Growth, wages and the competitiveness question

Malta’s economic story over the past decade is difficult to dispute. Growth has been exceptional, employment has expanded enormously, unemployment has remained extremely low and sectors that barely existed a generation ago have become important contributors to national output. The latest GDP figures continue that story. Gross value added made a 4.7 percentage point contribution to real GDP growth in the second quarter of 2026, with services accounting for 4.3 points. Consumption remained an important engine, contributing 4.2 points, while investment contributed another 1.1 points. 

There is little evidence, therefore, of an economy running out of momentum. The more interesting question is increasingly not whether Malta is growing, but what is driving that growth, how its gains are being distributed and, crucially, whether the evolution of wages is being matched by the productivity needed to sustain them. 

That distinction matters because the latest national accounts contain an encouraging development. Compensation of employees contributed around 4.15 percentage points to nominal GDP growth in the second quarter, compared with around 2.23 points from gross operating surplus and mixed income. This is significant.

At a time when the debate understandably focuses on the cost of living and whether households are sufficiently benefiting from economic expansion, labour income is clearly contributing strongly to current nominal growth. It would therefore be misleading to characterise Malta today simply as an economy in which profits are rising while wages are being left behind. The immediate picture is more nuanced, and arguably more encouraging, than that. 

Yet the longer-term picture raises a different question. A Central Bank of Malta analysis shows that Malta’s adjusted labour income share has been on a broadly declining trajectory. Between 1995 and 2023 it fell by 11.7 percentage points. Importantly, this was not primarily the result of Malta moving towards sectors that naturally have lower labour shares.

The changing composition of the economy would, on its own, have increased the aggregate labour share. Instead, most of the decline occurred within sectors themselves, including some of the service industries that became increasingly important to Malta’s economic model. The question therefore cannot simply be whether wages are rising today. It must be whether Malta is constructing an economy in which wages can continue rising tomorrow without eroding competitiveness. 

This is where the discussion becomes more complicated, because higher wages are both economically desirable and economically demanding. We should want wages to rise. A development model that produces impressive GDP figures without eventually translating those gains into better incomes and living standards would have limited social legitimacy.

But wages cannot sustainably be separated from productivity. If compensation rises because workers are producing more value per hour, higher wages strengthen rather than weaken the economy. Businesses can pay more because every worker generates more value. If labour costs rise persistently faster than productivity, however, unit labour costs increase and competitiveness eventually comes under pressure. The same wage increase can therefore represent economic progress or an emerging competitiveness problem depending upon what is happening underneath it. 

This is perhaps the next dimension that Malta’s economic debate needs to confront. Malta should not aspire to compete with lower-cost jurisdictions by suppressing wages. The objective must instead be to become a high-wage, high-productivity economy. Germany, Denmark, the Netherlands and other successful European economies do not compete internationally because their workers are inexpensive.

They compete because high labour costs are supported by skills, technology, capital intensity, organisational sophistication and productivity. The relevant economic question is therefore not whether Maltese wages are becoming too high. It is whether the productive capacity of the economy is rising sufficiently quickly to support substantially higher wages. 

That changes the way we should interpret the current data. Stronger compensation of employees is welcome, but we should not automatically interpret wage growth itself as evidence that Malta’s development model has successfully shifted towards productivity. In a very tight labour market, wages can rise because firms are competing for scarce workers.

Migration can expand labour supply and moderate those pressures, but it can also allow some businesses to continue labour-intensive models for longer than would otherwise have been possible. Neither mechanism necessarily tells us much about underlying productivity. What matters over the longer term is whether businesses are investing, reorganising, automating and moving workers towards activities where every hour of labour produces greater economic value. 

This is where the Central Bank’s longer-term labour-share analysis becomes particularly useful. A falling labour share is not inherently evidence of economic failure, something the Bank itself stresses. Technological change can raise productivity sufficiently that workers enjoy substantially higher real incomes even while labour receives a smaller proportion of a much larger economic pie.

The more revealing question is what happens to the growing capital share. If higher profits are reinvested into technology, machinery, research, intellectual property, skills and businesses capable of scaling internationally, they can create the productivity that supports the next round of wage increases. Capital and labour then become complements rather than competitors. 

The concern arises if that transmission mechanism is weak. Malta has powerful incentives directing capital towards scarce assets, particularly property. Land is finite, population and tourism have expanded and property-backed investment is familiar to both investors and the financial system. At the same time, relatively abundant labour has historically made expanding headcount a rational alternative to undertaking the harder work of redesigning production. Neither decision is irrational at firm or investor level.

The problem emerges at the aggregate level if capital disproportionately chases asset appreciation while businesses disproportionately expand through labour accumulation. GDP can continue growing impressively while productivity struggles to become the principal engine of higher wages.  

This is why labour competitiveness should not become another argument for cheap labour. It should become an argument for investment. If wages are going to rise, as they should, firms must be given both the incentive and the capability to increase output per worker. Technology and artificial intelligence are part of that transition, but so are better management practices, access to risk capital, infrastructure, competition and organisational innovation. Our financial system also matters enormously.

An economy seeking higher wages cannot simultaneously maintain an investment architecture that makes financing another property development considerably easier than financing productivity-enhancing investment in a growing firm. Capital allocation ultimately shapes productivity, and productivity determines how far wages can rise without damaging competitiveness. 

Education becomes equally fundamental. The Central Bank analysis notes that higher-skilled workers tend to command higher labour income shares and argues that investment in skills can simultaneously raise productivity and broaden the distribution of its benefits. This is the virtuous circle Malta needs to create. Better skills allow workers to operate more sophisticated technologies and perform higher-value tasks. Firms employing more productive workers can afford higher wages.

Higher wages strengthen incentives to acquire skills, while greater productivity allows businesses to remain competitive despite higher labour costs. The opposite equilibrium is considerably less attractive. Weak productivity constrains wages, low wages encourage labour-intensive business models, firms remain reluctant to invest in automation and the economy compensates by continually adding workers. 

The latest GDP figures also provide a reminder that we need to examine the anatomy of growth rather than celebrate the headline alone. A percentage point generated through productivity-enhancing investment is economically different from one generated through additional consumption, just as wage growth generated by productivity is different from wage growth generated primarily by labour scarcity. 

This is ultimately why Malta’s next economic transformation has to move beyond the language of simply attracting “higher-value sectors”. We need higher-value work. A country can host sophisticated multinational companies while significant parts of its domestic economy remain relatively labour-intensive.

It can import advanced technology without developing technological capability. It can generate substantial corporate profits without those profits necessarily being reinvested into domestic productive capacity. And it can experience rapid nominal wage growth without achieving the productivity improvements required to sustain those wages over decades.  

Malta’s first great economic transformation was fundamentally about scale. We expanded the labour force, diversified the economy, attracted investment, increased tourism and built new industries. It worked remarkably well. The next transformation has to be about depth—more output per worker, more innovation per euro invested, more productive use of capital, better skills, stronger firms and ultimately higher real wages supported by higher productivity. That is also how the apparently competing objectives of wages and competitiveness can be reconciled. 

The latest figures therefore contain both encouragement and a warning. Labour income is currently contributing strongly to Malta’s nominal growth, and that should be welcomed. The longer-term challenge is making sure this becomes part of a sustainable transition towards higher-value work rather than simply the consequence of a tight labour market and continued expansion. Malta has already demonstrated that it can make its economy bigger. The harder test now is whether it can make each worker more productive, allow that productivity to translate into higher real wages and still compete successfully internationally.