Cyprus: Social partners agree to reactivate cost of living allowance

On 28 July 2017, agreement was reached on a proposal by the Minister of Labour, Welfare and Social Insurance for the reactivation of the cost of living allowance – a wage indexing system linked to the consumer price index, which has been frozen since 2012 in response to the economic crisis.

Background

The cost of living allowance (COLA) is a wage indexing system that was introduced in Cyprus in the 1940s by the then colonial government. Initially, COLA covered only employees in the public sector. However, since the 1960s, following Cypriot independence, it has also become an essential element of the wage determination process in the private sector.

Trade unions have traditionally given great importance to COLA, as they believe it neutralises the impact of price increases on the purchasing power of wages. They also argue that COLA has contributed to the conclusion of long-term collective agreements and to labour market peace. Employers’ organisations, however, consider that COLA leads to high increases in real wages – thus undermining competitiveness – as well to excessive growth of the public sector wage bill.

The allowance has undergone various reforms over the years, mostly in relation to the annual frequency of wage adjustments and the modes of calculating the adjustments. Prior to the financial and economic crisis, COLA provided for wage increases (or decreases) linked to the average inflation (or deflation) of the consumer price index (CPI) in the preceding six months. It was calculated and disbursed to employees twice a year – on 1 January and 1 July. It is worth noting that COLA has not developed identically with the CPI for, as of 1999, excise tax increases have been excluded from the calculation of the wage adjustment rate.

How COLA is calculated

The COLA rate is accumulative, in that a positive or negative COLA rate calculated semi-annually increases or decreases the accumulative rate. The calculations work as follows:

  • At the beginning, the COLA rate is 0.
  • If in the first semester the CPI increases by 2%, in the second semester basic salaries will be increased by 2%.
  • If in the second semester the CPI increases by another 2%, in the third semester basic salaries will be increased by the accumulative rate of 4% (2% + 2%).
  • If in the third semester the CPI decreases by 1%, in the fourth semester basic salaries will be increased by the accumulative rate of 3% (2% + 2% -1%), and so forth.
  • Gross salary is indicated on the pay slip as the addition of two components: basic salary plus accumulative rate of COLA multiplied by the basic salary. If the basic salary is €1000 and the accumulative rate is 20%, the gross salary is calculated to be €1200.

In the second half of 2005, a COLA of 220% was incorporated into basic salaries; this marked the beginning of a new method of calculating the accumulative COLA rate.

COLA is not governed by law: it is provided to employees covered by collective agreements therefore there are no exact figures of the employees and workers covered. All employees and workers in the broad public sector are covered, however the proportion of private sector employees and workers covered has been experiencing a downward trend. This is due, in particular, to the increase in overseas workers and employees with individual employment contracts, the overwhelming majority of which are not covered by COLA.

Measures taken in the financial and economic crisis

Due to the deterioration of public finances during the financial and economic crisis, in 2011 the government concluded an agreement with the broader public sector trade unions that included pay cuts and the suspension of COLA. After the conclusion of the Memorandum of Understanding (MoU) between the government of Cyprus and its creditors, the pay cuts and suspension of COLA were expanded for the duration of the adjustment programme. These measures in the broader public sector were implemented via the budget law. COLA in the broader public sector has been frozen at the rate of 27.91%.

The suspension of COLA in the private sector followed a different path. In 2012, trade unions signalled their readiness to accept a COLA reform proposal submitted by the Minister of Labour and Social Insurance. The proposal included a provision for the suspension of COLA in the event of negative economic growth rates in the second and third quarter of the preceding year, as well as the disbursement of COLA once instead of twice a year. Although the reform proposal has never been formally adopted, trade unions – in view of COLA suspension in the public sector and the contraction of economy – ‘silently’ accepted in 2013 the additional suspension of COLA in the private sector. COLA in the private sector has been frozen at the rate of 31.82%.

In light of these developments, it became clear that COLA would be reactivated, but only after the completion of the economic adjustment programme agreed with the creditors. As the initial and all succeeding updates of the MoU between Cyprus and its creditors included a condition relating to a permanent reform of COLA, it also became clear that reactivation would be debated, along with some essential changes.

Social dialogue negotiations

In October 2016, six months after the completion of the economic adjustment programme, the Minister of Labour, Welfare and Social Insurance, Zeta Emilianidou, initiated a tripartite social dialogue for the reform and reactivation of COLA.

The first issue addressed at the negotiation table was whether – with the reactivation of COLA in 2017 – wages should be adjusted on the basis of the CPI’s performance in the last four years, as demanded by the employers’ organisations. This would, in effect, mean that wages should be decreased as the CPI fell by more than 6% during this period. Trade unions opposed this view, stating that it would be a second hit against workers’ earnings, which had already suffered considerable losses during the economic downturn.

Further issues debated in successive negotiation rounds included the annual frequency of wage adjustments, the terms for future suspension of wage adjustments in the event of negative economic growth, as well as the controversial issue of whether, in the future, COLA should be disbursed at the annually or semi-annually calculated rate, or at just 50% of this rate. The latter was part of the conditions required by the creditors and was also supported by the employers’ organisations. However, trade unions categorically rejected the disbursement of COLA at a reduced rate, arguing that this would undermine the philosophy of wage indexing, which is to fully neutralise the impact of price increases on the purchasing power of wages.

Agreement reached

As months passed without an agreement, the minister decided to temporarily abandon the aim of a permanent COLA reform. At the beginning of July 2017, Ms Emilianidou submitted a ‘take it or leave it’ proposal to social partners for a transitional agreement that would enable the reactivation of COLA. The transitional agreement, which was endorsed and signed by social partners on 28 July 2017, provides for:

  • the calculation and disbursement of COLA once a year (on 1 January);
  • the disbursement of COLA at a reduced rate of 50%;
  • the incorporation of the accumulative COLA rate into basic salaries on 31 December 2017 and a new start of COLA rate accumulation from zero;
  • the suspension of COLA in the event of economic contraction in both the second and third quarters of the preceding year.

The agreement is due to apply for a transitional period covering 2018, 2019 and 2020. The transitional period will be used to negotiate an agreement for a permanent reform of COLA and the social partners are commited to engage in social dialogue towards this end. The agreement applies only in the private sector. However, a similar agreement is also in place for the public sector.

Future perspectives

Ms Emilianidou may not have achieved her primary goal, but she did manage to score two intermediate victories: securing labour market peace – at least over the issue of COLA until the end of 2020; and gaining three-and-a-half years to mediate a final resolution of the COLA dispute. Social partners can, at this moment, also be happy with this agreement. Trade unions concluded an agreement leading to the reinstatement of a highly appreciated benefit and insured the commitment that future negotiations will be carried out ‘on the basis of the COLA philosophy’. Employers’ organisations missed their principal goal, which is the abolition of COLA, but did achieve the suspension clause and the disbursement of COLA at a reduced rate.

The agreement represents an undeniable step forward, yet there is a long way to go before the final regulation of COLA: Ms Emilianidou has a tough job over the next few years. The position of the social partners on some COLA issues, such as the full or partial disbursement of COLA, are so far apart that Ms Emilianidou will need to generate considerably more creative ideas than exist at present.


 

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