Cyprus: Labour and Younger Generation Suffering Under Current Government

Labour, particularly private sector employees, and the younger generation have suffered considerably worse under the government regime of President Anastasiades. Since 2012 employees have received much lower shares of GDP, experienced falls in their real wages, and have contributed disproportionately greater amounts in taxes to the government. While Eurostat data reveal that household income inequality in Cyprus between 2012 and 2020 declined, labour market developments indicate a substantial widening in the sizable gap between the incomes of lower-paid private sector employees and the higher-paid government employees as well as substantial and increasing inequalities between the younger and older generations.

Income Developments

More specifically, the compensation of employees as a share of GDP has declined markedly from 48.2 per cent of GDP in 2012 to 44.9 per cent in 2021, while profits or surpluses of employers have risen strikingly from 18.0 per cent of GDP in 2012 to 25.2 per cent in 2021. And lately in reaction to the strong upsurge in costs of energy and raw materials many employers such as petroleum companies have been able to protect and/or even raise their profits by passing on increased costs into higher consumer prices, while the compensation of their employees has largely stagnated.

Approximate estimates indicate that the average monthly compensation of private sector employees excluding those in the financial sector fell by over 3 per cent from 2012 to 2021 to around 1,750 euro. In sharp contrast, since 2012 the compensation of government employees has risen by nearly 6 per cent to an average of around 3,400 euro in 2021, that is almost twice that of private sector employees. Moreover, with the consumer price index recording an increase of 7.9 per cent between February 2013 and June 2022 it is estimated that real wages for most workers in the private sector have fallen steeply during the Anastasiades regime.

More recently in response to soaring prices and union pressures salaries of government and bank employees can be expected to rise by at least 7 per cent in 2022, while employers of most private sector employees contend that because of surging costs they can not afford to raise wages and have called on the government to provide assistance. In consequence, the huge discrepancy between compensation of government and most private sector employees is being further widened.

Intergenerational Inequalities

Among the private sector employees suffering the most are many younger persons, who despite their greater educational qualifications, remain unemployed and/or are underemployed with poorly paid jobs. Eurostat figures show the youth unemployment rate in Cyprus at 16 per cent, with many persons reluctant to take on and/or remain in lowly paid jobs with harsh work conditions that apply particularly for work in the hospitality (including tourism), retail and healthcare sectors.

And intergenerational inequalities are magnified by the facts that the richer older generation are to a much larger extent property owners whereas the poorer younger generation are mainly paying housing rent or living with their parents. With their low incomes and inability to accumulate saving partly because of non-existent positive deposit rates a large number of young persons are unable to get on the property ladder and afford decent housing accommodation compatible with the raising of a family. Furthermore, with an increasingly regressive tax system highlighted by extremely low taxes on property and mounting reliance on VAT and excise duties as well as the obligation of making future government debt repayments, the youth of Cyprus will be burdened with meeting an increasing proportion of the economy’s taxes.   

Recommended Government Policies

Given a continuation of government policies characterized by the promotion of property development, mass tourism and consumption and an increasingly regressive tax system many households dependent on private sector incomes will descend into poverty, while a rising number of the youth of Cyprus will find it increasingly difficult to enjoy a decent standard of living compatible with raising a family that can enjoy good education and healthcare.

In the short to medium-term there should be a major overhaul of government policies involving among other things a substantial redistribution of income and wealth.

Wages: Private sector incomes for lower-paid workers need to be raised through the introduction of a minimum wage to a level of 50 to 60 per cent of the median wage of 1,727 euro calculated and recommended by the EU, that is a monthly wage of around 950 euro. Employers have agreed implicitly to accept a lower minimum wage of some 800 to 850 euro to be paid to a limited group of employees not covered by collective agreements on the grounds that they can not afford to pay the minimum wage to all groups recommended by the EU. But a large number of employers have protected their profits against rising costs by raising prices and surely they can in most cases afford to raise the wages of their lower-paid employees to levels in line with EU recommendations even it means more modest increases in wages for higher-paid employees. However, in cases where it is obvious that employers are unable to pay higher wages the Government should step in and subsidize increases in the remuneration of lower-paid employees for a short period.

Social Transfers:  Apart from the incomes of employees and employers, many households depend, some entirely, on the receipt of social transfers including pensions to support a decent standard of living. Eurostat estimates show that social transfers increased the median equivalized disposable incomes (at PPP) per Cyprus inhabitant by 3,427 euro or 23 per cent to 18,305 euro in 2020. A large part of this contribution to household incomes was in the form of pensions rather than in other social transfers such as assistance and benefits to vulnerable groups, indicating that the latter as in Greece are quite low relative to the more advanced European countries such as Germany. Furthermore, with the accelerating rise in the cost of living over the last 12 months there is a more compelling case for boosting substantially the level of transfers to households. Even the 4.3 per cent increase promised to pensioners is grossly inadequate. 

While Eurostat figures on  inequality in the distribution of household incomes are at least questionable for Cyprus there is no doubt that social transfers have made a significant contribution in reducing income inequality with the Gini coefficient for household incomes falling from 46.2 before social transfers to 29.3 after social transfers. Eurostat estimates further indicate that In Cyprus income inequality among the younger households is higher than in households where major income recipients are older indicating that there is a greater relative need to support youth, especially those in lowly paid occupations, with reasonably sufficient social transfers.

Taxation: As outlined in previous articles the increasingly regressive and narrow-based tax system of Cyprus does not enable the government to generate enough revenue to finance social transfer payments and adequate productive development expenditures as well as its bloated wage bill. Furthermore, the regressive tax system together with large-scale tax evasion, especially by wealthier property owners, not only depletes government revenues, but with persons earning lower incomes mainly paying taxes through VAT and excises on higher-priced items such as petroleum, inequalities adversely affecting these individuals including many youths are accentuated.

Thus, there needs to be a substantial reform of the tax system, making the scheme of income taxes more progressive and broadening the tax base through the institution of a progressive immovable property tax on 2021 valuations, accompanied by serious efforts to combat tax evasion and avoidance through an overhaul of the grossly inefficient and corrupt tax administration.

Decent Jobs: While a substantial boost in tax revenues and their redistribution to households and businesses via greater social transfers and subsidies is needed at present to help protect living standards and counter widening inequalities the best way over the medium to long-term to address these problems would be to effectively implement a development model directed toward creating decent jobs, particularly for the younger generation. Indeed, it will be paramount for the new government administration resulting from the forthcoming Presidential election to design such a model and ensure its efficient execution utilizing fully the talented human resources of Cyprus.