Département des Affaires économiques

Economic survey of Austria 2007: Challenges facing the Austrian economy

 

Contents | How to obtain this publication | Additional information

The following OECD assessment and recommendations summarise chapter 1 of the Economic survey of Austria published on 13 July 2007.

Contents                                                                                                                           

Economic performance has been strong

Austria’s growth and employment performance has been good over the past decade. Trend GDP growth, at 2.2%, has exceeded the EU average and the employment rate is one of the highest in Europe, at about 70%. Moreover, regional income and employment differences remain particularly low, as well as the risk of poverty. Unemployment remains low at about 5½ per cent, and the country ranks high in the EU in terms of GDP per capita. Recent economic performance has also exceeded the euro area average, with real GDP growth at 3.4% in 2006, and inflation remaining at 1.7%. Austria continues to operate as an efficient economy, which successfully draws on its favourable location in the centre of an enlarged Europe.

 

The new grand-coalition government has a wider agenda

Parliamentary elections in autumn 2006 left the ruling centre-right coalition, which had pushed ahead with reforms in a number of areas, without a majority. While sticking to the main thrust of the reform agenda the new grand-coalition government (23rd Legislative Period) has extended its priorities more towards investment in growth enhancing measures while taking account of social concerns. Thus a balanced budget in structural terms is projected to be reached only by 2010. Education, innovation, environment, social issues and infrastructure investment will receive more funds from the budget, active labour market measures will continue to be financed at a high level, while public administration and health care are supposed to be areas with spending restraint. Other major reform areas in the policy agenda of the current government concern the negotiations over the new Fiscal Equalisation Law and the tax reform scheduled in 2010, the next election year.

 

To enhance prosperity Austria must focus on further strengthening framework conditions

Austria has established a top position among OECD economies through reforms which have helped flexible entrepreneurs and a well-educated labour force to generate high incomes. Maintaining this position calls for an ambitious and multi-faceted strategy along the lines of the Going for Growth recommendations, aiming at:

  • Making regulation in domestically-oriented sectors such as services more conducive to competition and innovation, while ensuring cost efficiency of the significant increases in spending for research and development.
  • Improving labour market participation and employability of various vulnerable groups, such as older workers, low skilled, young migrants and women with small children, by reducing fiscal incentives for early retirement, providing better incentives to accept job vacancies or return to work and better education.
  • Reaping the full benefits of regional integration by moving faster to adjust regulation and infrastructure to the needs of an emerging transnational agglomeration around Vienna.
  • Strengthening the fiscal policy framework and making the tax system more growth and
    employment-friendly.

 

All opportunities need to be seized to maintain a leading position

For a leading economy like Austria, the guiding principle should not be about beating averages but rather maintaining its position among the best performing OECD countries. In this regard Austria could have done better over the recent past, in particular for non-manufacturing sectors that are sheltered from international competition. Austria was on a steady catching-up trend with the top OECD economies until the mid-1990s, but its relative position has regressed somewhat since then. Both its labour utilisation and labour productivity performance have since slowed down in relative terms. Total factor productivity growth has been flat since the 1990s, while it tended to accelerate in other well-performing OECD economies such as Sweden, Finland and the United States.

 

Austria’s traditional sources of strength continue to deliver although non-standard labour contracts raise concerns

Austria’s traditional sources of strength, which were instrumental in its earlier rapid catching-up, continue to deliver. The two most important of these are: first, the medium-sized but globally-driven enterprises’ ability to use and further develop the most productive technologies; and second, the ability of businesses and workers to agree on wage and employment conditions that preserve the economy’s competitiveness. Themanufacturing sector has achieved record high productivity growth through the past decade without suffering from the relatively small size of the national science and technology base. Manufacturing firms are fully exposed to global competition, which is an important driver for productivity growth, and they also benefited in the 1990s from integration into the single EU market and with Central and Eastern Europe (see below). In parallel, employer-employee bargaining has focused on overall labour market performance, leading to real wage increases below productivity gains without pricing large groups of job seekers out of the market. The significant drop of real unit labour costs since 1995 and resulting gains in competitiveness underpinned a strong increase in profitability, while maintaining investment activity. The recent increase in temporary contracts is a source of flexibility but may also raise concerns about increasing dualism in labour markets. The severance pay insurance, introduced in 2003, extended eligibility to previously excluded workers and demonstrated how reforms could combine more flexibility with equity considerations. This could serve as a model case for an effort to make the standard labour contract more inclusive.

 

Entry barriers contribute to weaker outcomes in competition-sheltered activities

In contrast to exposed manufacturing firms, parts of the services sector are sheltered from competition, both domestic and global. Some key services have long remained under direct or indirect government control and under strict regulation or self-regulation in a competition-restricting manner. Limited competition appears to have contributed to relatively low productivity of the service sector as compared with manufacturing or service sectors in some other countries. The government should address these differences and foster product market competition in all areas of the economy, including liberal professions, which would stimulate productivity and employment gains over the long-run. Pro-competition
initiatives in a number of market services in the 2000s have been seen to have positive effects on productivity and employment. Nevertheless, there remains room for progress in a range of activities from government-dominated services such as public utilities, health and social housing, to private market services such as retail trade and the liberal professions.

 

Labour market performance is good for core groups

The other source of relative weakness compared with the best performing OECD countries is the lower participation and employment rates of some segments of the labour force. Contrasting with the high employment rates of the core labour force of prime age men and women – the vast majority of whom have upper secondary education or more – employment is much lower for older, less skilled and non-native workers. Older workers have one of the lowest employment rates in the OECD area, as do unskilled workers with only compulsory education, while workers of immigrant origin have a relatively high
unemployment rate. Young workers between 15-24 have a comparatively high employment rate, but their employment performance has weakened in the 2000s, while it has strengthened in benchmark countries. As far as the activity of women is concerned, labour force participation and employment rates are above international averages. But mothers of young children stay longer at home than in comparable countries, face weaker incentives for returning to work, and their human capital and pay levels are negatively affected. The economy’s limited success in integrating non-core groups effectively into the labour market may have played a role in increasing structural unemployment over the recent period, which goes against the trend in other countries.

How to obtain this publication                                                                                      

The Policy Brief (pdf format) can be downloaded in English. 

The complete edition of the Economic survey of Austria 2007 is available from:

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 Gonenc and Rina Bhattacharya under the supervision of Andreas Wörgötter.

 

 

 

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