Can the finance minister lift the genie from its bottle?

Last Updated on Thursday, 6 October, 2022 at 12:54 pm by Andre Camilleri

George M. Mangion is a partner in PKFMALTA – an audit and business advisory firm.

The Maltese labour market has undergone substantial transformation over the past 10 years, whereby strong economic growth has led to historic low unemployment levels.  

As always the world of work remains a critical yet challenging one. The world is facing a unique challenge as a confluence of different forces are acting together and can bring fundamental and disruptive changes in our economies and the world of work.  New forces, accelerated by the pandemic, are transforming the world of work as we speak and may continue in the near future.

Castille reminds us that Malta’s economy remains resilient together with our labour market.  Unemployment remains at record lows and well below European averages.  As at 2021, Eurostat figures show that the unemployment rate in Malta stood at 3.5% (compared to the EU’s average of 6.4%), being the third lowest rate reported following Czechia (2.8%) and Poland (3.4%).

However, a disparity within the labour market is evident.  Latest data published by the Labour Force Survey indicates that as of the second quarter of 2022, 8,446 people were unemployed yet statistics from the NSO show that for the first time in many years, unemployment in Malta has dropped to below 1000 people. The stark difference is due to the anomaly that there are thousands of unemployed workers who prefer not to register with JobsPlus.

Another outlook worth analysing is the potential economic implications of the upcoming COLA on the labour market. Economic theory, as highlighted by the Philips Curve, states that there is an inverse relationship between unemployment and inflation. Inflation in the past months has led to speculation that the COLA will be between €8 and €10 in the upcoming budget.  Unless appropriate measures are undertaken, this higher-than-normal COLA may potentially lead to a wage-price spiral.  

This term refers to a vicious cycle where workers demand upward wage reviews due to increasing inflation (in this case, through the COLA), such that employers continue to offset higher labour costs by raising their prices.  Such a series of events would lead to a negative feedback loop, adding to the existing uncertainty and tension in the economy. 

The Malta Employers Association carried out a survey among businesses, finding that 55% of respondents feel that the COLA rise will affect their competitiveness.  In fact, in a recent joint statement, Malta’s trade union groups have proposed a new alternative cost of living mechanism to the government, warning that a COLA increase of €10 per week could drive employers out of business.

In addition, the president of the Malta Chamber of Commerce, Marisa Xuereb, has argued that a relatively high COLA increase would lead to more inflation.  She stated that the allowance would be more effective if specifically targeted to low-income groups and to those employees who have not received wage raises during this inflationary environment.  Therefore, a COLA of €10 may have undesirable affects on the labour market. One possibility is the potential of higher unemployment rates as employers with collective agreements face fixed annual increases in addition to a €520 COLA increase.

Some try to cut down their headcount to be able to pay higher wages.  An obvious cause is an even higher inflation and thus an even higher COLA claimed for 2023. More specifically, businesses may opt to increase their prices to offset the financial burden brought about by the COLA, implying starting a spiral for an even higher cost-of-living, hence rending the COLA ineffective.  

As a result, a wage-price spiral would be deleterious should this trend persists in the coming years. Appropriate policies are hence crucial to mitigate the possibility of such wage-price spiral.  In mitigating inflation growth expectations, policy makers can resort to either fiscal or monetary policies. Monetary policy is undertaken by the Central Bank and it entails altering the money supply and/or interest rate, while fiscal policy is undertaken by the government through changes in tax rates and/or government spending.  Policies implemented during inflationary periods are optimised when they are targeted at tackling the underlying cause of the rising price levels.

The root of the 2022 inflationary environment can be attributed to a combination of the significant increase in money supply growth during the pandemic, the unforeseen rise in raw material costs for producers, high cost of fossil fuels and the economic uncertainty caused by geo-political turbulence.  In terms of monetary policy, central bankers worldwide have already been increasing the cost of borrowing in financial markets in order to reduce the availability of credit, aiming to push inflation back to its target. Meanwhile, due to the large increase in public debt during the pandemic period, governments are limited in their spending capacities, such that they could only influence the economy by reducing taxation rates. 

One hopes that providence guides our finance minister to seek an optimal solution in his next budget.

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