Increasing productivity is the key

As Europe seems to be finally on a fast track to tackle its dwindling productivity and competitiveness, when compared to the US and China, in Malta we are still getting frequent articles in the press on the minimum wage. Such articles frequently compare Malta’s minimum wage to that of other countries, implying that raising it would instantly make everyone richer and resolve numerous social issues for those still earning the minimum wage.

What such articles fail to say, is that the best way to help persons move from a minimum wage level is by improving labour productivity. If we were to increase everyone’s wage without improving everyone’s productivity, we would be creating more problems that the ones we are trying to solve. As I will be showing in this article, we are unfortunately already on such a path.

Increasing labour productivity helps people earn more than the minimum wage in several ways. When workers produce more in the same amount of time, businesses earn higher revenues and profits. Companies are then more likely to increase wages to retain skilled employees and maintain productivity. As productivity rises, workers become more valuable to employers. This increases their bargaining power, allowing them to negotiate better pay, beyond the minimum wage. On the other hand, productivity is often linked to skills and experience. As workers improve their efficiency and expertise, they can qualify for promotions or higher-paying positions, leading to wages above the minimum. It is also in any business’ interest to reward productivity through performance incentives, commissions or bonuses, allowing employees to earn more than the minimum wage. Ultimately, more productive employees reduce overall labour costs per unit of output. This mean that employers can reinvest these savings into higher wages to retain their workforce.

Thus, when considering all the above, the most important question is – Have we been focusing on increasing labour productivity in Malta to improve everyone’s wage or are we more inclined to focus on just increasing the minimum wage as a “magical” way to help people earn a better living? The answer is that our focus has been on the latter rather than the former.

The 2023 National Productivity Report clearly indicates that “by 2022, labour productivity in the EU27 had increased to a level that was 6.3% higher than the base year 2015. Similarly, to the EU27, labour productivity in Malta also increased over the years and reached 103.3 in 2022. This indicates that by 2022, labour productivity in Malta had increased to a level that was 3.3% higher than the base year 2015”. This means that although labour productivity increased in Malta it increased by a lower amount than the EU 27 average.

Meanwhile, as shown above, Malta’s productivity has grown at a slower rate than the EU average. However, as outlined below, the average full-time adjusted salary per employee in Malta has increased by a much higher rate than the EU average for the same time period, from 2015 to 2022. When wages increase at a faster pace than productivity, this impacts directly our competitiveness. Yet I never see any articles in the press that speak about our productivity and competitiveness.

Source: Eurostat

As an EU member state, our focus should be on transforming the economy to enhance performance through increased productivity, which can only be achieved by the right incentives that channel massive investment in upskilling, reskilling and digital transformation. This is the true sustainable way at having people move away from minimum wage levels.