The Economics Research Centre (CypERC) of the University of Cyprus recommends caution in labour compensation adjustments that do not take into account changes in productivity and the heterogeneity between sectors of economic activity, according to a report it published on Monday, which examines the relationship between input compensation, productivity, and inflationary pressures in Cyprus, taking into account the implications of the Cost of Living Allowance (CoLA). As indicated, the analysis carried out employs fundamental economic theory to analyze patterns in labour and capital prices and their relationship with productivity growth in Cyprus, and extends its analysis to investigate the relationship between labour income and productivity at the sectoral level. Data are from Eurostat covering the period from 1996 to 2022. According to the Centre , the report begins with the examination of the aggregate economy, with the data indicating that the change in the compensation of the inputs fluctuates around the change in the value of their marginal product (nominal productivity). It is added that during the period between 2010 and 2016, characterised by financial crisis and substantial wage cuts, labour prices fell behind, and capital prices exceeded their nominal productivity growth. However, estimation results show that over the entire period, input compensation growth matches its nominal productivity growth. Recognising the considerable heterogeneity between economic sectors which is concealed at the level of the economy as a whole, the report then provides an analysis by sector of economic activity, which reveals that some sectors experience lower labour income growth than productivity growth, while others exhibit the opposite trend. For instance, it is reported that in sectors like Information and Communication (ICT) and Finance and Insurance wages do not follow the high increase in their labour productivity. Moreover, in the most recent period from 2017 to 2022, the gap between labour income and its nominal productivity growth widened for the ICT sector, and the Industry (except construction) sector’s labour compensation growth fell below the change in its nominal labour productivity after 2017. As noted, “the sector-level analysis underscores the necessity for tailored policies that consider the unique dynamics within each sector, adding that attempting to adjust labour compensation at the aggregate level (CoLA) can exacerbate income inequality across sectors.” The ERC study examines the relationship between input compensation, productivity and inflation, and emphasizes “the need for caution when adjusting labour prices, showing that automatic link between wages and inflation has the potential to exacerbate inflationary trends, as the CoLA mechanism, by ignoring changes in productivity, restricts the economy’s ability to adapt to economic shocks, thereby undermining its resilience and competitiveness.” Overall, the report underscores the importance of considering productivity growth in labour compensation adjustments and recommends sector-specific policies recognising compensation and productivity growth variations, adding that collaboration among policymakers, social partners, and stakeholders is crucial to striking a balance that advances economic efficiency, living standards, and protects against inflation risks.
Source: Cyprus News Agency