Austria's international unit labour cost position improves slightly

According to a study published in autumn 2003 by WIFO, Austria’s businesses have improved their comparative unit labour cost position since 2001, in particular in comparison with the country's most important trading partners. This is due to notably high productivity growth in industry, which offsets Austria’s relatively high labour costs. The government is also aiming to ease companies’ tax burden from 2005.

In the long run, the competitiveness of a national economy – like that of Austria – depends not only on company-related factors such as innovativeness, quality of products and marketing, but also on 'macro' criteria such as qualification of the workforce, industrial relations and taxation. In the short run, however, currency rate variations in combination with changes in labour costs and productivity are the most decisive factors for competitiveness, in particular as regards companies in the sectors exposed to international competition. Since Austria joined the third stage of EU Economic and Monetary Union (EMU) in 1999, currency rate variations have been relevant only for its trading relations with partners from outside the euro-zone. In contrast, the other main competitiveness criteria - ie labour costs and productivity- have gained in importance.

WIFO study on unit labour costs

A study published in autumn 2003 by the Austrian Institute of Economic Research (Österreichisches Institut für Wirtschaftsforschung, WIFO) ('Internationale Lohnstückkostenposition 2002 geringfügig verbessert', Alois Guger, WIFO) examines Austria’s comparative unit labour costs. According to the study, Austria ranks in 10th place in an international hierarchy of labour costs. Norway is most expensive, followed by Switzerland, Denmark and Germany. In Austria’s manufacturing sector (ie industry and small-scale craft production), one hour of blue-collar labour cost EUR 20.93 in 2002, which was about 3% more than EU average. Austrian hourly labour costs were made up of EUR 10.93 in wages and EUR 10 in non-wage labour costs - supplementary non-wage labour costs thus amounted to 91.5% of wages. The level of non-wage labour costs is particularly high in Austria since there is a set of (tax-privileged) bonus payments - ie the '13th month' and '14th month' of pay and severance pay - which are defined as non-wage costs. If the 13th and 14th month payments are included as a component of the wage, the rate of non-wage labour costs is reduced to 63.4% of wages in manufacturing.

As regards labour productivity per hour, Austria has recorded an above-average growth in relation to its EU trading partners since 1990. This development has resulted from a combination of favourable circumstances, such as a relative high rate of investments and capacity utilisation, and the opening up of new markets, in particular an increasing internationalisation of production owing to the ongoing European integration and EU enlargement. Moreover, restructuring processes have resulted in substantial labour cutbacks, by way of outsourcing and early retirement of older employees. According to the WIFO study, the annual rate of productivity growth was 4.4% on average in Austrian manufacturing from 1995 to 2002, which was considerably more than the EU average of about 3.1% for the same period. The absolute level of productivity per employee in Austrian manufacturing, in 2002, exceeded that of Germany by 16%. This gap, however, does not reflect the countries’ relationship in terms of productivity per hour, since in Germany weekly working time is lower than that in Austria by 9%.

According to economists, one of the most decisive factors for the competitiveness of national economies in terms of price competition is the labour cost position per production unit, defined as the relationship of labour costs per hour and productivity per hour (ie unit labour costs). Whereas during the first half of the 1990s Austrian rates of productivity growth did not keep pace with increases in labour costs (due to the relatively high exchange rates of the national currency, the Schilling, as a consequence of revaluations), a more relaxed exchange rate and more moderate wage gains in Austria’s industry, in combination with sustained productivity growth rates, have improved the labour cost position in Austria’s manufacturing sector and the economy as a whole since the mid-1990s. From 1995 onwards, unit labour costs decreased by 2.2% per year relative to the average of Austria's trading partners (calculated in a single currency), the WIFO study finds. Thus, Austrian businesses have improved their competitive position by some 15% since 1995.

In 2002, labour costs in manufacturing, calculated on an hourly basis, rose by 3.3%. With productivity growth accelerating (up 3.5%), unit labour costs declined slightly (by 0.2%), also relative to Austria’s trading partners (0.3% less).

Company taxation reform plans

The Austrian government intends to improve the competitive position of the Austrian economy. Interestingly, the results of the WIFO study arguably contrast with the necessity perceived by the government to promote Austria’s economy by means of cutting taxes. The coalition government of the conservative People’s Party (Österreichische Volkspartei, ÖVP) and the populist Freedom Party (Freiheitliche Partei Österreichs, FPÖ) argues that Austrian enterprises, for reasons of international competitiveness, should be substantially relieved of the current burden of levies and taxes, in particular with respect to non-wage labour costs (AT0208201N) and the corporate profits tax. Given the forthcoming enlargement of the EU to include central and eastern European countries which generally have very low rates of taxes on business profits, the government agrees with the Chamber of Economy (Wirtschaftskammer Österreich, WKÖ) employers' organisation, which is calling for substantial cuts in company taxes over the next years in order to prevent relocations of companies from Austria to the new Member States (AT0209201N).

Such measures would mean further improvements in competitiveness. The share of company taxation in Austria's total tax returns has significantly decreased over recent decades and lies below the EU average. However, some experts state that the decisive criterion for a national economy’s competitiveness is its level of unit labour costs rather than its level of taxation. In this respect, the Austrian economy performs quite well even in relation to the EU candidate countries, which have to a notable extent lost their favourable position in terms of labour costs due to rapid wage gains in recent years.

Commentary

The coalition government of ÖVP and FPÖ plans to realise a comprehensive reform of Austria’s taxation system, including substantial cuts in company taxation in 2005. In response to a long-standing demand of WKÖ, this reform is planned to reduce both non-wage labour costs and taxes on (reinvested) company profits. The argument is that under the present tax regime EU enlargement will lead to competitive disadvantages for Austria’s companies due to their higher burden in terms of labour costs and taxes. The lower company tax rates of the forthcoming new Member States (which are relatively close to Austria geographically) are regarded as a strong incentive for Austrian firms to move their operations to one of these countries.

However, as the WIFO study shows, such incentives to relocate operations may be less strong than originally feared. This is because, in terms of its unit labour cost position (which is one key determinant of competitiveness), Austria performs outstandingly well. This holds true not only in relation to its EU trading partners, but also in relation to the forthcoming new Member States. Moreover, most Austria-based employers appreciate the country’s highly developed infrastructure and the high level of qualification and motivation of its workforce (granting a high level of productivity) within a relative stable socio-economic environment. This contrasts with operating in a low-pay country which – except for wages and company taxation – offers a less favourable framework.

Against this background, some critics argue that the societal costs of further reductions in company taxes may exceed the economic benefits, in that the outcome may be growing tax burdens imposed on labour and consumers and growing social inequality. (Georg Adam, University of Vienna)

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