Study finds increasing gap in pay structure

A study conducted by the Austrian Institute of Economic Research (WIFO), presented in December 2004, finds that - as in most other industrialised countries - inequality of income distribution in Austria has increased during recent decades. Mainly as a result of growing unemployment and an exceptional rise in property-related incomes, the wage ratio (the proportion of national income represented by total earnings from employment) has significantly declined since the 1970s. Among wages and salary earners, pay differentials have widened, especially since the mid-1990s. The redistributive effects of government action through spending and transfer payments, however, mean that the distribution of households’ net incomes has remained relatively stable.

In December 2004, the Austrian Institute of Economic Research (Österreichisches Institut für Wirtschaftsforschung, WIFO) published a study on the long-term development of income distribution in Austria (Die langfristige Entwicklung der Einkommensverteilung in Österreich, Alois Guger and Markus Marterbauer, WIFO, 2004). The study, which was carried out on behalf of the Ministry of Social Security, Generations and Consumer Protection (Bundesministerium für Soziale Sicherheit, Generationen und Konsumentenschutz, BMSG), examines post-war developments in terms of both functional distribution (ie the distribution of the national income between the production factors labour and capital) and personal distribution (ie income relations among individuals). In the context of a generally problematic data situation regarding income statistics, due to a variety of institutions recording and processing such data in different ways, the WIFO study aims to obviate the existing lack of data quality by simultaneously and comparatively referring to (at least the most important) different data sources. This methodological approach, which takes into account the heterogeneity of different income data, seeks to make the study more reliable in comparison with previous income studies. The main findings of the research are summarised below.

Functional distribution of incomes

Development of the wage ratio

In parallel with many other industrialised countries, Austria’s unadjusted wage ratio - ie the proportion of national income represented by total earnings from employment - grew continuously until the end of the 1970s. Thus, during the post-war period of long-term economic upturn, the functional income distribution changed to the benefit of labour. Since then, however, apart from short-term fluctuations in the economy, the wage ratio has declined continuously. As an indicator of the functional income distribution, a decreasing wage ratio signifies that wages and salaries lag behind the 'profit trend' (resulting from profits and income derived from property). Since the wage ratio is also affected by shifts in the structure of employment (eg an increase of the proportion of employees in the total employment figure from about 60% in the 1950s to about 80% at present), for the purposes of assessing changes in income distribution an 'adjusted' wage ratio is calculated that takes account of such shifts. Since the early 1980s the adjusted ratio has tended to decline continuously and significantly. From 1981 to 2003, it declined by 0.6 percentage points per year on average, resulting in a decline from 71% to 58.5% within that time period.

Aside from structural aspects of change, changes in pay policy have also had an impact on the development of the wage ratio. For a long time, productivity-related pay policy used to be the basis on which trade unions and employers' organisations founded their cooperation in the framework of economic and social partnership. Accordingly, the pay and incomes policy was devised not only to shape incomes per se, but also to achieve other economic goals such as price stability and the maintenance of international competitiveness. Austrian pay policy took its cue from the long-term trend in overall national productivity and the rate of inflation. This 'formula' was meant to guarantee - in the long run - a growth of real earnings at more or less the same rate as labour productivity and thus the maintenance of a relative stable functional distribution of incomes (in particular with regard to the adjusted wage ratio and the unit labour costs). However, since the early 1980s a deteriorating labour market situation, slackening economic growth and the opening up of foreign trade resulting from the EU internal market have led to real earnings lagging behind increases in productivity. The growth in unemployment has a direct impact on the wage ratio since the jobless people who claim unemployment benefits are no longer classified as employees but as beneficiaries of transfer payments. Moreover, an increasing rate of unemployment resulting from poor economic growth and increasing labour market supply means a change in the economic balance of power to the detriment of trade unions and at the expense of their power to enforce their pay policy goals. The consequence during the last two and a half decades has been a shift in functional income distribution from pay to profit, and hence a decline in the wage ratio.

Development of profits and property-based income

The most decisive factor in the decline of the wage ratio during the last 20-25 years has been the development of income derived from property, ie dividends and rent. In the mid-1960s, only about 5% of the national income represented by the production factors property, capital and enterprise were produced by property. By the late 1990s, the share of this income factor had increased to about 25%. Whereas profits grew by about 700% from 1964 to 1998, property income (including rent) rose by about 5,000%. Moreover, substantial growths were achieved by finance and the so-called free occupations - the latter with a current share of about 13.5% of profits and property income. Income derived from business in a narrow sense has declined from about 50% in 1970 to about 40%.

The significant expansion of property-based forms of income since the early 1980s has had a major effect on the overall distribution of incomes - in terms of both functional and personal distribution. On the one hand, high rates of interest at international level have markedly increased the interest yields; on the other hand, a relaxation of national laws governing tenancy have significantly raised rents for housing. The high interest rate policy has not only resulted in a change of income distribution between productive business activity and 'rentiers', it has also had major macroeconomic effects on the national economy. A comparison of the development of investment rates with that of profit rates indicates a dramatic change in companies’ investment policies during the 1980s: Whereas - by and large - the profit and the investment rates recorded parallel trends until then, since the early 1980s companies’ propensity to invest in their tangible assets has considerably declined. In turn, the share of (floating) financial assets invested in by the companies has likewise increased. Although this change in companies’ portfolio policy in favour of investments in the financial markets may have guaranteed a certain level of profits, real investments and thus both economic growth and employment level have been dampened. Hence, the decline of the wage ratio since the 1980s is not a result of extraordinary business activity; rather - in parallel with a strong expansion of property income - it can be explained by an overall change of companies’ investment policy.

Personal distribution of incomes

Development of gross incomes (wages and salaries)

The changes in the functional distribution of incomes - ie the increase of profits and property-based forms of income and the relative decrease of wages and salaries - have also had major implications on the personal distribution of incomes, since the structure of factors in incomes differs widely between low- and high-income earners. Wages and transfer payments play a more important role in 'poor' households compared with those with high incomes.

Since there is a lack of clear-cut data on profits and property income disaggregated at personal level in Austria, the WIFO study confines itself to focusing on wages and salaries, which still represent the by far most important source of the national income. Therefore, their distribution exerts the most decisive influence on the personal distribution of incomes.

Pay differentials are relatively high in Austria and have increased markedly for the last three decades. Whereas in the first half of the 1970s the distribution of pay remained stable, the pay gap started to widen in the second half of the decade. Since then, pay differentials have continuously increased. While the proportion of total income received by the lowest quintile (ie the 'poorest' 20%) remained stable at around 7%, the share of income of the highest quintile grew from about 36% in 1976 to almost 40% in 2002. These data are based on the contributions statistics of the social insurance institutions. Figures for income and earnings tax which cover almost all employees (including even those in minor employment and those with short-term employment contracts) suggest even higher pay differentials: Accordingly, the share of income of the lowest 20% decreased from about 5% in 1976 to 2.5% in 2002, while the highest quintile advanced its share of income from 40% to 46% in the same period. The income and earnings tax statistics indicate a significant growth of pay differentials, especially in the second half of the 1990s, when the income of the lowest quintile decreased by 1.6% (from 1995 to 2000) and the income of the highest 5% increased by 23.5%.

A long-term personal distribution analysis reveals that during periods of peak prosperity and full employment the 'income hierarchy' among employees has remained stable or partially evened out. Periods of economic downturns and substantial labour market problems, in turn, have widened pay inequality. By international standards, this pattern has been observed in most other countries of continental Europe, and despite a considerable increase in overall pay differentials in Austria since the mid-1970s, pay inequalities have remained less far-reaching compared with the USA and Great Britain.

Sector- and gender-related pay inequalities

Pay differentials between various branches and sectors of the economy in Austria are among the largest in Europe, and they are tending to further widen. This is despite the fact that Austria has an exceptional degree of 'corporatism' (AT0305202F) and relatively strong trade unionism which is marked by an extremely high degree of unity.

Pay is best in the energy sector. The oil industry pays twice as much as the overall economy on average, while electricity and water supply pay 168% of the national average. Next is financial intermediation (145%), mining (138%) and the chemicals industry (135%). At the lowest end of the pay hierarchy are private households (less than 45%), agriculture and forestry (64%), tourism (69%) and leather and footwear production (75%).

Interestingly, the inter-sectoral pay differentials have increased continuously since the early 1980s. This means that the high-pay sectors such as energy and water supply have improved their favourable pay position, while low-pay sectors such as agriculture and forestry have fallen further behind. Only a few low-pay sectors have improved their pay position, such as the textiles industry which has undergone severe restructuring during the last two decades, resulting in personnel cuts affecting half of the sector’s former employees.

While during the 1980s inter-sectoral pay inequalities generally increased, the 1990s show a more differentiated picture. Disaggregated by sex and employee status, both female blue-collar workers and male white-collar workers recorded a slight reduction in pay inequalities during the (early) 1990s, a development which has continued with regard to the former until today. This is due to the fact that in many sectors the employment structure has changed. In the traditional low-wage branches, such as garments, leather and textiles, a number of low-skilled employees were laid off in the 1990s, which has raised pay on average in the branches concerned. At the same time, high-wage sectors, such as oil production and paper industry, reduced part of their well-paid labour force in the course of large-scale early-retirement waves, which - in the short run - slightly dampened these sectors’ pay on average. Moreover, in relation to the service sectors, which tend to pay wages that correspond to the national average, both the exceptionally low- and high-wage industries have lost part of their labour force. In addition, the trade unions’ pay policy of demanding minimum wages pursued (by and large successfully) in the early 1990s may have contributed to a reduction in the inter-sectoral pay differentials for some time. Since 1995, however, the analysis of pay developments indicates a further overall increase in the inter-sectoral pay gap.

Gender-related pay inequalities decreased slightly in the course of the 1980s and the early 1990s. Women’s gross pay amounted to about 65% on average of that of their male colleagues in 1980 and to about 69% in 1994. However, since the mid-1990s women’s gross pay has declined by 1.5% relative to that of men. This development mainly results from a major increase in female part-time work: The part-time rate among female employees grew from 20% in 1993 to 35% in 2002. When adjusting the gender-related pay gap for working time, pay inequality between the sexes has continuously decreased during the last two decades. When adjusting women’s pay for actual working hours, it increased from 71.2% of men's in 1980 to 82.2% in 2002 on average. By contrast to a 2000 study on gender-specific pay differentials commissioned by the Ministry of Economic Affairs and Labour (Bundesministerium für Wirtschaft und Arbeit, BMWA) which ruled out qualifications as a significant factor for gender-related pay inequalities (AT0103209F), the authors of the WIFO study find that the improvement of qualifications among women may have contributed significantly to the reduction of pay differentials between the sexes.

The role of wage policy and welfare state redistribution

Aside from a series of economic determinants (such as 'skill-biased' technological changes and labour market flexibilisation), both pay policy (conducted by the trade unions) and government action have major effects on distributive relations in Austria.

First, pay policy in Austria is characterised by the pattern-setting role of the metalworking industry for all other sectors of the economy in the course of the annual collective bargaining rounds (AT9912207F). This mode of overall coordination provides for a high level of synchronisation of pay and incomes policy with the Austrian economy’s international competitiveness requirements. However, this overall coordination has not prevented large pay differentials in terms of sectors, gender and employee status (see above). This reflects the unions’ position of primarily maintaining a maximum level of employment rather than pursuing egalitarian bargaining goals. Nevertheless, in particular in the early 1990s, the unions succeeded in enforcing monthly minimum wages of at least 10,000 Schilling (EUR 727) and, a few years later, 12,000 Schilling (EUR 872) in almost all sectors of the economy, which helped reduce overall pay inequalities.

In addition, redistribution as a result of government action has contributed to egalitarian distributive effects, such that - despite increasing gross pay differentials among individuals - the personal net income distribution per capita has not become more unequal since the 1980s. 'Secondary distribution' by the welfare state takes place mainly through government spending, social insurance transfer payments and public provision of goods and services. The system of taxes and levies does not have a major redistributive effect.

Commentary

The increasing gap in Austria’s pay structure as well as the ongoing shift in the functional distribution of incomes at the expense of the wage ratio entail a series of unfavourable consequences. First, overall purchasing power and thus overall consumption tend to decline. While the 'poorest' third of the population have to spend their whole income for everyday consumption goods, the 'richest' third can save one-fifth of their income. Evidence shows that a more equal distribution of incomes would raise overall purchasing power. Second, an unequal distribution of incomes tends to weaken productivity, since an over-supply of cheap labour minimises companies’ efforts to promote further training and innovation. Third, large pay gaps in one generation have unfavourable effects on the provision of equal opportunities for the next generation. This is because - as many studies have corroborated - poverty is hereditary. Last, but not least, an unequal distribution of incomes threatens society’s stability and brings dramatic social costs.

Although the income situation of low-wage households is being significantly improved as a result of the welfare state’s spending and services, recent government action in the field of taxes and levies is likely to have few if any major redistributive effects. One of the WIFO study’s authors expects a tax reform endorsed by parliament in 2004 (AT0402103F) even to exacerbate further overall income differentials in Austria. (Georg Adam, University of Vienna)

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