The University of Cyprus's Economics Research Centre published a report, examining the intricate relationship between labour compensation, productivity, and inflationary pressures in Cyprus. The study emphasizes the potential implications of the Cost of Living Allowance.

Using data from Eurostat spanning 1996 to 2022, the analysis employed core economic theories to explore patterns in labour and capital prices and their link to Cyprus's productivity growth. The research also delved into the relationship between sector-specific labour income and productivity.

The Centre highlighted findings which showcased the fluctuation in input compensation around its nominal productivity. Notably, between 2010 and 2016—a period marked by a financial crisis and significant wage cuts—labour prices lagged, while capital prices surpassed their productivity growth. However, when observed holistically, the growth in input compensation aligned with its nominal productivity over the entire period.

The report acknowledged significant variations between economic sectors. A sector-by-sector analysis revealed disparate growth trends, with some sectors seeing labour income growth trailing behind productivity, while others exhibited the inverse.

For example, sectors such as Information & Communication (ICT) and Finance & Insurance demonstrated wage growth that did not keep pace with their productivity surge. Particularly, from 2017 to 2022, the ICT sector saw a growing chasm between labour income and productivity. Similarly, the Industry (excluding construction) sector observed labour compensation growth falling short of its productivity changes post-2017.

The study underlined the need for tailored policies, addressing the specific dynamics of each sector. It cautioned against broad, aggregate-level adjustments, like Cost of Living Allowance, which could amplify income disparities across sectors.

A key takeaway from the CypERC's analysis is the potential risk posed by an automatic linkage between wages and inflation. Such a connection, especially when productivity shifts are overlooked, can intensify inflationary pressures. The Cost of Living Allowance mechanism, in such scenarios, might hamper the economy's adaptive capacity, threatening its robustness and competitiveness.

Overall, the report advocates for the careful consideration of productivity when adjusting labour compensation. It calls for industry-specific strategies that recognize the nuances of compensation and productivity growth. The Centre emphasized the importance of collaboration among policymakers, industry representatives, and other stakeholders to foster economic efficiency, elevate living standards, and safeguard against inflationary threats.