Cyprus: Report analyses impact of crisis and adjustment programme

The annual economic report of the Cyprus Labour Institute concludes that fiscal adjustment had negative effects on GDP, employment and the unemployment rate, diverted resources from social uses towards servicing public debt, and caused a sharp deterioration in living conditions.

Background

A1.2% increase in gross domestic product (GDP), and forecasts announcing growth in 2016 of 1.4%, are strong signals that the adjustment of the Cypriot economy – under the adjustment programme – has entered its final stage. Hence, it is an appropriate time to review the programme's impact.

In December 2015, the Cyprus Labour Institute (INEK-PEO) released its Annual Economic and Employment Outlook for 2015 (PDF). The report describes the state of the economy, assesses the effectiveness of economic and structural policies, and highlights changes in the labour market. It also stresses the negative effects of the crisis and of Cyprus's adjustment programme, formally agreed in May 2013, on working conditions, employment and wages.

Dramatic decline in employees' earnings

According to the report, one of the most important events in Cyprus' economic history has been the dramatic decline in the purchasing power of earnings during the period 2013–2015. Today, gross earnings of total employees buy approximately 24% fewer necessary goods and services. Between 2012 and 2015, gross average earnings per employee fell by 11.7%, the corresponding purchasing power falling by 13.1% and the number of employees by 10.7%. As a result, the decline in real disposable income of total employees before tax (the number of employees divided by gross average earnings per employee) declined by approximately 24%.

in 2015, average earnings per employee in Cyprus were €22,200, or 55% of the euro zone average. Corresponding earnings in other countries that had received financial assistance were as follows: 

  • Spain, €34,800;
  • Ireland, €46,100;
  • Greece, €21,700;
  • Portugal, €20,400.

Real earnings per employee followed labour productivity until 2011. In 2012–2015, real wages decreased by 13.1% while labour productivity remained constant at 2011 levels. As a result of the divergence of wages and productivity, the average profit margin reached historically high levels.

The unit labour cost relative to 37 competitor countries decreased by 15.6% from 2008 to 2014; now, it is the lowest in the euro zone and slightly higher than the corresponding cost in central and eastern European countries.

The report also underlines the rise in income inequality resulting from the reduction in employees’ earnings. From 2010 to 2014, profits, interests and rents (net capital income before tax) remained roughly constant at approximately €5 billion, while labour compensation fell from €9.9 billion to €7.8 billion.

Deteriorating labour market conditions

The INEK report shows that the situation in the labour market has deteriorated dramatically. The unemployment rate reached historically high levels (14.9%), and long-term unemployment, temporary employment, and part-time work have risen quickly. Long-term unemployment was 46.6% of total unemployment during Q2 2015 (EU Labour Force Survey data) compared with 13.6% in Q3 2008. The corresponding figures for temporary employment were18.2% and 11.3%. The report concludes that the deterioration in labour market conditions is severe and will take a long time and persistent efforts to reverse.

In 2015, there was a weak recovery in GDP, eventually signalling the end of recession. However, it is predicted that very little progress will be made in hiring workers. The 0.2% increase in employment in 2015 and the expected increases for 2016 and 2017 (1.2% and 1.6% respectively) will cancel out only one-quarter of the 11% decrease in employment that was seen during the major economic downturn of 2012–2014. During the recession of 2012–2014, employment fell by 43,000; at the end of 2017 there will still be 30,000 fewer employed people than in 2011.

The rate of employment remains very low for blue-collar workers, service sector workers and unskilled workers. The total decline in employment for these categories, from 2011 until summer 2015, was around 20%, compared with 11% overall.

According to the report, real unemployment is higher than the official figure. It argues that, including discouraged workers in the unemployment rate (following the U4 definition by the US Bureau of Labor Statistics), the real unemployment rate in Q2 2015 was 19.7% (compared with the official unemployment rate of 14.9%). And this compares with a figure for 2008 of 6.2%.

Consequences of higher taxes and reduced social spending

The report examines a number of indicators of the social consequences in Cyprus of the fiscal consolidation, imposed by the adjustment programme during 2010–2014. To measure the social consequences, correlations were made between figures for fiscal effort (higher taxes and reduced public spending) and figures describing living conditions. The indicators are as follows:

  • the rate of employment (as a proportion of working age population);
  • the rate of unemployment among young people aged 15–24;
  • the number of people below the poverty line;
  • the number of people living in a state of material deprivation.

The analysis investigates the hypothesis that fiscal effort has had strong negative effects leading to unemployment, a deterioration in young people's living conditions, and increased poverty and material deprivation. The cumulative change of the structural primary balance is taken as a measure of fiscal effort.

Decline in employment rate: the employment rate fell from 69% in 2010 to 62% in 2014 following the intensification of fiscal effort. This finding takes into account both the overall rate and the separately estimated rates for young people and prime age workers.

Rise in number of people in poverty: In 2010, some 202,000 people were living below the poverty line; in 2014, that figure had risen to 234,000. The negative correlation between fiscal effort and the number of people in poverty shows that the sharp rise in the poverty index during 2012–2014 can be attributed to the recessionary effects of fiscal effort.

Rise in material deprivation: A similar picture is seen when fiscal effort is correlated with the general index of material deprivation, or partial indicators that describe particular aspects of material deprivation. Some 92,000 people were in a state of material deprivation in 2010, this figure rising to 131,000 in 2014.

Another set of three indicators have been calculated in order to examine the reduction in social spending:

  • annual public health expenditures per person;
  • annual public education expenditures per person under the age of 24;
  • annual expenditures for unemployment benefits per unemployed person (all expenditures at constant prices).

During the implementation of the adjustment programme, the decrease in public spending per beneficiary was dramatic. Public spending for education decreased by 13.8% – from €5,300 per person under the age of 24 to €4,570. Spending for health declined from €740 to €640 per person in the general population (-13.5%), and unemployment benefits per unemployed person decreased by 27.6%, from €4,410 to €3,190.

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