AI Takeaways
- AI insight: Fiscal drag acts as an invisible wage tax, capturing nominal increases without political cost.
- AI insight: Cheap overtime discourages hiring and locks firms into low-productivity labour strategies.
- AI insight: Removing social contributions from overtime shifts adjustment from employment to working time.
- AI insight: Labour competitiveness built on hours worked rather than value added erodes long-term growth.
Indirect labour costs remain one of the most significant — and least transparent — burdens on employment. They raise the cost for businesses, act as a disincentive to hiring, and are not immediately felt as income by workers themselves.
Somewhere along the way, this burden seems to “disappear”. Unsurprisingly, market-oriented voices have long argued for its reduction — or even its elimination. But why is labour taxed so heavily in the first place? And why does the government increasingly favour cheap overtime and the employment of pensioners?
One explanation lies in Greece’s persistent shortage of skilled labour, partly a legacy of the brain drain. A deeper structural reason, however, is the deliberate effort to keep labour costs low as a factor of competitiveness — ensuring that Greek products remain cheaper in international markets.
This logic helps explain recent policy choices. Priority is increasingly given to pensioners’ employment — now exceeding 260,000 officially — and to overtime work, which has quietly become significantly cheaper. The cost is indirect, but substantial.
Yet indirect labour costs do not simply vanish into thin air. Public debate often isolates selected components of these costs, ignoring their broader economic role. Healthcare contributions, for example, are not a dead loss for employers; they help sustain the workforce itself. Likewise, the social stability underpinned by the pension system carries long-term economic value.
The picture becomes more complex when taxation enters the equation. Consider a concrete example: a €50 increase in the statutory minimum wage, such as the one implemented in April 2025. This increase costs the employer €61, while the worker takes home only €32. Nearly half of what the firm pays never reaches the employee.
The main beneficiary of this gap is the tax authority.
Where the money goes
Above a monthly income of €617, income tax is withheld at 9%. Beyond €715, the rate jumps to 20%, and above €1,429 it reaches 26%. These thresholds remain unchanged despite inflation.
The result is a steady stream of “excess revenues” for the state, driven by fiscal drag. As nominal wages rise merely to offset rising prices, workers are pushed into higher tax brackets, paying more tax without gaining real purchasing power.
The same mechanism applies to VAT. As prices increase due to inflation, the state collects more revenue from the same 24% rate, calculated on a higher nominal base. Inflation, in effect, becomes a silent tax multiplier.
Social security contributions
Labour is also burdened by social security contributions: roughly 20% for employers and 16% for employees. In recent years, these rates were reduced by nearly five percentage points. Where health-related contributions were cut, the government compensated by injecting €470 million into the national health fund (EOPYY) from January 2025.
In practice, taxation was used to subsidise both businesses and wages.
However, another contribution — earmarked for workers’ housing — was abolished without replacement. This policy choice carries longer-term consequences. The absence of housing support mechanisms, such as subsidised loans for new construction, has contributed to the surge in housing prices and rents by constraining supply.
The quiet revolution in overtime
During 2025, social security contributions were stripped from the additional pay earned through overtime, overwork, Sunday and holiday employment. Employers continue to pay standard contributions on the base hourly wage (around 21%, excluding heavy and hazardous work premiums), but the overtime premium itself is exempt.
This has made overtime and Sunday work significantly cheaper.
Take a simple example. If the daily wage is €50 — or €5 per hour — the employer’s contribution per hour is €1. With a 40% overtime premium, the hourly wage rises to €6, but the insurance contribution remains €1. Until 2024, it would have increased to €1.25.
Similarly, for Sunday or holiday work, which carries a 75% premium, the hourly wage rises to €8.75, yet the insurance contribution remains unchanged at €1.
Employees benefit directly as well, with an effective gain of around 16%.
Under this framework, five hours of overtime beyond the standard eight-hour workday now cost the employer approximately €36 in total, compared with €42 last year — a reduction of roughly 15% in overall labour costs.
The social trade-off
Cheaper overtime may improve short-term competitiveness, but it comes at a clear social cost. Extended working hours often erode free time and family life, driven not by choice but by economic necessity.
Rather than encouraging new hires, the system increasingly rewards longer working days, older workers, and fiscal revenues boosted by inflation-driven taxation. Labour may appear cheaper on paper, but the real cost is quietly shifted onto workers’ time, health and long-term productivity.
