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Lifting growth potential through further product and labour market reforms.

Austria has one of the higher GDP per capita levels in Europe, but owes this position to a strong pace of convergence until the early 1990s. Over the past decade and a half, it has lost some ground vis-a-vis the best-performing OECD countries. While aggregate productivity growth has picked up in recent years, the employment rate has remained below potential. The most globally-oriented parts of the business sector have intensified their innovation efforts and achieved greater productivity gains. In contrast, the more sheltered services have displayed less dynamism and the participation rate of the low-skilled remains unsatisfactory. Further structural reforms in product and labour markets would help boost potential output, trend growth and average per capita income levels, and reinforce social cohesion. This chapter suggests that there is room for stimulating competition, innovation and investment in services and for labour market reforms to foster the employment of low-skilled workers.


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).



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)




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.


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.


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).



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

* 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

(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)



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).


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

(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

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

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.


Policy recommendations

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

* 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)

* 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.


Government follow-ups to past OECD recommendations

Recommendations of the           Action taken since 2007
previous Survey

Enhancing regional

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

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

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

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

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

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

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

Improving product market

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

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

Improving conditions for

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

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
                                 Innovationsgesetz) are under

Strengthening the fiscal

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

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

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

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

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.

Financial incentives

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.



Administrative rules

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

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

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

Timing of detailed     60% of cases at        About 14 days after
registration           first jobseeker's      first contact
interview              first contact with

Timing of individual   Within 1 month after   Usually within 10

action plan            registration           days of unemployment

Reporting frequency    Once a month           Six times a year on
of job-search                                 average

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
unemployed (year);
requirement on
application outcomes
required from
employer (ER) and/or
jobseeker (JS)

Compulsory             No; yes                No; yes
participation after
some set of
duration (period);
compulsory when
referred by PES

Continuing             No                     Variable
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

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

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)

Reporting frequency    Every four weeks       At least once every
of job-search                                 three months

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
unemployed (year);
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
requirement (R) and
verification (V)
during participation
in ALMPs

Regular reporting of   R, every two weeks
status (R),
in-person attendance
(P), length of

Timing of detailed     Up to a month or
registration           longer

Timing of individual   Within 30 days of
action plan            registration

Reporting frequency    On average every six
of job-search          weeks

Intensive interview    Every six weeks on
schedule during        average
unemployment spell

Annual number of       2.8 (2006) ; JS
direct referrals to
vacant job per
unemployed (year);
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
duration (period);
compulsory when
referred by PES

Continuing             R, V
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

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
Geographic Code:4EUAU
Date:Jul 1, 2009
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