Reform of Severance Pay Law in Austria - mutual learning programme

DISCUSSION PAPER
because they do not lose their entitlement to severance payment when quitting a job. Therefore
the “flexicurity” features of the Austrian labour market are strengthened. The reform extends the
number of workers entitled for severance pay considerably, however, it is expected that average
severance pay will be lower in the new system.
The former severance pay system was heavily criticised for distorting mobility decisions. The loss
of entitlement to severance pay created a strong incentive for workers with long job tenures not to
quit. The new severance pay system eliminates this disincentive. As far as I know no study exists,
which estimates the quantitative impact on actual labour mobility. One can only speculate that the
impact is currently at most modest as many workers with long tenure are still covered by the
former legislation. Furthermore, reducing labour mobility may be justified, if it supports investment
in firm specific human capital. Moreover, entitlement does not depend on the form of termination
of the contract, therefore severance payment is not a layoff tax any more.
The reform improves the role of the capital market in Austria and helps to strengthen the funded
pillar of the pension system. However, the possibility to claim cash payments after job
termination, which decreases the expected return on the capital market, and the relative low
contribution rate imply that the new system may not generate a sufficient second pillar retirement
income. One should note, that the available evidence indicates that disbursement is preferred to
acquiring pension claims by a considerable number of workers.
5. Literature
Blanchard, O., Tirole, J. (2004): The optimal design of unemployment insurance and employment
protection: a first pass, MIT Economics Working Paper 04-15.
BMWA Bundesministerium für Wirtschaft und Arbeit (2000): Abfertigung Neu: Bericht der
Expertenarbeitsgruppe 1999/2000, Wien.
BMWA (2005): Labour Market and Labour Market Policy in Austria, Vienna, available at
http://www.bmwa.gv.at/EN/Topics/Labourmarket/policy/default.htm.
BMWA, Synthesis (2006): From Severance Pay to the Separation Account, Vienna.
Card, D., Chetty, R., Weber, A. (2006): Cash-on-Hand and Competing Models of Intertemporal
Behaviour: New Evidence from the Labour Market, NBER Working Paper 12639.
EIRO (2001): Reform of severance pay under discussion, available at
http://www.eiro.eurofound.ie/2001/06/inbrief/at0106220n.html
European Commission (2006): Employment in Europe 2006, Brussels.
GPA (2006): Mitarbeitervorsorgekassen im Vergleich, available at http://gpa.at
Holzmann, R. (2005): Reforming Severance Pay: Towards an Understanding of Program
Rational, Economic Impact and Reform Options, Empirica, 32, 251-253.
30 Nov - 1 Dec 2006 Peer Review Reform of Severance Pay Law, Vienna
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