The automatic link between wages and inflation has the potential to exacerbate inflationary trends, according to a study about ‘Input Compensation, Inflation and Productivity Growth in Cyprus’ by the Economic Research Center of the University of Cyprus.
The study examines the relationship between input compensation, productivity, and inflationary pressures in Cyprus, taking into account the implications of the Cost of Living Allowance (CoLA ) mechanism.
According to the results, 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 recognizing compensation and productivity growth variations. Collaboration among policymakers, social partners, and stakeholders is crucial to striking a balance that advances economic efficiency, living st
andards, and protects against inflation risks.
The data indicate that the change in the compensation of the inputs fluctuates around the change in the value of their marginal product (nominal productivity). During the period between 2010 and 2016, characterized 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.
The sector-level analysis reveals significant heterogeneity, with some sectors experiencing lower labour income growth than productivity growth, while others exhibit the opposite trend. Notably, 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 it is noted, this sector-level analysis points out the necessity for tailored policies that take into account the unique dynamics within each sector. Attempting to adjust labour compensation at the aggregate level (CoLA) can exacerbate the income inequality across sectors, the study said.
Source: Cyprus News Agency