Low-wage labour artificially boosts economy

In late March 2007, the Cyprus Labour Institute presented the main conclusions of the ‘Annual economic and employment outlook’ for 2006. The main objective of the report is to set out recommendations concerning the continued rapid growth of the Cyprus economy as well as social development. The report argues that technological and organisational modernisation of the production system has to become a priority to offset the currently high demand for cheap labour.

Employment of low-wage workers

On 26 March 2007, the Cyprus Labour Institute (INEK/PEO) of the Pancyprian Federation of Labour (PEO) presented the latest Annual economic and employment outlook for 2006. The report finds that, although fixed capital investment in Cyprus is improving in the building and construction industries, investment in machinery is stagnating. In recent years, this has caused a slowdown in labour productivity. Since 2003, gross domestic product (GDP) growth in Cyprus has in fact not been due to technological and organisational modernisation but has rather been the result of cheap labour. Large numbers of unskilled workers are being hired and low productivity businesses are increasing as a percentage of the economy.

The findings of the report reveal that labour productivity has been increasing at a very low rate over the last number of years. More specifically, productivity increased at an average rate of 1.3% over the last decade, while it remained practically unchanged during the period 2002–2006, showing an average annual increase of 0.2%. Over the same period, the number of workers increased only in low-paid occupations. Moreover, over the past 10 years, average real wages increased at an annual rate of 1.1% and for the last five years (2002–2006) the rate stood at 1%. In 2005–2006, average real wages fell by 0.4%.

Therefore, the overall increase in GDP during the last five years was not achieved through increased labour productivity but through increased employment. Furthermore, during the last three years (2004–2006), many enterprises seized the opportunities offered by the labour market situation; instead of looking for technological and organisational modernisation through investment in equipment, they resorted to hiring people with fewer qualifications for lower pay who are not covered by collective agreements.

Real unit labour cost falling

According to the INEK/PEO report and the estimations of the European Commission, real unit labour costs in Cyprus declined by 1.4% during 2006. For 2007–2008, it is estimated that real unit labour costs will further reduce by 1%. If this happens, labour will be 6.5% cheaper in real terms by the end of 2008 than it was in 2004. By international comparison, unit labour costs in Cyprus calculated in euros are 16% lower than the average for the 15 ‘old’ Member States of the European Union.

At the same time, the report reveals that enterprises increased their prices more than unit labour costs at current prices would justify. This resulted in lower real unit labour costs, which allowed enterprises to increase their profit margins.

Commentary

According to the evidence produced by the INEK/PEO report, the Cyprus economy is being kept on a rapidly growing path, but the position of workers as a whole has worsened due to labour market changes. These changes have included employers’ recourse to hiring workers with fewer qualifications for lower wages who are not covered by collective agreements; this has led to the introduction of new wage bargaining practices. As a result, the average worker’s salary has not kept pace with the overall progress of the economy. The question of offsetting the losses shown by average wages is again being proposed, aimed at achieving a more equal distribution of the benefits of the country’s continuing economic growth.

In parallel, the INEK/PEO report argues that technological and organisational modernisation of the production system has to become a priority. The increased opportunities for employing cheap labour that have emerged in recent years in the Cypriot labour market have encouraged enterprises to hire workers with a lower level of qualifications. This trend has occurred at the expense of investment in electronic equipment, and thus also at the expense of technological and organisational modernisation. This low ‘road to competitiveness’, however, impacts on the country’s production system, with serious adverse consequences both in the long and in the medium term.

Polina Stavrou, INEK/PEO