In Cyprus the financial crisis of 2012-13 resulted in a loss of wealth for many households owing to the “deposit haircut” and the collapse of prices of bank shares and bonds.

Furthermore, in the following years incomes of most workers and small businesses were reduced considerably as a consequence of austerity policies imposed by the government in agreement with the troika of international institutions comprising the European Commission, the IMF and the ECB.

However, despite the much-trumpeted recovery of GDP growth since 2015, the real disposable incomes of most workers have not been restored to pre-financial crisis levels. Indeed, owing to the surge in inflation in recent years there is little wonder that a mounting number of households are experiencing cost-of-living pressures.

More specifically, in the period 2010 to 2012, the last years of the Christofias administration, the median gross monthly earnings of employees averaged €1595 and by 2024 had fallen in real terms to €1555 according to preliminary estimates. And with higher taxes being levied due to nominal incomes being augmented by inflation, the decline of at least 6 per cent in the real take-home income of employees over these years was even greater.

But, focusing on average income levels alone underestimates the difficulties being experienced by low-and modest-income households that are dependent mainly on earnings from employment in the private sector. These employees have less job security and benefits and often carry fewer rights in guarding against exploitation by their employers. In addition, the rise in the cost of living for lower income households has been greater than that of the Consumer Price Index owing to a higher proportion of their incomes being spent on food and energy products, the prices of which have risen much faster than consumer prices on average.

Furthermore, with their incomes sinking below their living expenses poorer households are forced into debt. And the burden of debt servicing with onerous interest payments in turn compounds the dire financial situation of households and causes them to make further cutbacks in family living standards, such as in terminating extra lessons for their children. Notably, the ECB’s latest Household Finance and Consumption Survey indicated that lower-income indebted households in Cyprus had an average ratio of debt service payments to income of over 30 per cent. 

Policies

An analysis of national accounts data indicates that ever since the financial crisis of 2012-13 the policies of the Cyprus government have clearly favoured the financial interests of corporations and largely neglected those of private sector employees and small businesses. The growth of GDP since 2015 has been relatively rapid, but the share of production-related income going to employees has been steadily declining, in fact, decreasing from an average of 47.1 per cent during the Christofias administration of 2008 to 2013, to 44.6 per cent over the periods of the Anastasiades governments from 2013 to 2023, and further to 43.5 per cent in the first two years of the presidency of Nikos Christodoulides. In marked contrast, the share of net operating surplus, which essentially reflects the profits of corporations, in GDP increased from an average of 17.9 per cent in the period 2008 to 2012 to an average of 21.8 per cent during the administrations of Anastasiades, and rose spectacularly to 26.2 per cent in the first two years of the Christodoulides government, as profits of banks, hotels and energy companies sky-rocketed to very high levels.

Compared with the rising share of “net operating surplus” in GDP, the portion of the item “mixed income”, that comprises mainly the income of self-employed persons from small businesses, fell steeply from 8.3 per cent in 2011 to 5.2 per cent in 2024.

Importantly, it appears that the financial crisis of 2012-13 and subsequent domestic demand restraint affected adversely the income of small businesses much more than that of non-financial corporations. And as the economy recovered from 2015 onwards the business of many smaller enterprises was taken over by corporations with the shrinkage of small supermarkets being a prime example. Indeed, the relative weakening of activity of smaller enterprises has contributed significantly to the decline in the real incomes of many households, while the takeover of much business by larger corporations has reduced competition and made for the extraction of monopolistic profits.

Undeniably, government taxation and budgetary policies and the turning of a blind eye to the corruption and lawlessness of many businesses have fostered an allocation of the country’s resources toward labour-intensive activities such as retailing, accommodation and food services and construction, where wages can be kept low and large profits wrested.

Indeed, many of the workers employed in these activities including all third country nationals are not covered by regulations on minimum wages and cost of living adjustments. In fact, the construction sector in Cyprus, which employs a considerable number of guest workers from non-EU countries, attests to the payment of low (below productivity) wages, with labour costs in this sector in 2024 averaging €16.7 per hour compared with €33.4 per hour in the Eurozone.

Furthermore, the government’s gross toleration of tax evasion and debt defaulting as well as violation of environmental regulations by well-connected companies distorts competition and limits the market entry of higher value-added firms that can pay decent wages and productively employ skilled personnel.

Recommendations

In order to raise incomes of lowly paid employees in the private sector the government should annually increase the minimum wage in line with the relevant EU Directive requiring the setting of this wage at a minimum at 60 per cent of the country’s median wage, meaning that it should be increased from the current €1,000 to €1,130 per month in Cyprus. And the minimum wage as well as the payment of annual cost-of-living adjustments should be extended to all sectors of economic activity.

In addition, there should be greater monitoring of these regulations by the Cyprus authorities to ensure that employers implement and not violate the rights of employees such as in forcing employees to work longer hours than specified by wage agreements. 

Furthermore, practices such as sub-contracting and determining wrongly that certain employees are self-employed so as to stealthily pass on costs of the employer, including social security, to employees need the enactment of regulations to protect the rights of workers.

And the disposable incomes of middle-income persons should be raised by decreasing tax rates at lower personal income levels to account for inflation since the last tax reform in 2002-03. In this respect, the tax-free threshold for annual personal incomes should be increased from the existing €19,500 to at least €23,000. Also, the progressivity of the personal income system should be augmented by among other things elevating the top marginal tax rate to 40 per cent or more.

Moreover, while taxation policies and regulatory measures can contribute to increasing the disposable incomes of employees, the best way for doing so is to create good jobs that enable workers to be well-compensated for their productive work. This is much easier said than done and will require a profound reallocation of the resources of Cyprus based on a more genuinely competitive business environment over a number of years.

Resources will need to allocated to activities where workers can utilise their skills to raise productivity and incomes to higher levels and enhance the competitiveness of business entities in the process. In consequence, the government should increase substantially its funding of research and development so as, among other things, create jobs for highly skilled persons in both the public and private sectors. In addition, the government should step up its investments in the green and digital transitions, including in upgrading critical infrastructure such as the electricity grid, through employing skilled personnel utilising advanced technologies.

Furthermore, the government should strengthen its active labour market policies involving training, job research assistance and wage subsidies, in partnership with companies to improve worker skills and their employability.

And, finally, while Cystat now produces a wealth of data on labour market indicators, room still exists for improving statistics. There is a need for construction of cost-of-living indices that better reflect the consumption patterns of low-and middle-income households as is the case in the United Kingdom and many other countries. Also, a breakdown of the item “mixed income” in the national accounts to show income by different sources, including that of self-employed persons, would be helpful for analysing developments in the labour market and business sector of Cyprus.