Reform of Severance Pay Law in Austria - mutual learning programme

More documents

Recommendations

Info

DISCUSSION PAPER discouraging hiring and firing. This could have negative implications for productivity growth and adoption to technological change. On the other hand, EPL could provide incentives for employees to participate in training, if there is insufficient insurance against loss of firm-specific human capital. The key issue for policy is how to reconcile the employers’ need for flexibility in hiring and firing with that of workers for employment security. Blanchard and Tirole (2004) discuss unemployed insurance and EPL together in a framework with risk-averse worker and risk-neutral entrepreneurs. They claim that a layoff tax can be efficiency enhancing, leading firms to internalise the costs of unemployment. According to the OECD (2006) severance payment can be a barrier to efficiency-enhancing labour reallocation by discouraging workers from quitting their current jobs to move to better jobs. This problem arises where high tenure workers are entitled to significant severance payments, if they are laid-off from the current job, but loose this entitlement if they voluntarily quit jobs. Against this background the OECD (2006) mentioned the reform of severance pay in Austria as addressing this problem. Austria has reformed its severance pay legislation by changing from a performance-oriented to a contribution-oriented system of individual savings accounts. The reform extends the coverage of the system to all employees in the private sector, but lower average payments are expected. In this paper we describe the reform of severance pay law and discuss some implications. The remainder of the paper is organized as follows. Section 2 provides some background information about the Austrian labour market and the pension system. Section 3 gives a description of the reform of the severance payment system and the problems driving the reform. We present figures concerning the development of the new system. Distributional issues and the role of severance pay as funded occupational pension are discussed. Section 4 gives an assessment of the impact of the new system on labour mobility and concludes. 2. The Austrian Labour Market In international comparison the Austrian labour market situation is favourable, although a gradual deterioration has occurred over the last 25 years. Unemployment is traditionally low in Austria, the unemployment rate amounted to 5.2 % in 2005. The employment rate is around 68 % and above the EU-15 average. However, the employment rate of older workers is one of the lowest in Europe. The unemployment rate has been continually rising during the 1980’s and 1990’s, with the only decline occurring during 1998-2001. However, as a consequence of slow economic development and increased labour supply unemployment has risen again during the last years. According to social insurance register data the average number of individuals in active dependent employment in 2004 was 3,078,544. The average number of individuals registered as unemployed amounted to 243,880. These numbers hide, however, the strong labour turnover in the Austrian economy. In 2004, a total of 1,454,000 jobs were taken up and 1,423,000 employment contracts were terminated (BMWA 2005). Stiglbauer et al. (2003) find that yearly job creation and destruction rates in Austria are comparable to the US, at least as one does not control for firm structure. 30 Nov - 1 Dec 2006 Peer Review Reform of Severance Pay Law, Vienna 8
DISCUSSION PAPER According to these figures, the Austrian labour market is characterised by high employment dynamics. However, high seasonal fluctuations in employment are a feature of the Austrian labour market. The variation in aggregate employment over the year is about 5 percentage points from peak to trough. In magnitude this is similar to the fluctuations observed in Canada or Scandinavian countries. Seasonal fluctuations can be explained partly by the big share of the construction and tourism sector in the economy. Construction and tourism account for 1/3 of the job seekers. Measures of worker reallocations, that do not consider short-term flows, indicate that the Austrian labour market exhibits rather low dynamics in international comparison (see Stiglbauer 2006). Aside from structural factors of the Austrian economy institutional regulations contribute to the lower frequency of worker movements. Austria ranks in the middle of the OECD countries with respect to the strictness of employment protection legislation (EPL) in the end of the 1990s (OECD 2003). Austria operates one of the most generous and complete PAYG (pay as you go) pension systems in Europe. The system is financially costly and encouraged early retirement (OECD 2003). The demographic development threatened the sustainability of the retirement system. Therefore the Austrian government implemented several pension reforms with the aim to reduce early retirement and secure the financial sustainability of the public pension scheme. In the long run the reforms imply a reduction of the replacement rate in the public pension system. In the coalition program 2000 the federal government stated their intension to develop a three pillars pension system in Austria. The government intended that the severance payment reform could contribute to the expansion of the underdeveloped second pension pillar. 3. The Severance Pay System in Austria 3.1 The former legislation Severance pay was introduced in Austria for white-collar workers in 1921 and extended to all workers in 1979. Austria’s former employment legislation stipulated that employees in the private sector are entitled for severance pay if their employment spell lasted for at least three years without interruption and was not terminated by the employee. An exemption was made for construction workers. In order to qualify they must have been employed for only 92 weeks during the previous three years, and not necessarily with only one employer. Note that the employees have been entitled to severance pay in case of retirement. The payment amount was based on the length of job tenure and was taxed at a low rate (6 %). Starting with two monthly wages after three years of job tenure, payments increased with the duration of the job up to a maximum value of one yearly income after 25 years. According to the former scheme workers received • 2 times their monthly gross wages for employment durations of at least 3 years, • 3 times the monthly wage for at least 5 years, • 4 times the monthly wage for at least 10 years • 6 times the monthly wage for at least 15 years • 9 times the monthly wage for at least 20 years, • and 12 times the monthly wage for at least 25 years. 30 Nov - 1 Dec 2006 Peer Review Reform of Severance Pay Law, Vienna 9
Page 1: DISCUSSION PAPER Reform of Severanc
Page 5 and 6: DISCUSSION PAPER reduced search int
Page 7 and 8: DISCUSSION PAPER Figure 2: Persons
Page 9 and 10: DISCUSSION PAPER In the new system
Page 11 and 12: DISCUSSION PAPER Koman et al. claim
Page 13 and 14: DISCUSSION PAPER Kristen, S., Pingg

Reform of Severance Pay Law in Austria - mutual learning programme

Create successful ePaper yourself

Delete template?

Save as template?