitments to "bring direct improvements" to consumers and to implement "less expensive co-operation" between suppliers and system operators. Costs and prices should be scrutinised against international benchmarks and access terms to distribution networks should also be monitored.
* Gas. The switching rate of consumers among alternative gas providers remains very low. However, the central competition issue in this sector is the diversification of cross-border supply sources, requiring more co-operation and action at the European level.
* Rail passenger transportation. This sector is open to competition, but no new entry has occurred. Comprehensive "public service obligations" should be re-assessed, and if necessary re-formulated, in more competition-facilitating ways.
* Rail freight. No new entry has occurred in this market either. There may be room for more pro-active policy initiatives to promote market entry and competition by European and regional providers.
* Postal services. The market is very competitive in newspaper and parcel deliveries, but remains monopolistic for standard letters. The post market is set to be fully liberalised by the end of 2010, in accordance with EU legislation.
* Telecommunications. This sector raises particularly challenging tasks for the regulator and the FCA. Services are provided under a mixture of monopolistic (fixed network), competitive (mobile) and bundled (Pay TV, ADSL, etc.) arrangements. In 2008 the Telecommunications Regulatory Authority (Telekom-Control-Kommission) found that Telekom Austria possessed significant market power in wholesale broadband internet access, as did all mobile operators in the termination of voice calls on their respective networks. As a consequence the Authority mandated cost-based tariff reductions. It must be noted that Austria, which until recently had broadband penetration above the OECD average, has started to lag as measured by the number of subscribers per 100 inhabitants. Prices, which on average tend to be high, are estimated to play a role in this. Access conditions to all network elements should continue to be closely monitored and more competitive access prices should be obtained.
Hindrances to competition in liberal professions have started to be addressed: regulations governing several professions, including accounting and auditing, have been amended (Berger et al., 2007). Still, numerous self-regulations prevail, some of which are potentially anti-competitive. The FCA discussed, for example, the recommendations concerning fee calculations with the Austrian Chamber of Tax Accountants. The recommendation of the Chamber to its members in this area constituted an infringement of the Austrian and EU competition law. After intense discussions in 2008, the Chamber withdrew their recommendations, to avoid a legal procedure with the Cartel Court.
Labour utilisation is high but some weaknesses persist among vulnerable groups
Austria's overall labour market performance is strong, with a high employment and low unemployment rate, and it has remained so in the initial phase of the ongoing downturn until early 2009. At the same time, there is a significant difference between a large, well-performing core of the labour force, and some more vulnerable groups with lower employment rates (Figure 2.8). Better performance of the latter would boost economy-wide employment, potential output and social cohesion.
More specifically, male and female workers between 25 and 54 with at least upper secondary education, who represent 80% of the labour force, have a very high employment rate, unlike less-skilled and older workers. Among high-income OECD countries this contrast is particularly strong today in Austria (Figure 2.9 and Boxes 2.1 and 2.2).
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Looking forward, the gap between skilled prime-age and less-skilled older workers will affect Austria's short- and longer-term employment performance through three channels:
* More vulnerable workers are generally the first ones to come under pressure when activity falls. In the light of the experience with previous slowdowns, the short-term prospects for the employment of these workers are bleak.
* A number of recent and ongoing policy initiatives may amplify adjustment challenges in vulnerable labour market segments. A hike in the guaranteed social minimum income and transition to a higher national minimum wage (both objectives currently pursued by the authorities) may, if not accompanied by supporting measures, undermine the supply and demand of low-skilled labour, not only in the short but also in the longer term.
* The employment challenges faced by vulnerable workers may increase in the future with the full liberalisation of the movement of workers from neighbouring new EU members. Exemptions from free movement of workers within the European Union have limited the inflows of lower-skilled workers into Austria to date, except for jobs in home care, seasonal and commuting work. From 2011 onwards, these limitations will be removed, and workers from the region, including workers with higher skills and lower wage expectations than local low-skilled workers, may start to compete with them, at least for certain types of jobs.
Box 2.1. Low-skilled workers The employment rate of the low-skilled, at about 55%, is weaker than in most other high-income OECD countries. It is notably lower than in the United States, United Kingdom, Australia and New Zealand, as well as than in other small European countries such as Sweden, Denmark, Norway, the Netherlands and Switzerland. (1) The share of the low-skilled in the working-age population is, however, diminishing. The weight of people with less than upper secondary education declined from almost 30% in 1996 to 18% in 2006. This decline, also observed in other high-income OECD countries, results from the higher educational attainment of younger cohorts. The low-skilled are concentrated in certain social groups: * Older workers. 30% of the 55-64 year olds are low-skilled, against 13% of the 25-34 group. * Immigrants. The share of the foreign born in the labour force exceeds 15%--the highest in the European Union after Luxemburg. As a result of the geographical origin of past immigration, the educational level of immigrants is lower than for the natives (see below Figure 2.13). * Women. The educational gap between men and women remains wide. In 2006, the shares of men and women with at least upper secondary education differed by 12 percentage points, against an OECD average of 3 percentage points. Women account for about 60% of the low-skilled working-age population. (2) * Workers in "atypical" employment forms. The utilisation of non-standard labour contracts is higher for the low-skilled. While the share of the low-skilled in total employment was 17% in 2007, they represented 26% of manpower leasing and more than 50% of temporary employment. * The unemployed. More than 30% of the unemployed were low-skilled in 2007. Among the long-term unemployed (with an unemployment spell of more than 12 months) their share exceeded 40%. In February 2009 the share of the low-skilled in total unemployment surged to 46%. * The inactive. The low-skilled represent nearly 33% of all working-age inactive persons in Austria. About 38% of the low-skilled are inactive, whereas the corresponding rate for the entire population is 22%. (1.) OECD, Eurostat and Statistics Austria data have been used in this Box. (2.) As in other OECD countries, the employment rate of low-skilled women is lower than for low-skilled men. It is higher, however, than the OECD average. This may be attributed to the very rapid growth of female part-time employment over the past decade. In 2006, the employment rate for low-skilled women was 50% against an OECD average of 48%, whereas it was 66% for low-skilled men against an OECD average of 70%.
OECD experience shows that the employment of the more vulnerable groups can be durably improved. Three areas deserve close consideration: i} the effective readiness to work (i.e. actual labour market availability) of low-skilled workers; ii) demand for such labour; and iii) up-skilling of this group.
Box 2.2. Older workers Among OECD countries, Austria has a particularly low rate of employment of older workers aged 55 to 64, even though it has risen somewhat in recent years, as a result of measures tightening eligibility for early retirement. Specifically, it increased from 32% in 2005 (41% for men and 23% for women) to 41% in 2008 (50% for men and 28% for women (1)). The OECD average approaches 55%, however, and in Sweden, Switzerland and Denmark, the rate varies between 60% and 70%. This situation results from the massive withdrawal of older workers from the labour force since the 1970s. Generous pension, early retirement and disability benefit schemes have provided large early exit avenues from the labour force. About 10% of the working-age population receives either old-age, early retirement or disability transfers--the highest incidence among OECD countries. Over one third of those retiring in 2005 did so on "disability" grounds. Benefit conditions for these schemes were tightened a few years ago, but cumulative cohort effects persist. In addition, some recent measures have weakened the participation incentives of older workers. The penalty on early retirement was reduced in 2007, with a cut in the discount rates on benefits applicable for each year of early retirement from 4.2% to 2.1%. (2) The implicit rate of taxation on continuing to work (after eligibility for retirement) remains high by international standards. There are also some loopholes in the heavy work and disability schemes. Austria has indeed one of the highest incapacitation rates among older workers due to the "own occupation-based assessment of disability" (Berufsschutz). This implies that a worker can claim disability benefits after age 55 if the capacity to work in "one's normal occupation" is undermined. In contrast, most other OECD countries grant disability only in case of general incapacitation. Austrian social partners remained committed to this provision while other countries which used to have similar rules such as Germany, Italy, Norway and the Netherlands abolished them in the 1980s and 1990s. Even before the ongoing downturn, a worker becoming unemployed after 50 faced a low probability of returning to work. Only half of unemployed men and women above 50 exited unemployment through employment before the crisis. For workers between 55 and 59 this rate declined to 30% for men and 20% for women. The low de facto employability of older workers undermined their participation rates: the share of inactive persons who declare that they would prefer to work is particularly high in Austria (8.4% against an EU-25 average of 5.2%). The detachment of older workers from the labour market is acknowledged by the Austrian authorities as a serious challenge, and new measures are under consideration to increase participation rates. In this context, it is important to phase in full all the provisions of the 2003-04 pension reforms. (1.) 2007 figures for genders. (2.) This amendment is to apply for a transition period lasting until 2050, and covers persons who are part of both the old and the new pension system: for persons whose first pension contributions start after 1st January 2005, and for disability pensioners, the reduction for each year of early retirement remains at 4.2%.
Labour supply incentives of low-income workers can be improved
The actual labour market availability of low-skilled workers, i.e. their readiness to work at prevailing market wages depends, among other things, on: i) the financial incentives associated with transition from inactivity to employment, and from part to fulltime employment, and ii) the degree of administrative enforcement of the rules requiring that beneficiaries of social assistance take up appropriate work. There appears to be room for progress in Austria in both areas.
The combination of wage, tax and social assistance systems shapes the incentives of inactive and unemployed persons to take up work. Effective tax rates measuring the financial loss incurred by inactive or unemployed persons transiting to employment are presently particularly high for three main groups (see Annex 2.A2 for further details):
* Low-skilled unemployed and inactive taking up work. A single person who used to earn 67% of the average wage before unemployment in 2007 needed to earn at least 33% of the average wage in a new job to achieve any net financial gain. This provides particularly weak incentives for the unemployed finding and taking up part-time jobs. Effective taxation increases to much higher rates (of above 100% for certain family situations) if the person starts from a so-called "marginal" job position (that he/she can cumulate with unemployment benefits).
* Inactive low-skilled women with two or more children. This group faces higher effective taxation when taking up work. If a woman with two children aged two and three (eligible for childcare benefits) as a second earner in a family finds a job earning 67% of the average wage, 83% of the earnings from the new job will be taxed away (taking into account the child care costs that she will need to pay for two children aged two and three). To cope with this, three options in the utilisation of childcare benefits were introduced in 2008; the benefit is higher the shorter the benefit period and the cap for additional earnings was increased to 16 200 [euro] per year. In 2009, an income tax allowance of up to 2 300 [euro] per year was introduced, to cover the care costs of children below ten.
* Workers transiting from part to full-time employment. Due to the structure of the Austrian income tax regime, in which low-wage earners pay almost no income taxes, this group is also taxed at a high marginal rate. Raising earnings from 50% to 100% of the average wage, for example the transition of an average wage earner from half to full-time work, is taxed at 45%--one of the highest rates among OECD countries.
The changes in the tax and benefit system targeted in the new government programme will alter the effective taxation rates associated with employment transitions. The reform of the personal income tax system includes rate cuts for low-income individuals: the tax rate for individuals earning between 10 000 [euro] and 11 000 [euro] (the first tax bracket) is being reduced from 33% to 0% (Chapter 1) and this will reduce the taxation of those taking up work, strengthening work incentives. However, the adoption of a guaranteed means-tested minimum income of 733 [euro] per month (announced in the government agreement of December 2008 but not yet adopted by Parliament) would combine several already existing social transfers of the different Lander, potentially weakening work incentives. This effect will be mitigated by the phasing-out of pay-back obligations for social assistance payments, (4) and the transition to a new national minimum wage floor of 1 000 [euro] (5) (even if the number of workers who will be directly affected remains unclear--see below). The extension of preferential tax treatment for dependent children will also improve work incentives. Finally, the planned adoption of additional in-work benefits for special groups will reduce their effective taxation rates.
The authorities announced that in-work benefits will be provided in the future by maintaining part of the social transfers to those taking up work at low income levels. Such measures had already existed, but were available only to very specific groups. The government plans to make them available to all long-term unemployed (including older and disabled workers, and the inactives returning to the labour market). The net effect of this overhaul in the tax and benefit system cannot yet be precisely calculated but needs to be carefully analysed before implementation.
The rules enforcing labour market availability of recipients of unemployment benefits are among the strictest OECD-wide (Annex 2.A2). In practice, however, recipients of social assistance may face less compelling requirements. One challenge is that the administration of social assistance is a Lander responsibility, while the administration of job search and active labour market programmes is the Federal government's. Although all recipients of social assistance are in principle referred to job search and active labour market programmes, the actual enforcement of these programmes differs according to local conditions and Lander policies. The division of tasks between government levels in the administration of unemployment insurance, unemployment assistance (which is activated when insurance benefits expire), and of mainstream social assistance should be based on a clearer legal ground, and on a clearer assignments of responsibilities.
One solution in the short-term is to more effectively co-ordinate unemployment insurance, labour market and social assistance services. The authorities plan to enhance the enforcement of work availability in the context of the introduction of the new minimum social income. The Public Employment Service, already in charge of the administration of unemployment insurance, is expected to participate in the treatment of applications for social assistance, and in the assessment of the work capacity of applicants. These "activation" steps in the management of social assistance are needed and will be welcome. At the same time, in light of other countries' experiences, a fuller integration of public employment and social assistance services should also be considered (OECD, 2001).
Demand for low-skilled labour appears to fall short of potential
Austria's labour costs have exceeded euro area averages since 2000, but remain lower than in Scandinavian countries, the Netherlands and Germany. They are several times higher than in CEE neighbours. Austria's co-ordinated wage bargaining system delivered a considerable degree of wage moderation in the past, especially in trade-exposed activities. Coupled with strong productivity gains, this helped preserve cost competitiveness. Even if wage growth will be strong in 2009, following negotiations in autumn 2008, it is expected that low inflation and a weak labour market will gradually help restore the moderation of labour costs (Figure 2.10 and Chapter 1).
Employment costs are, however, less flexible for low-skilled workers. A relatively high floor seems to have formed for their employment costs, at the risk of pricing them out of the labour market. Minimum wages are the main constituent of this floor. There is no officially legislated minimum wage, but hundreds of minimum wages negotiated at sectoral level. They differ across industries: from about 50% of the national average wage in metalworking and construction, to less than 35% for taxi drivers, hairdressers and ski instructors (Figure 2.11). Overall, the ratio of sectoral minimum wages to the national average wage exceeds the OECD average. In those sectors where minimum wages are relatively high, only workers attaining a minimum level of productivity are hired in regular jobs.
Since 2007 the government has encouraged social partners to agree on a minimum monthly wage of 1 000 [euro]. Due to the standard practice of 14 monthly wage payments per year, this new national minimum amounts to annual 14 000 [euro]. This new floor represents 35% of the national average wage, much lower than the levels prevailing in the largest sectors in Austria. It was therefore easy to comply with this objective in most sectoral wage agreements in 2009. Only a very small proportion of the labour force (1% to 3%) was directly affected by the new wage floor. (6)
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Still, the transition to a new national minimum wage floor might exert indirect effects on other wage agreements (notably if increased wages in traditionally low-pay sectors provide a higher basis for other agreements). Also, if social and political pressures grow in the future for the uniformisation of employment forms, the cost of "regularisation" of workers currently in atypical job positions will be higher. Finally, the potential employment costs of the currently inactive or unemployed persons will increase. Therefore, it will be important to monitor closely the economy-wide effects of this new floor, and contain any unfavourable impacts on the employment prospects of the low-skilled, marginal and inactive persons.
Total compensation costs of the low-skilled are further increased by labour taxes. Labour tax wedges in Austria are among the highest OECD-wide, especially for low-income workers. While several countries with high tax wedges grant rate reductions or exemptions for low-income workers, such measures have not been introduced to date in Austria (with the exception of a limited reduction in the unemployment insurance premia of low wage workers in 2008--see Box 2.3). The ongoing reductions in personal income taxes will reduce these wedges, but their main component remains compulsory social security contributions. As employer contributions account for the largest part of these wedges, they cannot be "absorbed" into employee take-home pay in the presence of sectoral wage minima, and amplify effective employment costs (Figure 2.12).
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The impact of labour market rules on business sector demand for low-skilled labour should also be taken into consideration. OECD labour market regulation indicators show Austria as close to the average of other member countries (OECD, 2006). However, there are signs that labour rules may fail to provide the needed degree of flexibility for the hiring of low-skilled workers in regular jobs. For example, immigrants are often employed informally in construction, tourism and agriculture, possibly revealing the high level of sectoral minimum wages and/or shortcomings in regulations, despite the availability of a more flexible official regime for seasonal work in these sectors. Another sign is the massive ongoing recourse to non-standard contracts for the employment of low-skilled workers (Box 2.3). The adequacy of labour market regulations for the employment of low-skilled workers in regular jobs may need to be re-assessed.
The authorities have responded to the observed weakness of demand for low-skilled labour. A wide range of incentives have been introduced over the years for potential employers, including:
i) The "combination wage" (Kombilohn). This in-work benefit scheme was first introduced in 2006, to facilitate the employment low-skilled workers in specific age cohorts in very low paying jobs. In practice, the scheme subsidised part-time jobs only. The take-up rate remained very limited, however, and the government is extending its reach from July 2009. Eligibility will still be limited to specific groups of long-term unemployed (disabled, older workers above 50 and women entering the labour market). Jobs paying from 23% (650 [euro]) to 60% (1700 [euro]) of the average wage will be subsidised by 150 [euro] per month for part-time positions (16-34 hours), or by 300 [euro] for full-time positions. The yearly budget allowance of the scheme is set at 10 million [euro], but should demand surpass this amount extensions will be considered.
ii) Support to long-term unemployed (Eingliederungsbeihilfe). Enterprises are subsidised for hiring long-term unemployed persons (defined as those who have remained unemployed for more than one year, or for six months for persons younger than 25), and persons deemed in danger of falling into that state. Subsidies can reach to up to 66% of the gross wage, and, in special cases, up to 100%.
iii) Apprenticeship help. Sizeable subsidies are offered to employers hiring apprentices to increase the supply of apprenticeship positions. The system was reformed in mid-2008. The creation of each new position is now supported by a lump-sum employer subsidy of three apprenticeship grants in the first year, two in the second, and one in the third and fourth years. Moreover, there are additional subsidies to help improve the quality of apprenticeship training (e.g. premia for apprentices with learning difficulties, or for good performance in apprenticeship final examinations).
iv) Support to old-age part-time work. This scheme permits an employee who is expected to reach the minimum early retirement age in no more than five years to reduce his/her working hours by 40% to 60%. The government compensates 50% of the income loss, if a previously unemployed individual or an apprentice is hired by the employer. Otherwise, the compensation is shared between the employer (25%) and the government (25%). The employee continues to earn 75% of his/her previous wage. The scheme has also a "blocked working time" option, which permits participants to work full-time for 2.5 years and retire 2.5 years early. In its first phase of application between 2000 and 2003 the scheme triggered a widespread shift of older workers to part-time work, and, through the "blocked time" option, to early retirement. Access conditions were tightened in 2004 with the introduction of an obligation to hire an additional worker in order for employers to obtain the full government subsidy, and for participating workers to be able to use the "blocked time" option.
v) Support to short work hours (Kurzarbeitsbeihilfe). This scheme subsidises the shortening of work hours in cyclical downturns and helps enterprises keep employees on their payroll. It is massively used in current circumstances. Employees' wage losses are to a large extent (but not entirely) compensated. In February 2009, Parliament authorised a broader recourse to this scheme, on the basis of a new agreement between social partners. The maximum utilisation period was extended to 18 months, from six previously. Employers can introduce re-qualification or training programmes for potentially redundant workers. According to the new agreement the working hours can be reduced by 10% to 90%. The Public Employment Service estimates that about 50 000 workers from 165 companies were already on this regime by April 2009. The Ministry of Labour declared that the total take-up is expected to reach 70 000 by end-2009 (25% of the number of registered unemployed in April 2009). (7)
These measures form an extensive apparatus of support to enterprises for hiring lower-productivity workers. Yet, and independently from the current downturn, they fall short for vulnerable groups. The government may need to consider even more far-reaching policies, such as substantial employer social security contribution cuts for low-wage earners, in order to nurture stronger demand for low-skilled labour. OECD experience suggests that, to be successful, such policies need to be tightly targeted and implemented as an integral part of a sound fiscal and tax framework (Box 2.3).
Box 2.3. Reducing employer social security costs for low-wage workers The OECD Jobs Strategy stresses that the labour tax wedges are a key determinant of labour market demand, in particular for low-skilled workers (OECD, 2006b). It underlines that a combination of high minimum wages and a high tax wedge can price low-skilled workers out of jobs, and indicates that in such cases, policy measures to lower labour costs are in order. As discussed in the main text, cutting social contributions for low-wage workers would be one way to reduce the employment costs associated with minimum wages, which are relatively high in the largest sectors. In countries that have implemented a reduction in employer social contributions for low-paid workers, OECD evaluations report significant positive impacts on employment, in particular for the low-skilled (OECD, 2003a). At the same time, reducing employer contributions for a sizeable part of the labour force poses major fiscal challenges. In parallel, evidence is strong that such measures enhance employment only if public spending restraint offsets the loss in receipts stemming from lower social contributions. Increasing other revenues is an alternative option to address fiscal sustainability problems, but if this augments other components of the tax wedge, the employment gains from the reform may be weakened. To evaluate the possible employment, growth and fiscal impacts of a significant reduction in employer social security taxes, a simulation exercise was realised in cooperation with the Institute for Advanced Studies in Vienna (IHS). Using IHS's general equilibrium model for Austria (TAXLAB), (1) a halving of employer social security contributions, from 22% to 11% of gross wages, has been simulated for workers earning up to 1 350 [euro] per month. This group of workers is the one targeted by the government in 2008 for reductions in employees' unemployment insurance premia. (2) These workers represent 20% of total employment and on average they earn about 37.5% of the average wage. The simulation assumes that revenue losses for the social security system (and therefore for general government) will be fully funded by spending cuts that will have no adverse implications for growth. The results of the simulation are summarised in Table 2.1. The level of low-skilled employment (workers with less than upper secondary education) increases by around 1% and total employment by some 0.4%. The level of GDP is lifted by nearly 0.3%. Favourable impacts also obtain for unemployment and labour force participation rates. On the fiscal side, immediate general government revenue losses (at unchanged employment and output rates) are estimated at 0.5% of GDP. However, the second-round fiscal revenue gains arising from higher profits, employment and consumption offset the bulk of the first-round revenue losses. The degree of self-financing (the ratio of second-round fiscal gains to first-round social security receipt losses) is estimated to reach 70% fairly rapidly following the introduction of the measure, and to rise to close to 80% over a decade. An earlier OECD cross-country estimation (Bassanini and Duval, 2006) suggested that a 10 percentage point reduction in the tax wedge in an average OECD country may reduce equilibrium unemployment by 2.8 percentage points, though with a potentially higher impact in countries where the ratio of minimum wages to average wages remains high. (3) This estimation, however, concerned a tax wedge cut across all categories of workers at all income levels, and the effects and fiscal costs were therefore higher than in the simulation presented here. (1.) Background information on the TAXLAB model is provided in Berger et al. (2006), and Berger et al. (2009). (2.) Unemployment insurance premia (amounting to 3% of gross wages) were reduced in 2008 to 2% for workers earning between 1 200 [euro] and 1 350 [euro] per month, to 1% for those earning between 1 100 [euro] and 1 200 [euro], and eliminated for those earning less than 1 100 [euro]. (3.) OECD evaluations report significant positive impacts on employment, in particular for the low-skilled (OECD, 2003a).
The comparison of employment trends of low-skilled workers in Austria with recent developments in comparable countries suggests that, should framework conditions change, their employment prospects may improve. The authorities should further investigate the policy and other sources of better outcomes achieved in other countries in this area (Box 2.4).
Box 2.4. Potential for additional low-skilled job creation A statistical analysis of the volume, structure and trends of low-skilled job creation in six high-income OECD countries, including Austria, provides a number of interesting results. (1) Total low-skilled labour inputs (measured by hours worked) represent one fifth of total labour utilisation in Austria, less than in Germany and Denmark, but more than in the United States, Netherlands and Sweden. It declined strongly in Austria between 1990 and 2005, by nearly 10 percentage points, at a rate similar to Sweden and Denmark, but markedly higher than in the United States and Netherlands. In Austria low-skill intensity (the ratio of low-skilled work hours to total work hours) varies a lot across sectors. It is highest in agriculture and forestry--where almost 40% of all hours worked are low-skilled. Other activities with a substantial low-skill intensity (above 20%) are hotels and restaurants, retail trade, transportation, construction and manufacturing. The share of low-skilled work is lowest in education, health, public administration and financial intermediation. Between 2000 and 2005 the volume of low-skilled work rose in Austria in three areas: wholesale and retail trade, hotels and restaurants, and real estate services. A shift-share analysis (2) suggests, however, that this resulted from the strong increase of total hours worked in these activities. Their low-skill intensity declined, as in all other sectors. Such a systematic decline of low-skill intensity across all sectors of the economy was found only in Austria and the Netherlands. In Denmark, four sectors experienced an increase in low-skill intensity, in the United States six sectors did, and in Sweden two. In Germany the share of low-skilled labour increased in the large majority of sectors. Developments in Germany are of particular interest to Austria. They suggest that there might be additional potential for further low-skilled job creation in three sectors: * Household services: 40% of the hours worked in the service of German households are low-skilled, compared with less than 20% in Austria. The sector is officially larger in Germany, with a share of more than 1% in total hours worked, as against less than 0.2% in Austria. The difference may partly reflect the weight of informal immigrant workers in this area in Austria. * Real estate and business services: the share of low-skilled work in total labour inputs amounts to 40% in Germany, versus 15% in Austria. Given the large size of the sector, even a slight increase in low-skill intensity may generate substantial additional job creation. * Other services: This mixed group includes sanitation, cultural, recreational, sport and media services. Their low-skill intensity in Germany (40%) is more than double than in Austria (19%). As the sector is very large (5% of total hours worked in the economy) it could offer considerable employment opportunities to the low-skilled. These comparisons do not take into account broader general equilibrium conditions characterising individual national economies, such as differences in consumer preferences and in the supply of low-skilled labour. They only provide a description of the international differences. They call for a full-fledged investigation of the policy and other underlying factors. (1.) The overview, carried out for this Survey, was based on the EU KLEMS database. The trend and structure of work hours provided by high-, medium- and low-skilled workers in six OECD countries (Austria, Denmark, Germany, the Netherlands, Sweden and the United States) between 1990 and 2005 have been analysed for NACE 2-level sectors. (2.) Shift-share analysis decomposes the percentage change in low-skilled hours worked in each sector into i) the growth of total hours worked in the overall economy ("share"), ii) the relative growth or decline of total hours worked in the sector in question ("mix"), and iii) the relative change in the share of low-skilled hours worked within the sector, that is, its skills intensity ("shift").
Improving the skills of vulnerable workers
Low-skilled workers are a highly heterogeneous population and span a particularly large spectrum in Austria, ranging from persons with practically nine years of compulsory education, to people who stayed in school a few years or less. The special geographical structure of immigration has played a role in creating further heterogeneity in Austria (see next section). In these circumstances, upgrading the skills and labour market prospects of the low-skilled is a multi-faceted task.
Three main policy tools can be used in this area:
i) Lifelong learning. This is increasingly utilised in Austria for up-skilling, but so far it has mainly concerned already-qualified workers. Workers with a weak basic educational background participate much less (OECD, 2004). Today's challenge is to develop approaches and tools to make lifelong learning more relevant for low-skilled workers.
ii) Active labour market policies (ALMPs). ALMPs have been a priority area in recent years, as evidenced by the significant increases in budgetary resources devoted to them. (8) ALMPs are in principle available for all unemployed, including the low-skilled. However, there is evidence that effective utilisation depends, among others, on the earlier background of participants. Women returning to the job market after taking care of their children are the most effective users, possibly because they have the needed basic human capital. They utilise such programmes to refresh and update their skills. The challenge for the authorities is to adapt the programmes to the needs and educational backgrounds of different groups of low-skilled workers. As these programmes claim large resources, labour market outcomes should be monitored and analysed to identify best practices.
iii) Improving the school background of all pupils. Reinforcing the basic education of all pupils, and reducing the drop-out rates is the first-best avenue to reduce the skills gap in Austria. It is also the best way to endow all new labour force entrants with a basic ability to update and improve their qualifications later. The government emphasises that improving the education system, and in particular reducing the excessive proportion of youth leaving school with no qualification, is a priority. Chapter 4 discusses the related challenges and policies.
Migration-related labour market challenges
Austria has received and continues to absorb sizeable immigration flows. This raises additional challenges for the effective functioning of the labour market. The share of the foreign-born in the labour force stood at 16% in 2006--the highest rate in the European Union after Luxembourg. This is the result of 40 years of immigration policies, which went through different phases (Box 2.5).
Austria's accession to the European Union in 1995 opened the labour market to workers from the other 14 members. However, this did not lead to any significant rise in labour immigration. In contrast, when the EU was enlarged by ten new member states in 2004, immigration pressures became much stronger, as a result of the concentration of new members in a small geographical region bordering Austria, with very large wage differentials. Three "transition stages" (2004-06, 2006-09, and 2009-11) were then included in the Accession Treaty, permitting member states to limit the free movement of workers. Austria has availed itself of this possibility during the first two transitional phases, and plans to do so also for the last one, on the grounds of "serious disturbances in the labour market or a threat thereof".
Box 2.5. Past phases of immigration Distinct phases of immigration policies and inflows have shaped the geographical origin, socioeconomic composition and educational background of today's immigrant population and labour force. Austria was a net emigration country until the early 1960s, with substantial worker outflows to Germany and Switzerland. The phase of active recruitment of immigrant workers started in 1961, with inflows stemming mainly from Turkey and what was at the time Yugoslavia. The first peak of immigration was reached in 1973, when about 300 000 foreigners were living in Austria, representing 4% of total population. Their labour force participation rate was very high (about 75%), reflecting immigration policies focused on labour market needs. The majority of immigrants were deemed to be temporary residents and few families accompanied them. Immigration policies became more restrictive after the 1974 oil shock. Total foreign employment declined. However, the foreign resident population, as a result of a growing number of family unifications, continued to increase from the mid-1980s. Conflicts in former Yugoslavia, together with strong economic growth in Austria, led to a new wave of immigration between 1989 and 1993. During this period, the foreign population living in Austria soared and the share of foreign workers in the labour force rose from 6% to 9.5%. The increase was mainly driven by workers from former Yugoslavia, but also from Turkey. Restrictive legislation was introduced in 1993 in response to this acceleration, and inflows slowed down. However, starting from 1998, as a consequence of stronger labour demand and new legislation promoting the integration of long-term residents, foreign employment increased again.
However, these restrictions do not imply a total closure of the Austrian labour market to immigrants from new Member states. A policy of "selective opening according to labour market needs for key workers" applies, giving free access to immigrants in 67 selected professions with domestic labour supply shortages. There is a growing consensus in Austria for more open immigration policies responding to economic needs. The new government considers abolishing the quotas for highly-qualified workers, and replacing them with more flexible "points-based" immigration authorisations. This approach is actively supported by employer organisations.
Overall, with Austria's accession to the European Union and subsequent EU enlargement, the nationality and skill composition of immigration inflows are changing substantially and nowadays certain immigrant groups have higher education levels than the native population. The share of EU citizens in the foreign work force has increased. In particular, the share of German citizens rose from 4% in 1994 to 14% in 2006. Over the same period, the share of workers from former Yugoslavia fell from 44 to 27%. Similarly, the share of Turkish workers declined from 23% in 1989 to 14% in 2006.
Despite ongoing changes in the educational background of immigrants, the labour market is faced with two important challenges related to low-skilled immigration. First, the average educational attainment of the immigrant population remains one of the lowest in the OECD. The foreign-born represented more than 25% of the low-skilled labour force in 2007, and 45% of the low-skilled aged 25 to 29. This large outstanding stock of a low-skilled immigrant population (Figure 2.13) raises specific education and labour market policy challenges, including for second-generation cohorts born in Austria, as discussed in Chapter 4. Secondly, the consequences of the opening of the labour market to worker movements from new EU Member states remain unknown at this stage. As mentioned above, any acceleration in the inflow of workers with higher skills and lower wage expectations than local low-skilled workers could raise additional adjustment challenges for incumbent workers. Such an acceleration would also call for additional measures to absorb and accompany the new inflows.
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Box 2.6 summarises the policy recommendations arising from the analysis in this chapter.
Box 2.6. Policy recommendations to lift potential growth Product markets * Facilitate the opening of sheltered service sectors to domestic and international competition, while preserving service quality and consumer protection. * Fully implement the EU directives relating to services. * Garry out in full the planned thorough evaluation of competition policy and its institutional framework. Labour markets * Re-examine the new tax-benefit position of low-income workers, taking into account all ongoing changes in the tax-benefit system, with a view to ensure that their incentives to join or stay in the labour force are maximised. * More substantial reductions in employer social security contributions for low-income workers should be considered, to reduce their employment costs. These cuts should be funded by other permanent sources. * Continue to strengthen the up-skilling and re-qualification programmes for low-skilled workers. Evaluate the results and concentrate resources on the most effective schemes. * Ensure that high-quality up-skilling programmes are also available for workers presently in the "shorter working time" (Kurzarbeit) scheme. * Fully implement past pension reforms. The transition period to the new system should not be extended, and the conditions of this transition should not be relaxed further. * Continue to develop high-quality and low-cost early child care services to support working parents. * Prepare for the full integration of the labour market with the new EU members from 2011. ANNEX 2.A1 Government follow-ups to past OECD recommendations Recommendations of the Action taken since 2007 previous Survey Enhancing regional integration Reduce to a minimum Some actions regarding bureaucratic hurdles and red managers and their relatives tape for multinational have been taken (see below). companies seeking to operate out of Vienna. Invest in road There has been progress in the and rail connections with key planning (S3, S8) and Central and Eastern European construction (AS) of roads commercial locations. towards CEE. One road connection (A6, towards the Slovak Republic) has been completed. Reform the immigration system Since 2008, access to the to encourage the entry of labour market has been highly-skilled and well- facilitated for skilled qualified workers who meet the personnel from new EU member requirements of the domestic states. Entrance regulations labour market. for researchers, scientists and managers have been eased. Quotas for "key personnel" were increased, and eligible occupations were expanded. The list currently covers over 50 professions. Adopt active labour market Active Labour Market Policies policies, including vocational area now better adapted to training and re-training individual or group specific programmes, to reintegrate needs. into the labour market workers who have been displaced as a result of globalisation. Overcoming labour market segmentation Strengthening work incentives of less active groups Pension system and early The provisions of the 2003 retirement Keep phasing in all pension reform are still being provisions of the pension phased in (harmonisation of reform. Do not reduce the pension systems across discount rates applicable private, public, federal and before the legal retirement Lander levels, increase of age. Administer "heavy work" women's retirement age to the criteria for early retirement level for men, etc.). In 2007, purposes very parsimoniously. the discount rate on benefits prescribed by the 2003 reform for each year of early retirement was reduced from 4.2% to 2.1% for a transition period. In September 2008, the transition period for retirement rules for certain groups was extended to 2013. Disability pensions: Ensure An "activation approach" that disability pensions are started to be implemented with only used by people unable to respect to applications for a work. Keep claimants of disability pension. In disability benefit who can September 2007, a task force perform other jobs than their was set up to reform the initial profession in the disability pension scheme, labour force (by dismantling which will provide its "own-occupation" restrictions recommendations by June 2009. in the disability scheme). Decouple applications for medical and vocational rehabilitation and vest vocational rehabilitation with the national employment service. Family benefits: The implicit From July 2008, work marginal taxation of mothers incentives of parents in lower of young children returning to income brackets were increased work should be minimised. by raising the personal income Family support schemes should tax allowance, and by remain neutral and not exempting them partly or fully discourage activity. The from employee unemployment replacement of child care insurance contributions (see allowances by child care details below). In 2008, a new vouchers and kindergarten system of child benefits was services, especially for also introduced, offering children under three, would different combinations of encourage activity. rates and lengths of allowances adapted to different work situations. In January 2009, child allowances were further increased. Social income and poverty The introduction of a means- trap: The authorities should tested minimum income was closely monitor the impact of postponed several times and the planned increase of the may be implemented in 2010 at "means-tested national minimum the earliest. The changes social income" on labour force mentioned above in personal participation. Part-time income tax allowances and workers should not be employees unemployment discouraged from shifting to insurance contributions will full-time work. The increase the work incentives authorities should strictly of social benefit recipients. enforce the planned work availability tests and monitor their efficiency. Reducing employment costs Minimum wages: The government The agreement by social should pay close attention to partners and policy makers on the risks raised by the a minimum wage of 1 000 [euro] planned minimum wage hike. The for a full-time job continues minimum wage should not be set to be implemented by sectoral on a centralised and collective agreements. To politicised basis. Concerns date, only a small share of about poverty at work can be workers has been affected by better addressed with in-work minimum wage increases and no benefits. impact was observed on other wage negotiations. No lay- offs were recorded due to the increase of minimum wages. The ongoing extension of the Kombilohn scheme will provide wider benefits to a larger group of workers. Labour taxes: Social security In 2008, the unemployment contributions should be insurance contributions of reduced for vulnerable groups workers earning less than 1 in the labour market. Cuts 100 [euro] per month (3% of should be targeted on groups their gross wages) were with low chances of abolished, and those of reintegration, i.e. those with workers earning between 1 100 low or obsolete skills. They [euro] and 1 350 [euro] per should not be used as a one- month were reduced. off sweetener for minimum wage increases. Making innovation policies more effective Simplifying the institutional homework for innovation policy Merge the Science Council and The new government programme the Council for Research and explicitly mentions the need Technology or enhance to re-define the role of the cooperation between them, to Council for Research and achieve more coherent policy Technology in science, advice, and strengthen its technology and innovation influence on policies in order policy. In 2008, a consortium to increase spending of research institutions was efficiency. asked by the government to evaluate the existing public incentive system for research, development and innovation. The consortium will provide their conclusions in May 2009. The policy-advising bodies and The evaluation will also deal ministries involved in with the interaction of innovation policies should innovation policies within the broaden their perspective by broader framework conditions considering the impact of for innovation. general framework conditions on innovation, such as the availability of human capital, financial constraints and product market competition. The responsibility for The new government decided not specific innovation policies to merge the competences for should lie with a single research and innovation into ministry. Task sharing between one ministry, but to agencies and ministries should streamline the governance be ended, with the operational structure in order to bring running of innovation support policy strategy and policy programmes confined to implementation more in line. agencies. In this respect, the responsibility for the FWF (Austrian Science Fund) was assigned to a single ministry, and the responsibility for the Climate and Energy Fund (KLIEN) to two ministries (formerly four) in 2009. The division of tasks between agencies and ministries is now clarified: strategic decisions are made mainly by ministries, and implementation measures are enforced by agencies. The pooling of programmes of The ongoing evaluation of the various agencies (such as public incentives to AWS, FFG and CDG) should be innovation is investigating considered. how to avoid overlaps between programmes. Ensuring the efficiency of innovation subsidies Ensure the efficiency of R&D The ongoing evaluation subsidies including tax exercise is targeting this incentives by regular need. In the area of tax independent evaluations. incentives, laws were adjusted in 2007. Further strengthen links Improving the co-operation between public research between public research centres and the business institutions and the business sector to ensure diffusion of sector has been at the core of innovation generated in public innovation policies over the research. past decade, supported by increased budget resources, and many initiatives to strengthen the links between science and industry have been launched. Since 2008, major public research centres have been going through additional reforms to intensify their cooperation with the private sector. Improving product market competition Proceed with reforms to The programme of the new simplify the system of government for 2008-13 competition policy (in includes an evaluation of particular merge the Federal competition policy, with the Cartel Attorney with the objective of strengthening the Federal Competition Authority) Federal Competition Authority and to strengthen enforcement. (FCA) competencies, and reforming the institutional set-up of competition law enforcement. Representatives of government ministries, the FCA, the Competition Council, the Cartel Court, regulatory authorities and the competition law community will be involved in the evaluation. A strengthening of FCA's resources is also envisaged. Further foster competition, in Several EU directives particular in professional concerning the certification services and distribution. of professional qualifications Implement EU directives were recently transposed in relating to postal services Austria. FCA initiated and services in general. discussions with the Chamber of Tax Consultants and Tax Accountants to obtain the withdrawal of their recommendations concerning the calculation of service fees. A "Services Law" implementing the cross-sectoral aspects of the EU Services Directive is to be finalised by autumn 2009. A screening of the legal acquis in this area at federal, regional and local level will be finalised by end-2009. The Crafts, Trade, Service and Industry Act was amended in February 2008 to facilitate entry in several professions. Work is ongoing on a new Postal Market Act to fully transpose EU Postal Directive into the Austrian law. The market will be fully opened to competition from 2011. Reduce FDI regulations There is no intention to lift regarding foreign ownership in restrictions with regard to the liberal professions and the acquisition of shares by other areas. foreigners in liberal professions due to the specific personal responsibilities associated with the practice of these professions. Improving conditions for start-ups Simplify and reduce the cost Several steps were recently of firm creation, including taken to facilitate firm minimum capital requirements. creation, including: the authorisation of electronic legal submissions by Austrian notaries to the Companies' Register since July 2007; the availability of unemployment insurance to entrepreneurs on a voluntary basis since January 2009; the creation of a "one-stop-shop" for start- ups in almost every district. In addition, an amendment of the law on private limited companies (GmbH-Gesetz) is in preparation, including the reduction of minimum capital requirements, and simplifying establishment procedures. The on-line creation of companies through electronic applications to the Companies' Register is also under consideration. The convergence of the income Tax allowances for the self- tax regime for the self- employed will be increased in employed and for corporations 2010. should be envisaged for their neutral tax treatment and in order to encourage entrepreneurial activities. Create new structures for The law on small and medium- venture capital funds which size enterprises conform to international best (Mittelstandsfinanzie- practice, including even rungsgesellschaften) treatment and full openness to was amended in 2007 in order international venture capital to facilitate the entry of investors. third-party investors in their capital. Additional improvements of legal conditions for private equity- venture capital investment (Kapitalmarktstarkungs-und Innovationsgesetz) are under consideration. Strengthening the fiscal framework Health care and pension reform Biannual evaluations of the No further action taken. reforms outlined in the 2005 Health Reform Act should be care policy. carried out in a timely, independent and comprehensive fashion, and the results fully taken into account in future public health care policy. The pension schemes for civil The new government works servants of the Lander and towards harmonising the municipalities should be pension regulations of the harmonised with the general public administration on the pension scheme, thereby basis of the general pension bringing about a complete scheme of the Bund. Several harmonisation of public sector Lander have already established pensions. fairly comparable schemes. The "heavy workers" channel Following the completion of a into early retirement should report on the life expectancy be restricted to well- of "heavy workers" in summer justified cases. 2009, their early retirement scheme will be re-organised, in combination with the disability pension scheme. Consideration should be given In addition to the existing to making binding and more (non-automatic) consideration precise the envisaged of "demographic demographic correction sustainability" in the mechanism for pensions (the management of the pension "sustainability" factor). system, the government envisages to introduce clear quantitative indicators and new analytical methods to assess long-term sustainability. More selective targeting of social spending Housing subsidies should be The policy of subsidising scaled back and better energy-saving housing targeted towards those who investments was reviewed in really need them, e.g. low- 2007, and a stronger emphasis income families. The policy of was put on the reduction of subsidising energy-saving C[O.sub.2] emissions. Housing housing investment subsidies are re-evaluated at expenditures should be regular intervals according to reviewed. underlying social objectives. The earmarking of revenues for The programme of the new the Family Burden Equalisation government for 2008-13 Fund (FLAF) should be foresees a re-organisation of abolished. the FLAF. However, there is no intention to change the earmarking principle. Making the tax structure more pro-growth Payroll taxes and social Unemployment insurance security contribution rates contributions were reduced in should be reduced for targeted 2008, and income taxes for groups of workers with weak low-income earners are being employment prospects. reduced in the context of personal tax reform. The valuation of real estate No action taken. The and property for tax purposes inheritance tax and the gift should be updated regularly tax expired as of August 2008. and brought to market levels. The abolition of the inheritance tax and other wealth-related taxes such as the gift tax should be reconsidered. Excise duties on alcohol, Excise duties on diesel and mineral oil, and tobacco and gasoline were increased in cigarettes should be raised. mid-2008. Minimum price levels Petrol prices at the pump for cigarettes were set should be raised to the higher according to EU legislation. levels prevailing in In the trading period 2008- neighbouring countries. 12, 1.3% of the C[O.sub.2] Government permits for the permits will be auctioned and emission of C[O.sub.2] and the first auction took place other greenhouse gases should in March 2008. From 2013 be auctioned. auctions will be the main instrument of allocation of emission permits. A complete list of all current A detailed analysis of exemptions from personal and exemptions from income and corporate income tax, as well corporate taxes is currently as VAT, should be compiled, pursued within the OECD's and tax expenditures cut Working Party 2 on Tax Policy. wherever feasible. Pursuing public expenditure management and budgetary reforms Public expenditure management Parliament adopted a Federal and budgetary reforms Budget Reform Law in December (relating in particular to 2007. The first stage, which budget formulation, execution, includes a legally binding and monitoring and reporting) four-year expenditure should urgently be pursued. framework and an explanatory The focus of these reforms strategy report, started to be should be on: i) the adoption implemented in 2009. The of a medium/term budgetary second stage, currently under framework; ii) the preparation, will take effect introduction and in 2013 and involves a new implementation of output/ budget structure, performance based budgeting (at least in budgeting, accrual accounting certain key areas such as and budgeting, as well as education and training, R&D/ result-oriented management of innovation support and active state bodies. labour market policies); and iii) the adoption of new accounting rules. The recommendations of the The Fiscal Equalisation Law 2005 OECD Economic Survey was re-negotiated in early relating to reform of fiscal 2008. Some streamlining was federal relations should be achieved by turning direct given serious consideration transfers into shared tax during the next round of revenues. negotiations over the Fiscal Equalisation Law. In particular, a better harmonisation of financing and spending responsibilities across all levels of government, and giving more responsibility and accountability to all public sector spending agencies, would help promote good governance and better management of public finances.
Financial and administrative incentives for labour market participation
The actual labour supply of low-skilled workers is influenced by financial as well as administrative incentives. Financial incentives arise from the tax and benefit system, and administrative incentives from rules and regulations concerning the labour market availability of recipients of unemployment benefits and social assistance.
Effective tax rates are calculated by the OECD to measure the gap between the gross and net incomes of individuals taking up work (OECD, 2007b). This gap arises, on the one hand, from explicit and direct taxation of work-related incomes, and, on the other, from implicit and indirect loss of social benefits and other costs incurred (such as child care costs) by persons taking up work.
Table 2.A2.1 presents the effective taxation rates associated with transitions between selected labour market statuses. Individuals considered in their starting position are either fully inactive or unemployed (i.e. having no average income), or are in "marginal employment" (persons earning up to 358 [euro]--i.e. 10% of the average wage in 2009--without losing their unemployment benefits). The table shows how much of new work-related income is lost when they take up work at different wage levels (36%, 67% or 100% of the average wage), depending on family status and spouses' earnings.
The effective tax rates presented in the table do not take into account ongoing changes in the tax and benefit system, resulting from the initiatives of the new government (established in late 2008). These are: i) the establishment of a uniform social minimum income scheme (see main text), ii) the phasing-out of the pay-back obligations of the social assistance received (see main text), iii)the reform of the personal income tax scheme (brought forward from 2010 to 2009, with rate cuts mostly in lower brackets, see Chapter 1), iv) the extension of preferential tax treatment for dependent children, and v) planned extensions of in-work benefits. The very first of these initiatives will augment the effective tax rates, the second will have ambiguous effects, and the others will tend to reduce effective taxation. The net impact can only be clarified after the compilation of the new effective tax rates on the basis of the new parameters of the tax and benefit system.
On the basis of the parameters in force at the end of 2008, the three main low-income groups which faced the highest effective taxation rates when taking up work were:
i) The low-skilled unemployed. The replacement rate for single individuals losing their job, at 55%, is not high in international comparison. This reduces the effective taxation of those returning to work, provided that they can earn their previous wage levels. If this is not the case, i.e. if they can only find lower-paying or less than full-time jobs, effective taxation increases. A single unemployed individual previously earning 67% of the average wage needs to earn at least 33% of the average wage to achieve any financial gain. This provides particularly weak incentives for those finding and taking up part-time jobs. The rate of effective taxation is even higher for individuals who were previously in "marginal employment" (earning less than 11% of the average wage i.e. less than 360 [euro] per month in 2009). This occurs because once earnings surpass the 11% level there is both a discontinuation of unemployment insurance benefits, and the onset of liability for social security contributions. The persons concerned must find a job paying at least 46% of the average wage -well above the minimum wage- to achieve any net financial gain (Figure 2.A2.1).
ii) Social assistance recipients. For persons in need who are not eligible for unemployment benefits, social assistance can be paid out for an unlimited duration. Including housing benefits, it is only slightly below the level of unemployment benefits. Therefore, the effective taxation of a social assistance and housing benefit recipient who takes up work is in principle of the same order as for a beneficiary of unemployment benefits (with the same individual characteristics). Still, social assistance is administered by the Lander, while unemployment insurance is managed by the federal government, and certain specific provisions of social assistance alter the tax-benefit parameters. Most importantly, social assistance is granted on a means-tested basis, implying that, notably in families where there is another breadwinner, an unemployed second earner having exhausted unemployment insurance cover may not receive any replacement income. This reduces effective taxation rates and increases work incentives. On the other hand, social assistance is granted formally as a "bridge loan", implying a payback obligation by those returning to work. Even if this liability is not enforced in practice, it generates a high rate of "potential taxation" and a degree of uncertainty (see above). Also, contrary to unemployment benefits, social assistance cannot be cumulated with "marginal" forms of employment--except in two Lander (Salzburg and Upper Austria). This reduces work incentives of social assistance recipients who might otherwise be able to approach the labour market through this channel.
iii) Low-skilled women with children. Family benefits in Austria are more generous than in the other OECD countries on average. They come in various forms, some being independent from the income level of parents, while others are only available to families below given revenue thresholds. (1) In particular, the maximum income threshold for childcare benefits (at about 4050 of the average wage) increases effective taxation rates for certain categories of parents taking up work, although recent adjustments have improved the situation. (2) Low-skilled women, as second earners, with two or more young children are particularly concerned. This is partly due to the fact that placing children in kindergarten is disproportionately penalising at low income levels. (3) As a result of all these parameters, effective taxation for women with children entering employment at 67% of the average wage is one of the highest in the OECD (Figure 2.A2.2). The government is now introducing a set of measures to reduce these rates -in particular by granting additional subsidies and tax allowances for childcare costs. The net impact of these changes has not yet been calculated.
[FIGURE 2.A2.1 OMITTED]
[FIGURE 2.A2.2 OMITTED]
Beside financial parameters, the enforcement of labour force participation rules as a condition for accessing unemployment-insurance and social-assistance benefits helps preserve work incentives. Even a social protection system with high replacement and effective taxation rates can achieve high labour force participation if administrative rules and requirements are well-enforced.
Table 2.A2.2 reviews the most important activation measures for recipients of unemployment insurance in Austria, in comparison with peer countries. Overall, the enforcement of work availability rules appears strict. Also, the Public Employment Service (PES) directly refers the recipients of unemployment insurance to active labour market programmes, which evaluate their qualifications against labour market needs, and direct them to short training programmes refreshing and completing their skills. Sanctions applied in case of non-compliance with these rules (internationally comparable data are not available on these sanctions) appear strict as well. Unemployment benefits may be withdrawn for at least six weeks--if the periodical reporting requirement is not fulfilled, a suitable job is not accepted, or participation in a training measure is refused. Conditions for accepting a new job were recently tightened, and new mandatory job search programmes were introduced. Following these various enforcement activities, about 14 000 unemployed among 180 000 (nearly 6%) have been sanctioned in 2007 for failing to comply with labour market availability rules--a relatively high number. (4)
For social assistance recipients the enforcement of work availability is generally less stringent. As noted, social assistance is managed by the Lander and distributed by municipalities. Anecdotal evidence indicates that if local labour market conditions become problematic, notably for the difficult-to-integrate individuals, the work availability rules may not be actively enforced. The division of tasks between government levels in the management of unemployment insurance, unemployment assistance (which is activated when insurance benefits expire), and of mainstream social assistance is not based on formal assignments. In principle, all recipients of social assistance are registered and treated as unemployed jobseekers, and are included in the placement goals of the PES. However, sanctions in case of non-compliance are under the competence of sub-central authorities and vary regionally. The involvement of social assistance recipients in active labour market programmes is also less systematic.
The authorities intend to improve the enforcement of work availability rules in the context of the introduction of the new minimum social income (details in the main text). The PES is expected to participate in the treatment of applications for social assistance and in the assessment of the work capacity of applicants. These "activation" steps in the management of social assistance are welcome. At the same time, international experience suggests that this will likely require more specific skills and performance objectives in employment services (Immervoll, 2008b):
i) The characteristics and labour market challenges of social assistance recipients are more heterogeneous than those of standard unemployment insurance recipients. This requires more personalised services and more customised placement goals;
ii) Work availability rules should be enforced with the help of time-limited sanctions, including reductions in benefits, while avoiding drifts in poverty. This policy should be combined with efficient job-search assistance;
iii) Commercial job-search programmes may offer additional prospects for special groups, and could be experimented with.
Under these caveats, and in the light of other countries' experiences (OECD, 2001), the full integration of social assistance and public employment services could be considered.
(1.) The first component is the family aid (Familienbeihilfe), which is lump sum and covers dependent children in all families. The second is the childcare benefit (Kinderbetreuungsgeld), which is granted for children at and below three, and is subject to a maximum income threshold of about 40% of the average wage. In addition, there is a children's tax credit and a sole parent's tax credit. Unemployment benefits, social assistance benefits and housing benefits are also supplemented in line with the number of children.
(2.) First, the original rule of a complete withdrawal of child benefits for those surpassing the income threshold has been replaced by a phasing-out rule. Second, the original scheme granting about 13% of the average wage (440 [euro] in 2009) for 30 months was supplemented by two alternative options with shorter entitlement periods but higher contributions. This wider "menu" of child benefits improved work incentives by offering choices adapted to different work and family situations.
(3.) Childcare costs are relatively high in Austria, and exceeded OF.CD averages in 2004 (OECD, 2007b).
(4.) Another 26000 recipients of unemployment insurance benefits, and 43 000 recipients of unemployment assistance benefits also faced interruptions in the disbursement of their allowances, due to neglect in status reporting.
Table 2.A2.1. Effective tax rates for selected employment transitions Per cent, AW = average wage No children Transitions (starting Two-earner position [much One-earner married greater than] earnings Single married couple when taking up couple 2nd earner work Employment transition 36 [much greater than] 67% AW 40 45 40 36 [much greater than] 100% AW 43 45 43 Short-term unemployed, previous job at 67% 01 AW, recipient of social assistance and housing benefits if eligible 0 [much greater than] 36% AW 91 100 100 0 [much greater than] 67% AW 68 74 72 0 [much greater than] 100% AW 60 65 63 10 [much greater than] 36% AW 126 123 135 10 [much greater than] 67% AW 79 80 83 10 [much greater than] 100% AW 67 67 69 Inactive recipient of social assistance and of housing benefits if eligible 0 [much greater than] 36% AW 85 100 20 0 [much greater than] 67% AW 64 74 29 0 [much greater than] 100% AW 58 65 35 2 children aged 4 and 6 Transitions (starting Two-earner position [much One-earner married greater than] earnings married couple when taking up couple 2nd earner work Employment transition 36 [much greater than] 67% AW 62 40 36 [much greater than] 100% AW 53 43 Short-term unemployed, previous job at 67% 01 AW, recipient of social assistance and housing benefits if eligible 0 [much greater than] 36% AW 100 108 0 [much greater than] 67% AW 82 77 0 [much greater than] 100% AW 70 66 10 [much greater than] 36% AW 116 149 10 [much greater than] 67% AW 87 90 10 [much greater than] 100% AW 71 73 Inactive recipient of social assistance and of housing benefits if eligible 0 [much greater than] 36% AW 100 22 0 [much greater than] 67% AW 82 31 0 [much greater than] 100% AW 70 35 (1.) Including the reductions in unemployment insurance contributions for employees in the low-income range enacted in 2008 (see Table 2.A2.2). Source: OECD Tax and Benefit Models. Table 2.A2.2. Activation requirements from beneficiaries of unemployment insurance International comparison Austria Germany Regular reporting of R, P, usually weekly No regular status (R), declaration in-person attendance (P), length of interval Timing of detailed 60% of cases at About 14 days after registration first jobseeker's first contact interview first contact with PES Timing of individual Within 1 month after Usually within 10 action plan registration days of unemployment status Reporting frequency Once a month Six times a year on of job-search average activities Intensive interview At least every three Six per year schedule during months (estimated average) unemployment spell Annual number of 8.1 (2006); ER, JS ER, JS direct referrals to vacant job per registered unemployed (year); reporting requirement on application outcomes required from employer (ER) and/or jobseeker (JS) Compulsory No; yes No; yes participation after some set of unemployment duration (period); compulsory when referred by PES Continuing No Variable job-search requirement (R) and verification (V) during participation in ALMPs Netherlands Denmark Regular reporting of R, every month R, every month status (R), in-person attendance (P), length of interval Timing of detailed Normally at first Up to a month or registration contact with Centres longer interview for Work and Income; then again after allocation to private service provider Timing of individual "Re-integration After 6-9 months of action plan advice" set up for unemployment hard-to-place duration (depending clients within one on age of jobseeker) month Reporting frequency Every four weeks At least once every of job-search three months activities Intensive interview Wide variation Every three months schedule during unemployment spell Annual number of ER 2.4 (2005) ; ER, JS direct referrals to vacant job per registered unemployed (year); reporting requirement on application outcomes required from employer (ER) and/or jobseeker (JS) Compulsory Yes (one month/six Yes (nine months for participation after months (start of unemployed aged some set of "reintegration 30-60; six months unemployment trajectory"); yes for others); yes duration (period); compulsory when referred by PES Continuing R job-search requirement (R) and verification (V) during participation in ALMPs Sweden Regular reporting of R, every two weeks status (R), in-person attendance (P), length of interval Timing of detailed Up to a month or registration longer interview Timing of individual Within 30 days of action plan registration Reporting frequency On average every six of job-search weeks activities Intensive interview Every six weeks on schedule during average unemployment spell Annual number of 2.8 (2006) ; JS direct referrals to vacant job per registered unemployed (year); reporting requirement on application outcomes required from employer (ER) and/or jobseeker (JS) Compulsory Yes (at 28 months at participation after the latest); yes some set of unemployment duration (period); compulsory when referred by PES Continuing R, V job-search requirement (R) and verification (V) during participation in ALMPs Source: OECD Employment Outlook, 2007.
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(1.) Early findings from this evaluation suggest, reportedly, that: i) the R&D tax incentive scheme is effective and its costs remain affordable ii) there are too many direct funding programmes, hence their consolidation would be desirable; and iii) the governance architecture of measures must be streamlined, with a better clarification of political and administrative responsibilities in their management. Recent fiscal developments suggest that resources available for these programmes may be reduced in the future, calling for a careful evaluation of the costs and benefits of different measures in order to concentrate resources on the most economically valuable schemes.
(2.) This is generally consistent with outcomes observed in other countries with similar ownership structures. OECD work--Boylaud and Nicoletti (2000) and Steiner (2000)-confirmed that cross-country differences in ownership played a role in explaining efficiency and price gaps in network industries.
(3.) According to OECD-wide comparisons, electricity prices for industry in the third quarter of 2008 were $ 0.160 per kwh in Austria, against 0.093 in Switzerland and 0.074 in the United States. The average 2007 price was $ 0.134 per kwh in Austria against 0.116 in OECD Europe and 0.094 in the OECD area as a whole (IEA, 2008). In telecommunications, average fees for a residential fixed-line basket in 2006 were slightly below the OECD average but above Germany's, Sweden's and Switzerland's. The same price patterns prevailed for business fixed-line baskets, mobile communications and broadband internet services.
(4.) The government plans to eliminate the existing legal requirement for all beneficiaries of social assistance to reimburse the aid that they have received in the past when they start up work. This requirement was not applied in practice, but its formal removal will constitute a welcome clarification. Impacts on work incentives will be ambiguous: on the one hand, the recipients of social assistance will be less reluctant to receive social aid, which may reduce work incentives; on the other hand, the elimination of the potentially large "one-off" charge on those taking up work will increase work incentives.
(5.) This is also a measure in the new government programme. This threshold takes the form of a floor in new sectoral wage negotiations. However, the largest sectors already have higher sectoral minimum wages.
(6.) On the basis of a special survey, Statistics Austria estimated in early 2009 that about 112 000 persons (excluding apprentices and those working less than 12 hours a week) earn less than the hourly equivalent of the targeted minimum wage (5.77 [euro]). This estimate concerns nearly 3% of total employment--approximately three times the estimate of the Federal Economic Chamber. The difference is attributable to atypical employment forms not included in collective agreements monitored by the Federal Economic Chamber: /) regular contracts not covered by collective agreements, ii) informal employment, iii) service contracts (Werkvertrage), and iv) work as independent contractors (Freie Dienstnehmer). Although there are no exact estimates of the relative volumes of these employment forms, the number of employees outside present collective agreements and for whom the new wage floor would be "biting" if they were employed in standard forms is not negligible. Based on an earlier estimate by BMSK (2008b), the groups most affected are young workers (27% of the 15-19 year old employees are affected) and young adults (20-29 years old, 7% of whom are affected).
(7.) The initial annual budget allocation for the scheme was about 220 million [euro], but actual take-up rates and budget costs are expected to increase through 2009-2010.
(8.) Total public resources dedicated to ALMP programmes represented about 0.6% of GDP (OECD, 2007d).
Table 2.1. A simulation of the macroeconomic effects of halving employer social security contributions for low-wage workers Number of years after reducing contributions Effects on levels 1 2 3 4 5 10 (in percentage) GDP 0.24 0.27 0.29 0.31 0.32 0.36 Employment 0.37 0.40 0.41 0.42 0.42 0.43 Low-skilled 0.98 1.09 1.11 1.12 1.12 1.13 Medium-skilled 0.27 0.30 0.30 0.31 0.31 0.32 High-skilled 0.07 0.08 0.09 0.10 0.10 0.11 (in percentage points) Unemployment rate -0.18 -0.21 -0.21 -0.22 -0.22 -0.22 Low-skilled -0.44 -0.54 -0.55 -0.56 -0.56 -0.57 Medium-skilled -0.14 -0.16 -0.16 -0.16 -0.16 -0.17 High-skilled -0.04 -0.05 -0.05 -0.05 -0.05 -0.06 Participation rate 0.12 0.12 0.12 0.12 0.13 0.13 (15-69 year-olds) Low-skilled 0.30 0.30 0.30 0.30 0.31 0.31 Medium-skilled 0.08 0.09 0.09 0.09 0.09 0.10 High-skilled 0.02 0.02 0.03 0.03 0.03 0.03 Degree of self- 68 72 74 75 76 79 financing (per cent) Source: Institute of Advanced Studies (2009).
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|Title Annotation:||Chapter 2|
|Publication:||OECD Economic Surveys - Austria|
|Article Type:||Statistical data|
|Date:||Jul 1, 2009|
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