Malta facing spiralling labour costs

The report, compiled by Prof. Joseph Falzon within University’s Banking and Finance Department, found that between 2000 and 2007, Malta’s cost of labour (per unit) rose from 0.56 to 0.68 – at a rate of 21.0%.

The rate of increase contrasts sharply with that of the European Union average, which rose by only 12.2% only for the same period (from 0.68 to 0.77).

While Malta’s cost of labour is still comfortably below the EU average, the rate of increase suggests that unless addressed, Malta’s cost of labour could quickly overtake the EU average and further undermine Malta’s international labour competitiveness.

Earlier this week, the European Commission itself approved recommendations to Malta advising it to reform its mandatory cost of living adjustment mechanism (COLA) as “this adjustment could further hamper labour competitiveness.”

It noted that “the issue is particularly pertinent in view of the recent increases in energy prices, which could lead to wage-price spirals,” and urged the Maltese Government to reform COLA and ensure wage growth reflects developments in labour productivity and competitiveness.

Contacted by MaltaToday, Prof Falzon said that targeting COLA is not the answer.

Falzon categorically rejects the Commission’s recommendation that the government reform the COLA mechanism to ensure competitiveness. “The government shouldn’t attack COLA, but it is not the cause of rising labour costs.”

Falzon said out that “rising unit labour costs due to wage increases is only an effect of the problem, not the cause. The true cause is inflation. The government should attack inflation, not the COLA.”

Asked what factors could be driving Malta’s cost of labour up, Falzon points to the need for sector-by-sector studies to determine the factors at work.

“What is confirmed is that overall, Malta’s cost of labour is rising at a much faster rate than the EU average, and this will seriously affect our competitiveness.”

He pointed to countries like Germany, which achieved a stable unit labour cost through a cautious and regimented approach to containing costs and keeping inflation down.

Falzon argued that the German economy’s high wages and highly-developed economy were countered maximisation of labour output, through the recycling of profits, cost-cutting, and regimented inflation-containment.

The report also notes that the increases in cost of labour is not uniform across the board however, as some sectors are registering slower increases than others.

Labour cost in the manufacturing sector increased by 33% compared to an EU-average increase of 14%, and by 36% in the hotels and restaurants sector as compared to an EU-average increase of 11%.

With regard to the wholesale and retail sector, labour cost increased by 44%, as compared to the EU-average cost of labour increase of 14%, while within the transport and communication, the increase was of 18%, contrasted by an EU-average increase of 10%.

Within the business activities sector, cost of labour increased by 75% (EU-average 24%); while in the financial intermediation sectors, it increased by 77% (EU-average just 2 %). Within the personal services sector however, cost of labour decreased by 33% (EU-average increase of 26 %).

According to the report’s findings, the domestic sectors of personal services and health and social worker registered a gradually declining trend in their labour cost index, at a time when “the same industries across the EU27 registered consistently increasing trends.”

As for the remaining economic sectors, (excluding Agriculture, Fishing and Quarrying due to missing data) the report says Maltese trends coincide with those registered.

“Indeed, several important sectors like manufacturing, hotels and restaurants, wholesale and retail, and financial intermediation, witnessed significant increases in their unit labour cost indices, making these sectors even less competitive internationally.”