How the Austrian economy works

Austria's eco-social market economy

Austria’s economy is a market economy. This means that households and companies get to choose freely and independently what to produce, buy and sell. In certain areas the state  interferes through laws and regulations, for example, to support certain groups, to protect the environment, to compensate for disadvantages or to avoid them altogether. This mix of individual freedom of choice and state regulation is called eco-social market economy. In addition to free participation in the economy, the state also pursues social and ecological goals.

The Austrian economic system has been based on these principles since the early 1990s. Before that, environmental issues used to play a less important role. This corresponded to the model of a of social market economy. Today, Austria’s economy is characterized by political stability, social peace, a constructive relationship between employers and employees, lasting internal security and Austria’s comprehensive integration into the global economy. At the same time, there is an emphasis on sustainable economic activity, meaning that there are efforts to conserve ecological resources and to promote social justice. On top of social interventions, there are laws to protect the climate and the environment, a bonus for repair works and additional public services that are environmentally friendly (e.g. waste disposal or government funding for the purchase of climate and environmentally friendly products). Social interventions include public unemployment insurance or rent subsidies for households in financial distress. The focus lies on reconciling economic growth with social goals and with climate and environmental protection, in order to ensure long-term stability and prosperity.

Compared to others, the Austrian economic system has two distinctive features: a broad social system and the tradition of the so-called “social partnership.” Social partnership refers to a form of voluntary collaboration between the main organizations representing employees and employers, respectively. It is officially recognized as an institution by the state and dates back to the period following World War II (1946). Since then it has had a strong influence on the Austrian economic system, especially the Austrian labor market. The Chamber of Labour is one of the major organizations that represent employees and their interests. All employees in Austria are automatically members because membership in the Chamber of Labour is required by law. Another player in the Austrian economic system is the Austrian Trade Union Federation, which also represents employees as part of the Austrian economic system. Here, membership is voluntary. 

Employees’ and employers’ representatives work to ensure that economic, social and partially ecological interests of all market operators in Austria are taken into account. This happens, for example, through their participation in review processes for draft legislation, in various councils (e.g. regarding apprenticeships, competitiveness or the labor market) and the representation of all groups’ interests in Austrian labor and social policy. 

Overview of economic systems

Markets are where products and services are traded – where supply meets demand. It can make sense for governments and societies to intervene in these markets to ensure the proper functioning of the economy and the security of market operators. In these cases, the government intervenes directly through legislation. Citizens, on the other hand, intervene through elections by voting for parties that want to carry out certain state interventions. This means that the political decisions that are taken in countries or economic areas (e.g. by the European Parliament) strongly influence an economic system’s structure. The economic system forms the basis for the production, distribution and use of products and services in a society. It thus influences all exchange relationships in the economic cycle. Today we can roughly distinguish between three types of economic systems.

In many countries, economic systems deviate from these categories or represent mixed forms. In reality, clear distinctions are not always possible. Moreover, in times of crisis governments may temporarily interfere more strongly to stabilize a country’s economy. 

The most important economic sectors in Austria

Gross domestic product (GDP) is an important indicator for the performance of Austria's economy. GDP comprises the economic value of all products and services produced in a country over a year. The following chart shows the composition of Austria’s GDP, broken down into the country’s four main economic sectors:

These figures describe Austria's economic output. As Austria is a small country, there are many more potential customers abroad than in Austria itself. Therefore, sales abroad and thus exports are key for the domestic economy. Austria exports more than 50 percent of its economic output. 

Austria’s most important trading partners are Germany, Italy and the USA. Two-thirds of total exports go to other EU countries.

In an EU-wide ranking, Austria’s GDP per capita is in the top third. Compared to the EU average, income from work and consumer spending are thus considerably higher among households in Austria. In addition to a strong domestic economy, EU membership also contributes to these favorable numbers for Austria. Free trade among member states supports these positive results. Austria also stands out from other EU countries due to its long standing eco-social economic tradition, its unique social partnership system and the overall economic importance of exports and tourism for all of the aforementioned economic sectors.

Small and medium-sized enterprises (SMEs) are very important for Austria's economic output. These are companies with up to 250 employees. Almost all Austrian companies are SMEs. There are only very few large companies with more than 1,000 employees. However, these few large companies employ the majority of Austrians.

Overall, around 4,500,000 people engage in gainful activity in Austria, i.e. are either self-employed or employed. 

The Austrian social system

The Austrian social system is considered one of the best in the world. Austrians are particularly well protected from challenges related to illness, accidents, incapacity to work and old age as well as their consequences. The working population as well as unemployed and retired people are entitled to full protection. However, they need to meet certain criteria. For example, you can only receive unemployment benefits if you were previously employed in Austria for at least six uninterrupted months. Protection is assured through social security (also called social insurance), the backbone of the Austrian social system. 

The social security system is a mandatory insurance system based on four pillars:

• Statutory pension insurance guarantees a future state pension for everyone in employment.
• Through statutory health insurance the state covers general medical and health care costs.
• Statutory accident insurance provides financial support for recovery from work-related accidents and illnesses.

The fourth pillar plays a supplementary role:

• Statutory unemployment insurance is a partial income replacement that is paid out for a limited period, in case you lose your job (unless you were self-employed).

Families receive additional state support, mostly through direct payments to the beneficiaries. The most important benefits include:

• maternity allowance after the birth of a child
• childcare allowance after the birth of a child (following maternity allowance)
• family allowance depending on the age of the children in the household

In addition to direct financial support, the Austrian government also provides infrastructure which Austrian citizens can use at low or no direct cost. The government invests in infrastructure across all relevant economic sectors. In terms of physical infrastructure, public investment primarily goes into: transport infrastructure (public and private transport), housing (affordable, social housing or rent allowance), information and communication infrastructure (telephone, radio, TV, internet), water and energy supply (electricity, gas, heating) and parts of the public sector (administration, national defense, education, health care, cultural affairs, sports and recreation).

The social security system is financed through mandatory contributions that are deducted from the salaries and wages of Austria’s working population. Both employees and employers have to pay parts of these contributions. Employers contribute approximately 21% of the total wage or salary of their employees who, in turn, contribute 18% of their income from work. All of these contributions finance the comprehensive social support that the Austrian social security system provides.

The Austrian labor market

The labor market in Austria is governed by stronger legal regulations than in other countries. This is due to the eco-social nature of the Austrian market economy and to the role of the social partners. Consequently, government intervention in the Austrian labor market is relatively strong by international standards. The Austrian Public Employment Service (AMS) is the main authority in charge of such interventions. The AMS is a service provider under public law. It pursues labor market policy objectives on behalf of the Austrian Federal Ministry of Labour and Economy. Its central aim is to ensure that a maximum number of those with the capability to work are in fact engaging in gainful activity. The AMS is thus Austria’s central employment and recruitment agency. It is also the first point of contact for all job seekers. 

The AMS provides direct financial support to job seekers or employees through subsidies. These subsidies include unemployment benefits, allowances for further training and education or subsidized short-time work. On the other hand, it actively supports companies by providing financial support, e.g. for hiring people after long-term unemployment, or providing combined wage subsidies. Moreover, the AMS offers a broad range of training opportunities to job seekers and people who have only recently entered the job market.

Environment, climate and sustainable consumption

In addition to social support measures, environmental protection and ecological subsidies also play an important role in Austria's eco-social market economy. This is evidenced, for example, by the fact that Austria has had its own Environmental Support Act since 1993. It specifies areas in which the Austrian government supports environmentally friendly behavior. This is achieved through direct government intervention or by providing targeted subsidies to companies and individuals. The Environmental Support Act primarily concerns the following areas:

• appropriate wastewater removal and adequate water supply, including improvement of the ecological condition of bodies of water
• resource and energy efficiency as well as emission reduction
• foreign instruments or programs that enhance the implementation of environmental and climate goals at national, EU or international level
• securing and cleanup of contaminated sites (cleanup of contaminated sites)
• measures to protect, restore and conserve biodiversity
• reduction in resource consumption through prevention, collection, reuse, recycling and other forms of waste management as well as establishing mechanisms of a circular economy and land recycling 

These action points include current instruments like the gradual eco-social tax reform (including CO2 pricing and the climate bonus) or the 2030 Mobility Master Plan. At the European level, Austria is committed to Regulation (EU) 2021/1119 (European Climate Law), a general framework for climate action. This EU regulation is directly applicable in all member states and part of the European Green Deal. Based on the European Climate Protection Strategy, all EU states are committed to joint climate action and the goal of climate neutrality by 2050.