Economic analysis from the European Commission s Directorate-General for Economic and Financial Affairs. Unemployment in Austria: low, but

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1 Economic analysis from the European Commission s Directorate-General for Economic and Financial Affairs Volume III, Issue ECFIN COUNTRY FOCUS Highlights in this issue: On the face of it, Austria s labour market has been performing relatively well. However, has been on a rising path, although dampened by institutional factors. The labour market needs further reforms, if is to be brought onto a downward trend soon. Unemployment in Austria: low, but By Monika Sherwood* Summary On the face of it, Austria s labour market performs very well, which is reflected in one of the lowest rates in the EU. However, while many of the euro area members have recently succeeded in reducing, the Austrian jobless rate has been on a clearly rising path since the early 198s and in 5 reached its highest level in the post-war era. In addition the statistics are distorted by the relatively low labour force participation of older workers and the comparatively long average duration of university education. Pressures on the labour market will increase due to recent and possibly future pension reforms aimed at raising employment among older workers, restructuring of universities resulting in shorter courses of study, staff cutbacks in public administration and continued immigration. In September 5 the government responded to the situation by introducing a package of measures aimed in particular at reducing youth and female. However, more needs to be done. Austria still doing better than the euro area, but ever less so For many years, Austria s job market has been considered a model of excellent performance. In 5, Austria s rate, at 5. of the labour force according to Eurostat s harmonised definition, was the fifth lowest in the EU, well below the EU average of 8.7. In terms of overall employment rate, Austria is very close to achieving the Lisbon goal of employing 7 of its working age population. In addition, the country has already fulfilled the Lisbon goal of employing 6 of working age women. The gap between euro area and Austria has been narrowing However, in the course of 5, both the number of unemployed and the rate reached their highest levels in the country s post-war history. Even though the rate is still relatively low, the gap between Austria and the euro area has narrowed almost continuously during the last decade (see Chart 1). The NAIRU (see Chart, and for details of the estimation see Denis et al., ) has been on the rise for at least 5 years, indicating that the steady rise in Austria s rate is due to structural factors. * Directorate for the Economies of the Member States. The views expressed in the ECFIN Country Focus belong to the authors only and do not necessarily correspond to those of the Directorate-General for Economic and Financial Affairs or the European Commission.

2 Chart 1: Unemployment gap with euro area narrowing Euro area Difference Euro area and Source: Commission services Chart : Austrian NAIRU on the rise NAIRU Unemployment rate Source: Commission services In the last decade employment growth has been much slower than in the euro area To some extent, Austria has been affected by the phenomenon of jobless growth. While yearly real GDP growth has matched that of the euro area almost perfectly, strong productivity gains have meant that employment growth in Austria has been less than.6 per year on average, half that of the euro area (see Chart 3). As stated in IMF (), higher labour costs, declining relative equipment costs and a tax system which favours capital accumulation contributed to a significant capital deepening, limiting the employment effects of the relatively solid growth. Chart 3: Employment growth in Austria much slower than in euro area 3 change Employment grow th Employment grow th euro area Source: AMECO The labour force has grown rapidly due to immigration, women entering the job market, and pension reform The sluggish employment growth has been combined with a rapidly increasing labour force. As shown in Chart 4, the rate has been on the rise in the recent years in spite of a growing overall employment rate. The additional labour supply is explained by growing immigration, more women entering the labour market (the female employment rate grew by almost 3 percentage points in the last decade) and older workers obliged by the recent pension system reforms to stay longer in employment. Chart 4: Employment and rates 69, 5 68,8 68,6 68,4 68, 68, 67,8 67,6 Unemployment rate rising in spite of grow ing employment rate ,4 67, Employment rate (lhs) Unemployment rate (rhs) Source: Eurostat Note: Data for 5 not yet available. Break in series in 4, therefore not shown ECFIN Country Focus Volume III, Issue 3 Page

3 It is also worth noting that there are two factors, each working on the opposite end of the working age population spectrum, which have been dampening the official rate statistics. On the one hand, Austria has an extremely low labour force participation by older workers (see Chart 5). On the other hand, the average duration of university education is long by international standards, hiding some additional potential. This is not really reflected in Chart 5 as the Austrian employment rate of 15-4 year olds is heavily influenced by the high number of apprenticeships (Biffl, ). Chart 5: Employment rates by age in EU1 DE 6 4 EU1 DE * EU1 DE Source: Eurostat * Rate of employment of 15-4 year olds excluding apprenticeships Low labour force participation of older workers dampens The actual retirement age started falling again in 3 The level of participation by older workers in the labour force in Austria is one of the lowest in the EU The reforms have diminished incentives to retire early, but not sufficiently Austria is not the only country to have encouraged early retirement as a way of relieving tensions caused, among other things, by the oil shocks of the past and the cohort of baby boomers entering the job market. However, it does not appear to have been as successful as other countries at reversing this trend in the light of changing circumstances. Not only have older workers in Austria been encouraged to retire early; their employability has also been negatively affected by the particularly steep age-income profile of salaried employees and civil servants (Bauer and Lamei, 3). The actual retirement age started rising in the mid-199s, but has been falling again since 3 in spite of the evident ageing of the population, and remains lower than the EU average for both men and women. In 4, the employment rate of year olds was the third lowest in the entire EU and almost 1 percentage points below the euro-area s average (see Chart 6). In addition, the gap between Austria and the euro area has been growing continuously since. If the labour force participation of older workers in Austria were to rise to that of the EU average of about 44 in 4 while employment remained unchanged, the rate would actually amount to almost 8, well above the 4.8 quoted by Eurostat. In order to discourage early retirement and thus make the pension system sustainable in the long-term, several reforms have been introduced in the last decade. As a result a person retiring at the statutory age of 65 years (at the moment it is lower for women but will gradually become equal) with 45 years of insurance contributions receives a pension equal to 8 of revalorised lifetime earnings. However, early retirement is still possible for people aged at least 6 and with a minimum of 37.5 years of contributions. A 4. reduction/increase in the pension is applied for each year of early retirement/extra year worked up to a maximum of three years before/after the statutory retirement age. The option of early retirement due to reduced capacity to work and long-term has been abolished, as has gradual retirement. Even though the minimum retirement age and the reduction factor for each year of early retirement were increased in the course of the restructuring, the system still contains work disincentives for older workers (OECD, 5b). In particular, the 4. reduction is much lower than the OECD average of 6. According to OECD calculations, the optimal age for a male worker in Austria to retire is 6 (and even lower for women) as that is the point at which accrued pension wealth will be highest. And since Austrians also put a relatively high value on ECFIN Country Focus Volume III, Issue 3 Page 3

4 leisure (Biffl and Isaac, 5), they can thus still be expected to retire well ahead of the statutory retirement age. Implicit tax rates on continued work for older workers are high Having closed some of the early retirement channels, the recent reforms opened others. Firstly, they made access to disability pensions much easier for unskilled workers aged 57 and more. There is evidence (OECD, 5b) that Austrians use disability pensions as an alternative to early retirement to a much greater extent than other nations. Secondly, the reforms introduced an early retirement option for people involved in onerous work. Finally, they also modified the old-age part-time employment scheme in a way that allowed phases of work and inactivity to be grouped in blocks (so that, for example a person could work full time for two years and then not work at all for another two years), which effectively opened yet another channel for early retirement. According to OECD calculations (OECD, 5c), the various early retirement options mean that implicit tax rates on continued work over the next five years (from the age of 55 onwards) in Austria are very high in comparison with other countries. Chart 6: Employment of older workers in of total population EU1 Source: Eurostat Further reforms of pension system might bring additional Early estimates of the impact of the pension reforms on the labour force participation of older workers (OECD, 5b) show that only 55 of the increase in participation translated into higher employment. The rest was made up either of those who had joined the old-age part-time scheme but no longer actually worked or those who had already applied for retirement, but were not yet receiving benefits. Therefore, further reforms will probably be needed to encourage labour force participation and generate new jobs in order to make the pension system fully sustainable in the longterm, and also to stem the overall decline in the labour force (Statistics Austria expects the working-age population to start shrinking in 19; Eurostat expects the decline to start already in 1). Long duration of higher education hides potential Further reforms to the university system might result in additional job seekers coming onto the labour market Furthermore, the relatively high graduate exit age has been hiding some potential. According to data from referred to in OECD (5a), the average duration of university studies in Austria was, at 6.3 years, one of the longest in the OECD, where the average was 4.7 years. Just to show the magnitude of a possible effect of shortening the duration of study, it is worth noting that if it were to be reduced to the OECD average and the number of students were cut proportionally, the labour market could be flooded with some 4 thousand additional job seekers. Some reforms with potential for shortening the average study duration have already been introduced, e.g. performance-related elements in university funding (OECD, 6). As the situation of the universities ranks high in the current policy debate, further possible restructuring may be in sight. ECFIN Country Focus Volume III, Issue 3 Page 4

5 Unemployment outlook not very bright in the short term Working time and severance pay legislation has been reformed Much has already been done to address the difficult situation on the labour market. Among other things, working-time legislation has been liberalised. Flexible arrangements (such as Sunday, Saturday, night or shift work) constitute a high share of the Austrian labour market by international standards (Stiglbauer, 4 and 5). The severance pay legislation has also been changed so that it now encourages job mobility from the employee s point of view and reduces the specific cost of dismissal for the employer (OECD, 4). This is reflected in the change of Austria s ranking in employment protection legislation for regular employment between the late 199s and 3, as shown in Table 1. Table 1: Austria has a middle-ranking position in terms of employment protection legislation (EPL) among 8 OECD members Overall EPL Regular employment Temporary employment Collective dismissals Late 199s Source: OECD Note: This shows Austria s rank out of 8 OECD members, with country No 1 having the strictest EPL The government has announced a package of measures to combat, though they seem to be though of a shortterm nature Immigration will add to the pressures exerted on the labour market, but possibly to a lesser extent than in the recent past As reached record levels in the course of 5, the government announced a special package of measures in September aimed in particular at combating youth and helping women re-enter the job market. However, both the measures themselves and the jobs resulting from them seem to be of a rather short-term nature. In addition, the package must be balanced against the government s administrative reform started in, the first stage of which (-6) is to result in a reduction of 13, staff. The latest update of the Austrian stability programme refers to an agreement on the next stage of the reform reached between the federal and sub-national governments in November 5, which foresees a reduction in staff by about 15,7 full-time equivalents across different levels of government by the year 1. Even though these numbers are small compared to total, it means that the public administration cannot be counted on to mop up any labour shed by the private sector. Last but not least, the Austrian labour market will continue to face some pressures from sizeable immigration. However, in its latest population forecast Statistics Austria foresees that net inflows of migrants, while still positive, will keep falling until, so that the pressures exerted by foreign workers on the labour market might be less than in the past. One of the public concerns in Austria at the moment is immigration from the newly acceded EU member states. However, according to the report by the European Commission (6) the average number of EU 8 nationals (recently acceded Member States excluding Cyprus and Malta) holding work permits in Austria as a percentage of working age population remained unchanged between 4 and 5 at a level of.7. The same report notes that in general the percentage of EU 1 low-skilled entrants in EU 15 labour markets tends to be smaller than for nationals of the latter, whereas the proportion of EU 1 workers with medium qualifications is higher. This means that the immigrants from the new EU members may be complementary to the receiving country nationals, reducing bottlenecks in some sectors of the economy without "stealing jobs" from low-skilled workers. ECFIN Country Focus Volume III, Issue 3 Page 5

6 References Bauer, M., and N. Lamei (3), Altersprofile der Einkommen von unselbständig Erwerbstätigen und Pensionisten, Statistische Nachrichten, May 3 Biffl, G. (), "Arbeitsmarkt und Beschäftigungspolitik: Europäische Koordination als Antwort auf globalen wirtschaftlichen und gesellschaftilien Umbruch" in H. Neisser und S. Puntscher Riekmann, Europäisierung der österreichischen Politik Konsequenzen der EU Mitgliedschaft, WUV Universitätsverlag, Vienna, pages Biffl, G., and J. E. Isaac (5), Sustaining Employment of Older Workers in an Ageing Society, WIFO Working Papers, 56/5 Denis C., K. Mc Morrow and W. Röger (), Production Function Approach to Calculating Potential Growth and Output Gaps Estimates for the EU Member States and the US, European Economy Economic Papers No. 176 European Commission (6), Report on the Functioning of the Transitional Arrangements set out in the 3 Accession Treaty (period 1 May 4 3 April 6) IMF (), Austria Selected issues, IMF country report, No. /4 OECD (4), Employment Outlook, Paris, OECD OECD (5a), Economic Surveys: Austria, Vol. 8, Paris, OECD OECD (5b), Ageing and Employment Policies: Austria, Paris, OECD OECD (5c), Economic Policy Reforms: Going for Growth, Structural Policy Indicators and Priorities, Paris, OECD OECD (6), Economic Policy Reforms: Going for Growth, Structural Policy Indicators and Priorities, Paris, OECD Stiglbauer, A. (4), Longer Working Hours? More Flexible Work Schedules? Do Austrian Economic Policymakers Need to Act?, Monetary Policy & The Economy Q4/4, Austrian Central Bank Stiglbauer, A. (5), Has Accession to the EU and Monetary Union Changed Austria s Labour Market? State of Play and Need for Action, Monetary Policy & The Economy Q/5, Austrian Central Bank The ECFIN Country Focus provides concise analysis of a policy-relevant economic question for one or more of the EU Member States. It appears fortnightly. Chief Editor: Marco Buti, Director of the Directorate for the Economies of the Member States. Coordinating Committee: Zdenek Čech, Nathalie Darnaut, Martin Larch Layout: Karl Gradinger, Johannes Kattevilder ECFIN-CountryFocus@cec.eu.int Website: ECFIN Country Focus Volume III, Issue 3 Page 6