Austria: Study examines seniority principle in the labour market

A study of the problems older employees face in the Austrian labour market shows that their age is the biggest hindrance to getting a job. The study debunks the common belief that older workers’ problems are caused by the ‘seniority principle’: the fact that the longer workers are employed, the more they are paid.

Background

A study on the impact of the seniority principle on the Austrian labour market (in German, 745 KB PDF) was published by the Austrian Ministry of Labour, Social Affairs and Consumer Protection (BMASK) in July 2015. Researchers from the Institute of Advanced Studies (IHS) analysed seniority provisions in 30 of Austria’s most important collective agreements in seven sectors, in which 54% of all dependent employees are employed. The most important results are:

  • age itself is the main obstacle for becoming re-employed;
  • seniority regulations do not explain the unfavourable labour market situation of older people;
  • seniority pay is problematic only if wage increases are larger than productivity gains;
  • current seniority regulations, or previous wage increases due to seniority rules, have not increased unemployment among older people significantly;
  • it is not useful to narrow the debate about older workers’ labour market problems to focus on the seniority regulations. 

Objectives of the research and background information

In the political discussion in Austria, the ‘seniority principle’ (Senioritätsprinzip) is usually given as a possible reason why older employees who have lost their jobs have a higher unemployment rate and longer duration of unemployment. It has been argued that to increase their employability, they should not expect their pay to keep rising. However, empirical data on the seniority principle and especially on its effects on income are scarce. The study by BMASK sought to answer these questions.

  • Is a seniority principle present in Austria? If there is, in what sectors and to what degree? Is the seniority principle also implemented according to the legal provisions and stipulations?
  • To what extent does the seniority principle affect wage formation?
  • How much does the seniority principle affect the employment situation of older persons?

Austrian labour law includes certain regulations and clauses which provide for a gradual improvement in employees’ working conditions as their working life progresses. A certain number of years worked earns them, for example:

  • a sixth week of paid holidays (after 25 years with the same employer);
  • extended sickness pay;
  • extended notice periods;
  • extended rights of appeal against dismissal due to a breach of the principle of social considerations or on discriminatory grounds.

Collective agreements set out additional and even more detailed regulations on seniority, especially for wage rises to reflect increasing company experience or time in the labour market.

Methodology

The study is based on:

  • a literature review of the economic models explaining the seniority principle, and of empirical analyses of the relationship between age and production;
  • an analysis and systematisation of the legal situation (laws/regulations and collective agreements) and current judicature;
  • an empirical analysis of the consequences of the seniority principle on the employment situation of older people.

The study analyses the seniority stipulations of some 30 collective agreements. The agreements cover the following sectors: manufacturing; construction; the wholesale and retail trade; accommodation and food service activities; information and communication; financial and insurance activities; and social work activities without accommodation. More than half of all employees in the private economy (54%) are covered by such collective agreements.

Researchers also interviewed seven experts and stakeholders on the practical relevance of seniority principles. The empirical analysis of the consequences of the seniority principle for employment is based on two data sets: the Labour Market Database (AMDB) run by the Public Employment Service (AMS) and BMASK; and a further data source on pay slips from the Finance Ministry (BMF) and the Labour Force Survey by Statistik Austria.

Results

Seniority principles and their implementation

Seniority principles are set out in legal provisions and in collective agreements in Austria. However, they vary greatly from sector to sector and with employment status. For blue-collar workers, if pay increases are stipulated at all, they are minor (in commerce, tourism and manufacturing) and hardly any other improvement is mentioned. For white-collar workers, however, there are sectors (banking and insurance, and commerce) in which seniority brings considerable wage increases and further non-wage improvements. Empirical data on the actual implementation of such stipulations are very scarce; however, the experts interviewed reported that there are very few legal proceedings brought for non-compliance with such collectively agreed provisions.

Seniority principle and wage formation

The impact of work experience on a person’s net income has been drastically reduced in the last 20 years and this means that average income profiles have been flattened, particularly among blue-collar workers. The highest (net) pay increases among blue-collar workers are found in the social care sector and among trade workers. It is evident that in the sectors analysed for this study, white-collar workers experience a similar development of their wage curves, even though there are considerable differences in the extent of the pay increases in collective agreements. Thus, the employee matching process provides – to a minor extent – for factual pay increases in terms of market conditions.

Seniority principle and employment of older people

The analysis shows that there is no positive correlation between pay increases and unemployment. There is a positive correlation between the extent of collectively agreed seniority pay and the employment share of older workers, when broken down by sector. Equally, there is a negative correlation between collectively agreed seniority pay and the sector-specific unemployment rate of older workers. In other words, the unemployment rate for people aged 50 and above is generally lower in sectors that have strong seniority stipulations.

The issue of productivity was not analysed in this study, but the authors suggest that seniority benefits may only be problematic if their value outstrips that of respective productivity gains.

Discussion and policy response

The results of the study show that increasing pay curves may not only be dependent on regulatory governance, but may also be based on matching processes determined by the market. In Austria, there is a profound difference in the extent of seniority regulations between blue- and white-collar workers, and between sectors. In sectors with extensive seniority regulations, the labour market situation of older workers is comparatively favourable, and comparatively unfavourable in sectors where there are hardly any seniority benefits. This demonstrates that the seniority principle has hardly any bearing on older workers’ generally unfavourable employment situation.

After the publication of the study, Social Minister Rudolf Hundstorfer announced a number of measures intended to increase employment among older workers (in German). They included:

  • implementing a partial pension from 2016 on, so that employees are not asked to retire at age 62;
  • increasing funds to support the re-integration of older workers into the labour market;
  • implementing labour market pilot projects with funding from the European Social Fund;
  • implementing a system to reward companies that employ workers aged 55 and above, and penalising those that do not.
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