Nobody would have been surprised to hear that CoLA (the cost of living allowance), also known as the ‘automatic price-index readjustment of wages’, is back in vogue. Its return to the public agenda was inevitable given the high inflation rate that has reduced people’s purchasing power and disposable income and given unions some justification to demand its restoration in its old harmful form.

Unions have always promoted the fallacy that adjusting wages in line with the retail price index safeguarded the purchasing power of wages. This is a discredited measure that has been banished from all well-functioning market economies because it makes a bad situation worse. Wage increases that do not derive from growth and productivity increases have an inflationary effect.

The adjustment of wages in line with the retail price index, may offer some temporary relief in the short term, but in the medium term it increases the inflation rate as it pushes up interest rates that eat into disposable incomes and adversely affect investment. Businesses, meanwhile, are faced not only with higher labour costs but also higher loan repayments, which could lead to job cuts and/or higher prices being charged for their products and services.

Although unions have argued that this is not indisputable as there were a few maverick economists who have argued that wage increases did not necessarily lead to inflation and erosion of competitiveness, conventional economic wisdom maintains that wage hikes, without corresponding increases in productivity, are inflationary. When Cyprus was in the assistance programme, one of the reform proposals of the Troika, for boosting competitiveness and controlling the public payroll, was the abolition of CoLA. It had been frozen since the start of 2013.

In the end it was not abolished but employers and unions agreed to modify it. The adjustment would be made once a year instead of every six months, it would be 50 per cent of the rise in retail price index, and it would depend on there being growth in the second and third quarters of the previous year. As a concession to the unions, wages would not be adjusted negatively if the retail price index fell. This would be valid for three years, starting in 2018, but because of the pandemic it lasted until this year.

Now, the unions of both the public and private sectors have united to demand the full restoration of CoLA to its pre-2013 form, which, for 2023, would translate to 9 per cent increases on gross wages. Employers’ organisations are also united, not only in opposing its restoration but demanding its abolition. There are no reserves of goodwill between the two sides, which had rowed acrimoniously in September over the minimum wage, as they enter another collision course.

While employers are adamant they will not agree to the restoration of CoLA, unions have declared that its full restoration was non-negotiable and they would not hesitate to take industrial action if they were not satisfied. Representatives of the warring sides will meet on Monday with the the labour minister Kyriacos Koushos, who will have the impossible task of finding a compromise. Much will depend on the position that the government will take, considering the restoration is estimated to add more than €100 million to the public payroll, an additional expenditure for which there is no provision in the 2023 state budget.

With presidential elections only three months away, we suspect the government will be reluctant to take a firm stand against a united union movement, regardless of the damage that satisfying their demand will cause the economy and public finances. Unions sense this government weakness, which is why they have declared their position non-negotiable. They also know that their hard line will have the full support of the parties, the media and the public as everyone is feeling the effects of rising prices and there are daily calls for the government to help people cope.

Of course, the real beneficiaries of a full restoration of CoLA would not be the impoverished workers on low wages but the fat cats of the civil service, the semi-governmental organisations and the banks. All public sector employees are entitled to CoLA whereas in the private sector only between 25 and 30 per cent of workers are eligible. Those in the lowest-paid jobs will get nothing as they are not covered by collective agreements which ensure the payment of CoLA, so the unions are in effect campaigning for the privileged workers of the public and semi-governmental sectors.

This should be made clear by the labour minister at Monday’s meeting at which he should take a clear position against the restoration of CoLA, because it will further fuel inflation, push up interest rates, put businesses under increased pressure during a time of soaring costs. It will also put jobs at risk and throw the state budget into disarray. And he should have the full backing of the president, who is not seeking re-election and is therefore in a position to take the unpopular, but responsible stand, for the good of the economy.