Cyprus: Deterioration and Politicization of Labor Market

Has the Cyprus economy recovered from the financial crisis of 2012/2013 in that the majority of its citizens by 2021 were better off than they were on the eve of the crisis? Government officials claim that the Cyprus economy has recovered well from the financial crisis of 2012/13 and more recently from the adverse repercussions of the pandemic. They refer to real GDP and employment growth and the fall in the unemployment rate as providing good evidence on the economy’s sound recovery. But have ordinary citizens benefitted from GDP and employment growth through improving their economic wellbeing as a result of securing higher incomes and better jobs over the last nine years? In answering this question there is a need, among other things, to analyze key developments in the labor market since 2012.

Developments in the Labor Market

 With respect to the labor market the most revealing development under the Anastasiades administration has been the large loss for labor in its share of GDP that has been caused by profits of businesses being relentlessly increased at the expense of the compensation of private sector employees. In fact, the share of labor (compensation of employees) fell from 48.2% of GDP in 2012 to 44.6% in 2019, while the operating surplus of business entities (profits) rose from 18.0% of GDP in 2012 to 23.6% in 2019. And during the last two years of the pandemic labor’s share of GDP was kept below 45%, whereas the share of the operating surplus rose further to 25.2% by 2021, owing to the profits of supermarkets, pharmacies, and businesses in the health sector skyrocketing.

Political and market power has allowed firms to directly exploit workers in the private sector by paying wages lower than what they would be otherwise. Most strikingly, average compensation of private sector employees declined by 3.8% between 2012 and 2021, while in sharp contrast the average compensation of government employees rose by 5.7 % over these nine years. As a result the average annual compensation of government employees is now more than twice that of the average compensation of private sector employees excluding those in the financial sector. Furthermore, the money-driven politics of governments since 2012 have taken advantage of labor in other ways including weakening unions and failing to enforce competition policy as well as condoning the exploitation of ordinary citizens by banks.

Despite the sizable expansion of employment of 14.9 % and the larger rise of GDP per capita of 19.7% reflecting increased labor productivity between 2012 and 2021, average wages are estimated to have increased by only 1.2% over this period. These statistics indicate clearly that despite strong demand, labor over these years has not benefited from the provision of better jobs in terms of earning higher incomes commensurate with their contribution in raising productivity.

Most private sector employees outside of the financial sector receive relatively low incomes and have few benefits as employers are obsessed with suppressing costs rather than employing and incentivizing workers to utilize their potential to contribute to the firm’s value added and the economy in general. This has resulted in employees, particularly in the retail, hospitality and construction sectors, being under-paid, with many Cypriots indicating an unwillingness to work for abusively little wages. In fact, in these sectors employers prefer to hire mainly foreign workers who accept low incomes and often inadequate work conditions.

While public sector employees are relatively well-rewarded in terms of income, benefits and job security there has been a decline in the quality of its personnel with the number of government permanent employees falling by 21.4 % over the period 2012 to 2021, whereas the number of casual employees more than doubled, rising spectacularly by 119.1%. It is well known that the appointment of government casual workers is more determined by political factors with their number usually increasing steeply in years prior to elections as appears to be the current situation. Conversely, the appointment of permanent employees is more influenced by their skills and potential to contribute to the provision of good government services. Nevertheless, even for the employment of skilled persons in the Cyprus government the adage of “who you know rather than what you know” applies.

Undeniably, the Anastasiades administration has continued to favor a structure of production based on low-cost labor such as industries catering for mass foreign tourism and property investment and excessive domestic consumption. Notably, the average gross monthly earnings  of employees in the accommodation (952 euro), construction (1,550 euro), and retail (1272 euro) sectors were well below the average for all economic activities of 2,003 euro in 2020.

And in promoting these low labor cost economic activities the government and bankers have disproportionately benefitted leading hoteliers, property developers and retailers by implementing scandalous schemes and practices to sell Cyprus property assets to foreigners and predatory investment funds as well as treating them very generously in regard to their tax and debt obligations.

Current Situation

With prices and costs surging upwards in recent months and most lately being pushed to much greater heights by the effects of the Russia Ukraine war, households are experiencing unprecedented increases in their costs of living. In consequence, unless working class households are adequately compensated with higher wages and government transfer payments against steeply rising consumer prices, many will have their standard of living further eroded and descend into poverty.

Unfortunately, the Cyprus government in proposing measures to deal with soaring prices and costs is largely neglecting those households most adversely affected by higher inflation. The Government has proposed cost of living adjustments to the wages of employees, independent of their level of remuneration, covering around 40% of the work force including mainly employees in the broader public sector and banks. However, most lowly-paid workers employed in the private sector would not be eligible for cost of living adjustments. It is noted that at least 15% of employees in Cyprus earn monthly wages of less than 750 euro, that is below the minimum wage of 770 euro per month for cleaners, while over 25% receive less than 1,000 euro.

Furthermore, with employers very reluctant to give private sector employees wage increases in part because they too are facing higher input costs there would be a need for the Government to provide targeted financial assistance to lowly paid employees. In addition, the government should mandate employers that have been able to adequately raise their output prices, such as super markets, to raise the wages of their employees.

Undeniably, employers use any excuse to protect their profits, but employ also any excuse not to raise the wages of their employees so as to protect them against inflation. A case in point relates to discussion of increasing and institutionalizing the minimum wage in Cyprus. In this connection the director of OEB, Michalis Antoniou, most recently stated that “the employer’s side is asking (again) for the freezing of the dialogue (on the minimum wage) until the economic situation is normalized”. Employers cannot both boost their output prices and obtain assistance from the government to contribute to wage payments. Such a development would just aggravate the existing unfair distribution of the GDP pie with employers gaining a greater share through their considerable profits at the expense of the lower share going to employees. Furthermore, the huge gap between the incomes of public sector and private sector employees would continue to be widened resulting in a great many households suffering a further worsening in their economic wellbeing.