Policy Note 47: The new location competition is coming to a head: workers are becoming more mobile

In a recent study, the economic research institute EcoAustria looked at the effects of growing labor mobility on tax revenues. Since the start of the pandemic, digital nomads have long been found in all educational and age groups. In a cautious scenario, the Austrian budget could lose almost 500 million in wage tax per year if Austrian workers were to discover the advantages of other countries in terms of taxes and lower bureaucratic hurdles - for example when setting up a company. At the same time, the Austrian state now has a historic opportunity to change the framework conditions in order to support the influx of qualified workers to Austria and thereby increase tax revenues.

"A high level of competitiveness in a country or region has positive effects on the establishment of companies, innovative strength and productivity, and ultimately on economic growth in general. Competitiveness has a variety of dimensions, from the design of institutions that ensure the security of property rights or functioning markets to the educational structure of society, the infrastructure or the tax and duty system," emphasizes EcoAustria Director Monika Köppl-Turyna.

Previous discussions about location competition and tax revenue have largely focused on corporate taxes or consumption taxes, although income tax revenue is many times more important for public finances. Advancing digitalization, which is being further intensified by the experiences of the COVID-19 pandemic, may in future give rise to a new dimension of location competition that has not yet been discussed in detail in the public debate: location competition for the settlement of internationally mobile workers.

Digitalization has already led to far-reaching changes in the labour market in recent decades. These include, for example, a shift in demand for labour towards cognitive skills and activities, especially in highly digitalized sectors, but also a decline in demand for repetitive work. Even before COVID-19, but increasingly due to the pandemic, the option of teleworking was already being used. Crowdworking, a new form of digital work, is also being applied and used more and more frequently.

All of these trends in the labor market can promote the international mobility of workers. The estimate of wage tax revenue at stake in international competition to attract workers is based on wage tax statistics, data from the literature on teleworking potential and various scenarios on the actual use of international mobility. Depending on the scenario, between 1.8 and 18.1 percent of employees subject to income tax are internationally mobile. This accounts for 2.2 to 22.2 percent of wage tax revenue in Austria. High-income earners in particular, who also bear a disproportionate share of the tax burden, are potentially internationally mobile.

"In a very cautious scenario alone, where only five percent of workers who are able to work remotely also become mobile, hundreds of millions of euros less in wage tax revenue are at stake," says Köppl-Turyna.

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At a glance

Location competition with countries within and outside Europe is becoming increasingly important. It is now necessary to take steps to increase the attractiveness of Austria as a business location from the perspective of internationally mobile workers. Key location dimensions include the tax and duty burden, which is above average in Austria compared to other countries, regulatory hurdles to self-employment and the quality of the infrastructure, particularly the digital infrastructure. In addition, the quality of life and the healthcare and education system are also key locational dimensions in the competition for internationally mobile workers.