By Stelios Orphanides
Cypriot policy makers should pay attention to the pay gap between the public and private sector, a labour market distortion and the risk for public finances which Cyprus’s economic adjustment programme has hardly addressed, economists said.
While on average, workers in the public sector earn significantly more than those in the private sector, the remuneration system for government workers favours those with lower skills who earn significantly more while those working in positions requiring more qualifications are disadvantaged, Alexander Michaelides who works for the London-based Imperial College said in an interview.
“Basically, to a brutal approximation, the secretaries are overpaid in the public sector relative to the private (sector) and the doctors or people with high human capital are underpaid,” Michaelides said, adding that this explains why it is hard for the government to fill top positions such as doctors or university professors, while vacancies for junior positions attract an excessive number of applicants.
His comments came days after the Fiscal Council criticised the lack of “a rational and scientifically drafted remuneration mechanism” in the wider public sector. Such a mechanism should promote meritocracy, transparency and good practices, reduce corruption and make the sector more resistant to pressure groups demanding “unreasonable benefits” and pay increases. According to the council’s autumn report, public sector workers earn on average €2,757 a month compared to €1,752 in the private sector.
“They have a point,” the Imperial College economist said in reference of the fiscal watchdog’s position.
What is important, Michaelides continued, is for policy makers to realise that horizontal changes in remuneration of public workers does not address the problem.
A progressive pay cut, part of Cyprus’s fiscal consolidation measures in response to the fiscal and banking crisis five years ago, made matters even worse, as it reduced the pay for highly-skilled workers disproportionately, he added.
The latest attempt by the government to overhaul the human resources management in the public sector failed 11 months ago when the parliament rejected a bundle of draft bills which was part of an initiative by the head of the Unit of Administrative Reform, Constantinos Petrides who is also minister of interior. Workers in the public sector receive annual pay rises depending on collective agreements negotiated with unions, which have stepped up the pressure for more pay in recent weeks. In the absence of evaluation procedures, seniority is rewarded regardless of a worker’s performance.
Taking for granted that the government is more generous in remunerating its workers compared to private-owned companies regardless of their productivity, leading to more demand for such jobs, this in turn puts more pressure on the private sector to offer more money, said Alexandros Polycarpou, an economist working at the University of Cyprus.
Still, the capacity of the private sector companies to lure skilled workers with more pay is limited he said.
Polycarpou said that while such a gap in pay does affect the way the labour market operates, he warned at the same time that in the absence of a thorough recent study comparing “like with like” it is hard to draw safe conclusions.
The most recent study in this area was published six years ago by Panos Pashardes, the late University of Cyprus professor, which shows that lower skilled workers are better off working for the public sector and vice-versa.
“There have been cases when the government sector was unable to attract highly skilled employees with scarce qualifications, like it was the case of the actuaries in the past, when the government was unable to attract any because of the relatively low remuneration,” the University of Cyprus economist said. “Likewise, today we see doctors leaving the public sector, as it is not offering similar earnings like the private sector”.