IMF warns South Cyprus Over ‘Inflated’ Public Sector Wage Bill

The report wrote that in recent years, “consolidation” of Cyprus’ public sector wage bill, the word used for efforts to reduce or stabilise it, “has stalled”, and that “the wage bill remains large by European standards”.

It described a “sizeable public-private wage premium”, meaning that wages in the public sector are often considerably better paid than those of workers in comparable positions in the private sector, and said this “constitutes an inefficient use of resources amid competing spending priorities”.

This, it added “risks skill misallocation between the public and private sectors”.

It added that in addition, “the large wage premium is further exacerbated by insufficient wage differentiation by occupation and the unconditional annual increments” for public sector workers’ wages.

“Following a sizeable consolidation after the crisis of 2013 and 2014, the public sector wage bill has been on an upward trend in recent years,” the report said, pointing out that between 2012 and 2018, Cyprus’ public sector wage bill fell from around 15 per cent of the island’s gross domestic product (GDP) to 11 per cent.

“However, since then, most crisis-era measures have either expired or were reversed. Nominal salary reductions were phased out between 2018 and 2023, and annual salary increases resumed in 2017,” it wrote.

It added that with the introduction of the cost-of-living allowance (CoLA) last year, the ageing of the island’s public sector workforce, and an expansion of temporary hirings, the public sector wage bill “has risen again recently”, now making up around 12 per cent of the island’s GDP.

It then compared Cyprus to European countries and to other advanced economies elsewhere in the world, writing that “Cyprus’ [public sector] wage bill is larger” than the average public sector wage bill both of the EU and of global advanced economies.

“While government employment as a share of the working age population is below peers, average public sector compensation in Cyprus’ is above peers’ averages, particularly once adjusted for relative income and purchasing power,” it said.

It added that public sector wages in Cyprus are estimated to be 27 per cent higher than in the private sector, and that this is “one of the highest” gaps among European and other advanced economies.

Later, the report charged that “the compensation system rewards the level of education and tenure over skills or performance”.

“The salary table of public employees is based on a combination of scales, largely representing different levels of education … regardless of the field or occupation,” it said, adding that “every year, employees automatically and unconditionally advance one step in the salary scale, receiving a base salary increase”.

These annual salary increases, it said, “exacerbate” the gap between public and private sector wages for those who have been in work longer, “and provide little performance incentive”.

It added that “during periods of economic slowdown, high public sector nominal wage growth is unlikely to be matched by the private sector, leading to a further widening of the wage premium”.

“Additionally, the unconditional nature of salary increases lacks a mechanism to incentivise better performance,” it said.

Source: Cyprus Mail