Last Updated on Thursday, 9 June, 2022 at 9:05 am by Andre Camilleri
Director General of the Malta Employers’ Association (MEA) Joseph Farrugia is calling for a discussion among social partners on the best way forward, following the news that the Cost-of-Living Adjustment (COLA) that is awarded annually could reach €8 per week next year.
Farrugia said that the MEA is ‘closely monitoring the situation’.
The Times of Malta had reported that the COLA could rise by that much next year. Farrugia, contacted by this newsroom and asked about the situation, said that the country is just emerging from a very serious crisis, “which now has evolved because of the fallout from Covid and the war in Ukraine, into scarcities and higher prices for basic commodities such as energy and food.”
He said that one would need to see the extent to which this will lead to a ripple effect in inflation.
“If the first push of inflation results in higher costs of production, such as through increased labour costs, then it will be reflected in a second round of price increases. That is the real danger, because having wage prices spiral could also impact aggregate demand in general, as at higher prices people may purchase less especially if their own disposable income would have gone down. More dangerously, it could have a negative impact on the competitiveness of many enterprises.”
He said that there could be fiscal interventions, whereby the government would, first of all, protect those who are the most vulnerable. “So, for example, pensioners don’t earn wages but they are still affected by price increases. There are also low income groups who may be more prone to increases in basic food items. I believe that in the coming weeks or months, we should try to explore means through which, rather than having an across the board increase in the Cost of Living Adjustment (COLA), government can intervene to focus mostly on vulnerable people and families, without affecting overall competitiveness.” He said that he is not calling for a suspension on the COLA, but for a mature discussion among the social partners on the best way forward.
It was reported that the Cost of Living Adjustment (COLA) could rise to 8 euros per week. What kind of impact would this have on employers? Does the MEA plan on speaking to the government and asking for some kind of subsidy or support if it does reach such levels?
We are monitoring the situation closely.
It is evident that inflation is on the increase both in Malta and in many other countries. Indeed, the subsidies that government is issuing to stabilise energy prices and some commodities such as wheat help, as otherwise inflation would be higher.
The €8 per week which has been mentioned is the result of an automatic mechanism, which is based on the retail price index and as expected it will be reflected in a much higher COLA than we have been accustomed to over the past 15 years or so. Therefore, it will be a shock to some businesses.
Some companies have the COLA increase hedged because the cost of living increase is entrenched as part of the collective agreement increase, and they would have already planned for it.
Are you talking about government entities here?
Not just, even in the private sector there are some collective agreements that have incorporated the cost of living increase into the collective agreement increase.
However, one shall see how the unions will react to this now, because having an expected COLA of three euros per week is one thing, but now, it is eight.
One would also have to see the extent to which this will lead to a ripple effect in inflation. If the first push of inflation results in higher costs of production, such as through increased labour costs, then it will be reflected in a second round of price increases. That is the real danger, because having wage prices spiral could also impact aggregate demand in general, as at higher prices people may purchase less, especially if their own disposable income would have gone down. More dangerously, it could have a negative impact on the competitiveness of many enterprises.
We need to be careful to retain the competitive level between Maltese enterprises and others, especially for those companies that are export oriented.
We cannot afford to lose competitiveness at this stage. You may ask ‘what can one do?’ Well, as I said, it is an automatic mechanism. To those who have been saying for years that it does not truly reflect prices, my standard answer has always been that is based on the retail price index, which is based on the household budgetary survey and therefore, one cannot say that it is not realistic. I have to be consistent and say that this is the case today as well.
However there could be fiscal interventions, whereby the government would, first of all, protect those who are the most vulnerable. So, for example, pensioners don’t earn wages, but they are still affected by price increases. There are also low income groups who may be more prone to increases in basic food items, for example. I believe that in the coming weeks or months, we should try to explore means through which, rather than having an across the board increase in the Cost of Living Adjustment (COLA), government can intervene to focus mostly on vulnerable people and families, without affecting overall competitiveness.
Are you saying that the COLA wouldn’t be given to all workers?
I think we should be open to all ideas at this stage. Obviously any sort of agreement would have to be reached with the other social partners – with the unions and the government. So, this is as much of a challenge as when we had the Covid outbreak. We need to find a solution which works in the best interest of everyone. Simply being dogmatic and saying that the COLA exists, it has to be given and no other ideas should be explored, could have a very negative impact on some enterprises, especially those who operate in low value added sectors.
But, given that the COLA reflects the cost of living as it is today, if you don’t give workers that increase, wouldn’t they end up becoming more vulnerable because of such a move?
Yes, of course, but some of them might become even more vulnerable if, for example, as a result of this they lose their jobs. That is why there needs to be a very mature discussion here.
You mentioned, if I understood you correctly, that one of the options could be to perhaps change the mechanism temporarily to offer the COLA increase to the more vulnerable, but not to those who aren’t vulnerable. Are you also considering other options like businesses receiving aid instead of that, or businesses pushing for financial support from the government?
We need to look at not just one option, but at a number of actions that might be taken to keep businesses afloat. Bearing in mind that the fiscal manoeuvrability of government at this point is very limited. It’s very limited because of the expenditure it incurred during the Covid-19 pandemic.
It’s not as if we have a surplus budget and could say that government has the space to manoeuvre to assist businesses in such a manner.
We are just emerging from a very serious crisis which now has evolved because of the fallout from Covid and the war in Ukraine, into scarcities and higher prices for basic commodities such as energy and food.
I am not calling, at this stage, for a suspension of the COLA, but certainly there needs to be a mature discussion among the social partners to decide on the best way forward, in the same way that we did when there was Covid and also when Malta faced other crises in the past, like the financial crisis for example, and also the war in Libya.
Nowadays it is difficult to say when we are living in stable times. It seems as though one crisis is leading on to the next.
The Labour Party, in its electoral manifesto, had mentioned possible changes to the COLA mechanism. I’m wondering if you have any updates about that, if you’ve heard anything about it?
There are two actions that are being considered. One of them is the low wage commission. The low wage commission had been set up in 2017 to look into a possible, not mandatory, review of the minimum wage every five years.
The next revision is due in 2023, therefore the next recommendation is due in 2023. There are meetings of the low wage commission to address the minimum wage. It has come at a very delicate time because of inflation. One would never have imagined three years ago that there was going to be inflation in excess of 5% in Malta, bearing in mind that in the Eurozone the average inflation is 8% and there are countries even within the EU that are looking at inflation rates of 15% – 18%. The situation is quite serious.
Besides that, government was also exploring a revision of COLA, or to have a separate index for low income groups. But nothing has come out of that as yet.
I don’t know whether this is the opportune time to really go in that direction.
