Price and quantity adjustments in the Austrian labour market

Austria is among the very few countries in the European Union which have managed to maintain comparatively low unemployment rates and high employment rates. This study looks at the price and quantity adjustment mechanisms in the Austrian labour market which may have contributed to this favourable outcome. After reviewing briefly the basic theoretical reasoning an empirical investigation is began into gross flow dynamics in the labour market and the cyclical volatility of employment and unemployment in Austria. In international comparison Austrian unemployment is very stable over the business cycle. This is due mainly to the high sensitivity of the labour force on cyclical conditions and, partly, also on the relatively weak responsiveness of employment to cyclical fluctuations in output, the latter being possibly attributable to the high degree of real wage flexibility in Austria. The study proceeds to show that the long-run elasticity of wages with respect to unemployment is indeed quite high in Austria. However, evidence was also found for outsider effects in the Austrian wage setting process. Relative wage structures, on the other hand, appear to be rather rigid.