Public debate on wage indexation system

The future of the automatic wage indexation system for determining wage rises in Cyprus is of particular concern for workers across the country. Pressure from employers’ organisations for a radical revision or even the scrapping of wage indexation is now also supported by the Troika – the European Union, the International Monetary Fund and the European Central Bank. The unions appear to have no other option than to support the government’s efforts to find a compromise.


Cyprus is one of the few remaining countries in Europe to have an index-linking system for determining pay increases (TN0808019S).

The general principal of indexation and the present system of calculation have been repeatedly criticised by employer organisations in Cyprus. They would prefer that the whole system be abolished (CY0808019Q). The issue of altering the system, and in particular the relationship between indexation and productivity levels in Cyprus, was last seriously discussed between social partners over a two-year period between 1995 and January 1997. This is essentially the first time since 1997 that the employers have so urgently posed the question of a radical revision or even abolition of the Cost of Living Allowance (COLA).

Index-linked pay and financial crisis

With the deterioration of the Cypriot economy in 2012, and the possibility of having to seek financial assistance from euro zone Member States, public dialogue has focused again on wage indexation. Tripartite agreement was reached in February 2012 to implement the system throughout almost the whole private sector (CY1202019I).

However, there has been constant pressure from employers, and there are now upcoming consultations with the Troika – the European Commission (EC), the International Monetary Fund (IMF) and the European Central Bank (ECB) – on the implementation of a memorandum in Cyprus. This has led the government to put together a new proposal on the content and operation of the system.

Social partner positions

Trade union approach

On the employees’ side, the approach to date was that any decision to diversify the pay indexation system should be the result of joint consultations. In this context, the three biggest unions, the Democratic Labour Federation of Cyprus (DEOK), the Pancyprian Federation of Labour (PEO) and the Cyprus Workers’ Confederation (SEK), have agreed reforms proposed by the Ministry of Labour and Social Insurance.

The ministry’s proposals are considered particularly harsh on workers because they effectively eliminate the automatic nature of the current system. The three union federations, however, believe some of the characteristics of the system are retained, and indexation can still be arranged through collective bargaining. The basic provisions of the ministry’s proposal include:

  • pay indexation once instead of twice a year, every January, based on the cost of living index for the second and third quarter of every year;
  • no increases for a year if negative growth rates are recorded in the second and third quarters of the previous year.

The three union federations have expressed the view that in other times employers’ representatives would consider the ministry’s proposals to be especially favourable.

Employers’ counter-proposal

However, the views of the employers are currently backed by the Troika, and they insist on imposing even stricter conditions.

The Employers’ and Industrialists’ Federation (OEB) has proposed a freeze in COLA-calculated pay rises for as long as any memorandum remains in force. They also say account should be taken of the country’s financial performance throughout the whole year rather than only the final two quarters. The employers’ federation is also asking for other factors to be considered when calculating automatic indexation, particularly labour productivity at sectoral and enterprise levels, and what the OEB describes as the competitiveness of enterprises – effectively, their profitability.

The employers want their proposals to constitute the basic elements of the automatic pay indexation system, and say this should continue even when the crisis comes to an end.

Government position

In a statement on 22 November 2012, the Minister of Labour Sotiroula Charalambous said progress was being made in the negotiations. She said that, in the context of the consultations to set the terms of the memorandum, there had been progress towards achieving a comprehensive agreement that would also include a revision of automatic wage indexation.

Given that initially the Troika wanted to abolish the system, the government working group considers it an achievement that the retention of COLA has been agreed in principle. Although not yet finalised, the agreement at the moment stipulates that when the economy is in recession there will be no wage indexation. However, during a period of economic recovery indexation will be applied once a year, but reduced by 50%. At the same time, a series of products will be removed from the consumer price index shopping basket, representing a reduction of around 30%.

It should be noted that there is also a proposal to freeze payment of COLA in the public sector until 31 December 2016.

Evangelia Soumeli, INEK-PEO

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