Cuts don’t hurt all civil servants

The economic adjustment program may succeed in putting Greece’s public finances in order, turning the current account balance into a surplus earlier than envisaged and partly restoring the country’s competitiveness to levels unseen since before its eurozone entry, albeit at a huge, unwarranted social cost. Even so, the effort will be in vain if the public sector, the main source of Greece’s economic problems, is inadequately reformed. Unfortunately this seems to be the most likely outcome.

Three-and-a-half years into the program, Greece appears set to produce its first primary surplus since 2002 and even turn its chronic current account deficit into a surplus. The economy has also recaptured a good deal of lost ground in international competitiveness since its euro entry more than a decade ago, according to the relative unit labor costs. However, this has come at a large output loss, depicted in the sharp reduction of the nominal gross domestic product from 233 billion euros in 2008 to an estimated 184 billion this year.

The significant drop in economic activity, unheard of in a developed country in peacetime, has come at a huge social cost. Unemployment went up to 24.2 percent in 2012 from 7.7 percent in 2008, according to the Hellenic Statistical Authority (ELSTAT). It is projected to average 27 percent this year. The sharp rise in the jobless rate reflects the loss of hundreds of thousands of jobs in the last few years and a rise in the number of people actively looking for work.

The sharp rise in unemployment masks vast differences in labor market conditions in the private and public sectors. This is more obvious when one looks at the figures in more detail. According to ELSTAT, about 737,000 jobs were lost in the private sector between Q2 of 2009 and Q2 of 2013, taking the total number of employed to 2.8 million. In the same period, the number of workers in the broader public sector shrank by 163,000 to a total of 843,000 in Q2 of 2013.

However, most of the state employees retired or accepted voluntary retirement schemes and therefore were not fired. In some cases, limited time contracts offered to seasonal employees and others were not renewed, prompting some of them to resort to the courts and remain in their positions, being fully paid, awaiting the final ruling. So, there were no formal layoffs in the public sector, unlike in the private sector, and those who left were paid their severance pay or early retirement bonus, unlike many laid off in the private sector.

The policy of encouraging early retirement in the public sector with generous schemes over the last few years has contributed to the reduction of the wage bill but it has largely shifted the financial burden from the public sector to the social security funds. Of course, there have been nominal pay cuts in the public sector since 2010, but, as some are now discovering, the cuts have been mitigated by payments for overtime work and other benefits so expenditure cuts are not overall as severe as thought. The bonus for the use of computers in the public sector, which was recently abolished, is just one example.

In addition, the unified public sector wage system has neither been applied to all due to exemptions – i.e. “uniformed” officers – nor completed. As a result, the wage grid has maintained large disparities in pay for employees with similar qualifications and seniority at different ministries and state organizations, depriving the budget of significant savings.

A glance at the evolution of staff costs per capita at some state-owned or controlled organizations and firms is indicative of the trends and gross pay levels. The figures include the cost of early retirement schemes and other costs, depending on the company. Based on publicly available data, the average cost per employee at railways company OSE was 40,000 euros in 2009, 50,000 in 2010 and 38,000 in 2012. The same average cost at Hellenic Post (ELTA) stood at 34,000 in 2009 and 33,000 in 2012, whereas in the Hellenic Aerospace Industry (EAB), it was 46,000 euros last year from 44,000 in 2009 and 62,000 in 2010. The cost at water company EYDAP was 44,000 euros last year from 67,000 in 2010 and 62,000 in 2011. At the Public Power Corporation, the average cost per employee stood at 53,000 euros in 2013 from 64,000 in 2010. The average cost per employee at Hellenic Petroleum (ELPE), in which the state holds a 35.5 percent stake, is estimated at 91,000 euros in 2012 from 93,000 in 2010. At Piraeus Port Authority (OLP), the cost stood at 52,000 euros in 2012 compared to 60,000 in 2011 and 54,000 in 2010.

It is obvious, even after adjustments for specific costs which do not accrue to all employees at the above firms, that the whole package of pay, job security, accountability and work intensity make some parts of the public sector more attractive than the private sector to the general public. This is more so if one adds the lower social security contributions and the timely payment of salaries. Consequently, one should expect that pressure on politicians to make appointments in the public sector will remain strong, along with resistance by trade unions and vested groups to downsize it.

It is reasonable to assume spending cuts of any kind will be resisted, especially after shifting a good deal of the burden from the public sector to pensions, and the overhaul of the public sector, which brought the country to its knees, will be partial at best. Since taxation cannot bring much more into the state coffers, the attainment and sustainability of the projected large primary surpluses sought by the program will be put in doubt. This is more so since the permanent transfer of resources from the private to the public sector via taxation over the last few years has undermined the economy’s productive capacity. Can this change? Perhaps, but we doubt it. Unfortunately, it appears very difficult to put the public sector on permanent diet.