Greek wages in crisis: Whose loss and whose hope?

Anyone who is even remotely familiar with the crisis in Greece must be aware of its record-high unemployment. From an already elevated value of 8% in 2008, the Greek unemployment rate rocketed to 27% in 2013 and has since remained in that ballpark. The vast majority of lost jobs came from the private sector, as public sector jobs are either permanent by constitution or safeguarded by any politician interested in re-election. Does this mean that workers in the private sector lost the most during the crisis? The casual observer may object. After all, it is a widely held belief that public employees paid the price of the crisis with wage cuts. Over 2010-2012, public wages were sliced three times, accompanied by three waves of massive strikes and demonstrations. The government also intervened in private pay-setting by decentralizing wage bargaining in 2011, and cutting the mandated minimum wage by 22% in 2012. Still, by common perception, most of Greece’s wage adjustment concerned public sector workers.

We question this common perception in a study covering the period 2009 to 2013, during which the government implemented the bulk of labor market reforms. We find that wages in the private sector declined faster and overall more deeply than in the public sector, even prior to the measures that deregulated wage bargaining and lowered minimum wages. In fact, the premium of a public sector job for workers with the same characteristics (age, education, work experience, marital status, number of children, occupation, sector of employment, type of contract, etc.) increased in the early phase of the crisis and only started declining after 2011, though never falling below its pre-crisis level (of 9.3%).

Thus, it appears that private sector workers did all the heavy lifting of the crisis: they lost the jobs and they lost the wages. Did they also lose hope? Our results suggest that, despite the overall gloomy picture, there is some good news coming out of the crisis for private employment. In the private sector, the adjustment has been large in size but qualitatively constructive. In the public sector, the adjustment has been moderate but potentially destructive.

Specifically, although the pressures on the private economy were strong and continuous (the Greek GDP contracted by 32% within five years impacting wages of all skilly levels), these pressures also resulted in a rationalization of the ‘structure of returns’; i.e. the way in which the sector rewarded different labor market characteristics. Private jobs that survived the crisis now paid higher returns to marketable workforce characteristics, most notably schooling. This development is rather positive, given that the returns to skills in the private sector have been low relative to the public sector for decades, inducing the educated and experienced workers to queue for public sector jobs. Attracting the most able and skilled professionals in the private sector may be an important feature in the prospective recovery of the Greek economy.

In contrast, the wage losses in the public sector were lowest for the low skilled and highest for the most skilled. By implication and without any substantial incentive schemes to increase productivity, the public sector will struggle in the future to keep its executives motivated, if it retains them at all. This is the reason behind the urgency expressed by Greece’s lenders about further public wage reforms.

The third memorandum of understanding that the Greek government signed this month was for a brand-new three-year ESM program, which clearly states that it will reform the public wage grid, effective 1 January 2016, by “decompressing the wage distribution across the wage spectrum in connection with the skill, performance, responsibility and position of staff”. As that government has now resigned and the country is heading to new elections, it remains to be seen whether the new government will deliver on this commitment.

Featured image credit: Photo by martaposemuckel, CC0 Public Domain via Pixabay.