Reforming the labor market with an 8-point plan

On behalf of the Vienna Economic Chamber, EcoAustria has examined the potential and possibilities for strengthening the labor supply in Austria. The results of the study show that the level and structure of public levies, unemployment insurance regulations, training measures and social and family benefits have a significant impact on the labor market.

In particular, it is noted that high taxes lead to unemployment and reduce labor market participation. A long period of entitlement to consistently high unemployment benefits leads to a longer period of unemployment. The possibility of marginal employment during unemployment has similar effects and leads to a longer duration of unemployment as well as lower income after re-entering the labor market. Further training is a key factor in the successful reintegration of the unemployed. The expansion of childcare also has a positive influence on the supply of labor.

"Each of these measures contributes to strengthening the potential workforce. This means that several adjustments need to be made to counteract the shortage of skilled workers," explains Johannes Berger, Head of Labor Market and Social Security Research at EcoAustria.

Specifically, EcoAustria recommends the following reform approaches to increase the labor supply in Austria and reduce the shortage of skilled workers:

1. reduce the tax burden: A reduction in the tax burden on income, which is high by international standards, not only boosts the income of private households, but also stimulates the supply of labor. A reduction in wage and income tax by 1% of GDP could lead to an increase in the supply of labor by 22,500 people and reduce unemployment by around 16,000 people.

2. optimize tax incentives: The tax system must be reviewed for incentive compatibility with regard to labor supply. Many regulations favor part-time employment, such as the sole-earner deduction or the additional earnings limit for childcare allowance. In Austria, redistribution is applied at many points and at different levels (from the tax rate to income-related cost contributions), so that the overall distributional effects are no longer apparent. A stronger concentration of redistribution on wage and income tax could reduce inefficiencies in the distribution system, increase accuracy and transparency and strengthen the supply of labor.

3. increase labor force participation of older people: Only a few OECD countries have a similarly low actual retirement age as Austria. A higher retirement age not only strengthens the sustainability of the social security system, but also significantly increases the supply of labor and can reduce poverty in old age. In addition, social benefits must be reviewed for possible negative effects on labor supply. Reforms to widows' and widowers' pensions, for example, could increase women's incentives to work, as the empirical evidence shows.

4. reform labor market policy: In the area of labor market policy, a redesign of unemployment benefits or a restriction on additional income opportunities can lead to a higher labor supply. The expansion of qualification measures as part of active labor market policy also has a positive effect on the labor supply, as people can be placed in employment more easily. It is important that the qualifications acquired match the qualifications in demand as closely as possible. This should be achieved through increased cooperation with companies, e.g. in the area of retraining and vocational training measures.

5. expand childcare provision: A further expansion of childcare provision and longer opening hours will strengthen the labor supply of women in particular by making full-time employment compatible with childcare.

6. strengthen qualified migration: Reducing bureaucratic obstacles, particularly in relation to the Red-White-Red Card, and measures to increase Austria's attractiveness for international skilled workers can alleviate the shortage of skilled workers.

7. simplify the recognition of foreign educational and professional qualifications: A more efficient, faster and more transparent recognition of foreign qualifications also makes it easier to take up a qualified employment relationship. A more competence-oriented rather than curriculum-based recognition logic and a joint assessment body with a digital portal for clearer, more transparent and simpler processing are therefore helpful.

8. improve access to the labor market for asylum seekers: Finally, the criteria for access to the labor market can be relaxed for asylum seekers who have a high probability of being granted residency. This also has the advantage that people whose asylum procedure is concluded positively would then already have labor market experience and better language skills.