Marked Deterioration in Austria's International Labor Cost Position

Price competitiveness of Austria's manufacturing sector declined markedly in the 1990s, thus offsetting to a large extent the improvement during the second half of the 1980s. During the 1980s Austria's manufacturing industry managed to offset the increase in wages and non-wage compensation vis-à-vis the major trading partners by higher productivity growth. Since 1990 however, productivity advances were no longer sufficient to compensate for above-average wage increases and a further appreciation of the schilling. Between 1990 and 1995 the increase in labor costs in Austrian manufacturing (wages and non-wage compensation) was 5¼ percentage points higher than in the trade-weighted average of competitors, with labor costs expressed on a national currency basis for all economies. But since the Austrian schilling gained 7 percent in value during the same period, Austrian hourly labor costs on a common currency basis rose relative to competitors by 12¼ percent. Through accelerated labor shedding, Austria's manufacturing industry was able to achieve productivity gains of 9¼ percent; nonetheless, unit labor costs relative to competitors rose by about 3 percent. During the last two years, in particular, the rise in relative labor costs, measured in a common currency, was not offset by productivity gains: despite high productivity growth, resulting mostly from severe cuts in employment, unit labor costs vis-à-vis competitors rose by 1¼ percent in 1994 and again by 1¾ percent in 1995. Exchange rate changes taking place after September 1992 caused enormous shifts in the hierarchy of labor costs. Today Austria has the fourth highest labor costs after Germany, Switzerland, and Belgium, but took tenth place as late as 1991. In 1995, hourly labor costs in manufacturing were ATS 216 in Austria. German labor costs exceeded the level in Austria by 23 percent, but hourly labor costs were considerably lower in most other countries, by 16 percent in the EU, by 32 percent in the USA, and by 43 percent in the United Kingdom.