Economic Survey of Austria 2009: Lifting growth potential through further product and labour market reforms

 

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The following OECD assessment and recommendations summarise chapter 2 of the Economic Survey of Austria published on 2 July 2009.

 

Contents

 

Growth potential can be lifted further

While the macroeconomic policy response to the global financial crisis is the immediate priority, it should not detract from structural reforms in product and labour markets. Austria continues to enjoy a relatively high level of GDP per capita, but over the past decade and a half it has tended to lose some ground compared with the front-runners. This reflects persisting gaps in both labour productivity and labour utilisation. The productivity gap has started to narrow in recent years, but the labour utilisation gap has tended to worsen. The most globally-oriented parts of the business sector have intensified their innovative efforts and achieved significant productivity gains, but the more sheltered services have been less dynamic. Structural reforms and policies to improve productivity, investment and employment would not only help boost growth potential and average per capita income, but would also enhance social cohesion.

 

Service market regulation should become more supportive of innovation and investment

Despite important liberalisation initiatives in recent years in large sectors such as retail trade and telecommunications, the regulatory framework in services remains somewhat restrictive. In the absence of the incentives and disciplines of trade competition, the rules governing market entry and the creation of new corporations, as well as various sectoral regulations, are not sufficiently supportive of competition, innovation and productivity growth. This is a prime factor underpinning the contrast between the good productivity and employment performance of manufacturing and a generally weaker record of services in international comparison over the past decade. Even though the legal framework of competition is strong and comprehensive – with few sectoral exemptions – competition policy will have to be fostered, especially by further strengthening the Federal Competition Authority (FCA). Regulations should be adapted to instil more competition in trade-sheltered markets and facilitate entry, innovation and investment. The FCA should be mandated and adequately resourced to play a more proactive competition advocacy role.

 

Greater competition is needed in the infrastructure sectors

Greater competition in network sectors such as energy, transport and communications would improve real incomes and the overall competitiveness of the economy. These industries are characterised by large vertically-integrated firms with high government ownership relative to other OECD countries. Government ownership seems to enjoy broad public support as a source of quality and security of supply in key services, but cost and price performance fall short of OECD benchmarks. For example, electricity prices for industry exceed OECD averages and, while fees in telecommunication services are lower than OECD averages, they remain higher than in other high-income European countries. Sectoral regulators and the FCA should closely monitor market structures, behaviour and prices in particular in electricity, gas, rail passenger transportation, postal services and telecommunications.

 

Labour market dualism should be reduced

Austria’s overall labour market performance is strong, with a high employment rate and a low unemployment rate – notwithstanding the recent rise in joblessness. At the same time, there is a stark contrast between the respective employment rates of a large, well-performing core of prime-age workers with at least upper secondary education, and vulnerable groups such as older workers and workers with less than upper secondary education. Among high-income OECD countries this contrast appears strong in Austria, and constitutes a drag on potential growth. The employment challenges faced by vulnerable workers may further increase in the future due to the inflows of workers from neighbouring countries after the full liberalisation of labour movements with the new EU member states in 2011. Increasing the employment rate of older and low-skilled workers should be higher on the agenda, by addressing their remaining incentives for staying out of the labour force, as well as the impediments to stronger demand for their labour in the business sector. Helping up-skill these workers and improving their employability should also be a prime objective of public policies.

 

The employment rate of older workers can be raised

The low employment rate of older workers mainly reflects their massive withdrawal from the labour force until a few years ago. Pension, early retirement and disability schemes provided them with incentives to do so. The associated benefit conditions have since been tightened but cumulative cohort effects persist. Moreover, some recent policy measures have weakened older workers’ participation incentives. The penalty on early retirement was reduced in 2007, with a cut in the heretofore actuarially neutral discount rates applicable at early retirement. To lift the employment rate of older workers, the early retirement and disability pension schemes should be redesigned. The discount rates applicable before the standard retirement age should be actuarially neutral.

 

The low-skilled’s work incentives should be strengthened

The employment rate of the low-skilled remains one of the lowest among high-income OECD countries. This reflects shortcomings in work incentives, as well as weak demand for their labour. They face high implicit taxation when moving from inactivity to employment, and from part to full-time employment, even if this was to some extent alleviated by the 2009 tax reform. The implicit taxation rate is high for inactive low-skilled women with two or more children. In addition, while the enforcement of labour market availability rules for the recipients of unemployment insurance is among the strictest in the OECD, this is not the case for social assistance. The partition between federal responsibilities for unemployment insurance and Länder responsibilities for social assistance appears to be a source of inefficiency. Labour market participation incentives of the less-skilled should be improved by reducing the implicit taxation of low-income individuals transiting from inactivity to employment, by better integrating the management of unemployment insurance and social assistance, and by providing a larger proportion of social assistance through in-work benefits.

 

Business sector demand for low-skilled labour can be bolstered

The employment costs of the low-skilled are high and relatively rigid in Austria, contrasting with the degree of wage flexibility in the core labour market. Minimum wages are the main constituent of cost floors. There is no officially-legislated minimum wage, but hundreds of minimum wages negotiated sectorally, with ratios to the national average wage clearly above OECD averages. In these conditions, the recent government initiative to set a national minimum wage floor for all wage negotiations, at a level below the minimum wages in the largest sectors is likely to have only a limited impact. Still, it may affect the cost of hiring into regular jobs workers with atypical labour contracts, as well as the potential employment costs of the presently inactive or unemployed. The total costs of employing the low-skilled are also magnified by hefty employer social security contributions – among the highest in OECD. In light of the experience of other OECD countries, the employment of the low-skilled could be boosted by substantially reducing employer social security contribution rates, although this should be fully funded by spending restraint in lower-priority areas, or increases in less distortive taxes.

 

Developments in productivity and labour utilisation

1. Based respectively on 2001 and 2007 purchasing power parities (PPPs).
2. Ratio of employment to the labour force.
3. Share of the working-age population in the total population.
4. Labour productivity is measured as GDP per hour worked.
Source: OECD (2009), National Accounts, Productivity and Labour Force Statistics databases and OECD calculations.

 

Labour utilisation differs across groups

Employment rates, 2007 1

1. Some of the groups overlap. Data for the low-skilled are for 2006. Population-weighted averages for all OECD countries. For male migrants, it is an average of Austria, Belgium, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland (2006), Ireland (2004), Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, the Slovak Republic (2004), Spain, Sweden, Switzerland and the United Kingdom.
Source: OECD, Labour Force database, OECD, Education at a Glance 2008 and Eurostat.

 

How to obtain this publication

 

The complete edition of the Economic Survey of Austria is available from:

The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.

 

Additional information

For further information please contact the Austria Desk at the OECD Economics Department at eco.survey@oecd.org.
The OECD Secretariat’s report was prepared by Rauf Gönenç, Lukasz Rawdanowicz and Christian Hederer under the supervision of Vincent Koen. Research assistance was provided by Béatrice Guérard.

 

 

 

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