The effects of a reduction in non-wage labor costs on the economy and competitiveness
Austria's economic situation deteriorated significantly in 2023. Specifically, real GDP shrank by 0.7%. According to the European Commission's forecast, growth is expected to remain moderate in 2024 and 2025 at 0.6% and 1.4% respectively. High interest rates and inflation are weighing on the Austrian economy. In this context, EcoAustria was commissioned by the Austrian Federal Economic Chamber (WKO ) to investigate the extent to which a reduction in non-wage labor costs can make a positive contribution to economic development.
The model analysis assumes a reduction in non-wage labor costs with a measure volume of EUR 7.5 billion or 1.4% of GDP from 2025, which corresponds to the abolition of the FLAF contribution. Public benefits will not be reduced. "This measure strengthens the demand for and supply of labor, creating around one percent more employment. In concrete terms, this would result in around 40,000 additional jobs," explains Ludwig Strohner, Head of Public Finance Research at the EcoAustria Institute. In addition, real private consumption would increase by around 1.5 percent in the medium term, while real investments would increase by around 1.8 percent.
In recent years, it has become apparent that the gap in unit labor costs with important trading partners such as Germany is widening, which also has a negative impact on the real effective exchange rate and impairs competitiveness. According to the study, a reduction in non-wage labor costs can also improve price competitiveness and lead to a 1.4 percent increase in exports.
"The model simulation shows that real GDP will increase by around one percent in the long term, which corresponds to almost EUR 5 billion in additional economic output. This is accompanied by positive effects on public finances, as the consumption effect increases revenue from consumption taxes and the employment effect increases revenue from social security contributions," Strohner continues. However, part of the loss of revenue must be financed, whereby a reduction in expenditure is preferable in view of the high tax burden and the more growth-dampening effects of tax increases.
The studies also indicate that there is potential for efficiency in Austria because comparatively high public spending is accompanied by average results. Benchmarking analyses among the EU member states as well as Norway, Switzerland, the UK and Iceland show an efficiency potential of 2.6 percent of GDP in the areas of general public administration, education and the healthcare system, if the average value of the more efficient countries is used. There is also great potential in the pension system. Raising the statutory retirement age by one year, as assumed in the study, could reduce public pension expenditure by around 0.7 percent of GDP in the medium and long term.
