Unemployment rates in Austria are traditionally lower than in most other OECD countries (see, e.g. OECD, 2010, for the latest rates), although unemployment of low qualified Austrians has recently been strongly increasing.
For example, the rate among men having completed only compulsory education increased from 7.2% in autumn 2008 to 12.5% a year later. For low-qualified women, the rate increased from 8.6% to 10.4% in the same period (Statistik Austria, 2009).
Thus, designing policy measures capable of reducing unemployment among low qualified persons and improving incentives to take up low-wage jobs is a primary issue on the social- and economic policy agenda in Austria as well as its fellow OECD countries. In the US and the UK, for example, wage subsidies like the “Earned income tax credit” (EITC) or “family credits” exist since many years and have in the recent past provoked interest of policy advisors in Germany and Austria (Steiner, 2006).
In Germany, several proposals aimed at improving the opportunities to earn money with low wage jobs have recently been brought up. Some of these proposals feature wage-subsidies for recipients of means-tested unemployment assistance who take up jobs with a few hours of work, but also cutbacks of transfers for the unemployed rejecting job offers (see, e.g. Sinn et al, 2006, Steiner, 2004), which probably is why politicians have been reluctant to support them. Other recent proposals favor wage subsidies to employees earning low hourly wages in jobs covered by the social security system and the abolishment of the implicit subsidy of so called mini-jobs” which are exempt from social security contribution (see Haan and Steiner, 2007 for an evaluation of alternative recent reform proposals).
In Austria, the system of social assistance, which is organized by the federal states and features different rules in each of the nine states, will be replaced by a comprehensive system called needs-based minimum benefit” “Bedarfsorientierte Mindestsicherung” BMS) by the end of this/beginning of next year. While within the existing system of social assistance in Austria, transfer applicants have to turn to the local municipalities, receivers of BMS are to be supervised by the unemployment agency (“Arbeitsmarkt service”). The primary aims of the new system are combating poverty, harmonizing the different existing regulations and preventing non-take up. However, the new system is also intended to work as a stepping stone enabling the unemployed to move into regular full-time employment in due course.
In this study we show that the introduction of the proposed BMS will hardly improve financial incentives to take up or increase employment. In fact, our simulation results show even a small overall decline in labor market participation and total working hours. We evaluate an alternative reform proposal which combines the same standard rates as the BMS proposal and somewhat more generous financial incentives to take up regular employment including (partial) refunds of the social security contributions as well transfer cutbacks for people who are reluctant to take up a job. Our simulation results show that, although this reform alternative would yield modest positive labor supply effects, a relatively large number of households would suffer income losses.
The paper is structured as follows. Section 2 introduces the prevailing system of unemployment benefits and social assistance, the BMS as well as the alternative reform proposal analyzed here. Section 3 describes our simulation approach. Simulation results showing the effects of the BMS and the alternative reform proposal on household budget constraints, labor supply, household incomes and fiscal costs are reported and discussed in Section 4, and Section 5 concludes.
