Tweaking COLA won’t fix purchasing power

The infamous Cost of Living Adjustment (COLA) is once again at the centre of national debate. Amid certain inflationary pressures, a prominent proposal has emerged: shifting COLA payments from an annual schedule to every six months, alongside a revision of the COLA calculation to reflect modern household expenses.

While the proposal stems from a genuine desire to alleviate immediate financial stress, tweaking the frequency or formula of the mechanism misses the root cause of the problem. Without addressing the underlying economic engine, altering COLA is merely treating a symptom rather than curing the disease.

Under the current framework, Malta’s COLA calculation is strictly tied to the Retail Price Index (RPI), which measures monthly changes in the cost of a fixed basket of consumer goods and services. The core issue with revising the COLA calculation to include a wider or updated array of modern expenses is that the RPI itself cannot simply be modified by decree.

Because the RPI framework dictates automatic wage adjustments across the entire economy, any structural update to its composition requires explicit agreement among all social partners – unions, employer bodies, and the government by achieving a consensus at the Malta Council for Economic and Social Development (MCESD).

Most importantly, whether COLA is increased, rewritten, or paid out bi-annually instead of annually, it will not effectively solve the purchasing power issues faced by low-wage earners.

COLA is fundamentally a reactive mechanism. It does not create new wealth; it merely tries to catch up with wealth that has already been eroded by inflation. Delivering this adjustment every six months might offer a brief psychological reprieve, but it does nothing to alter the baseline economic reality for a low-income household. A worker receiving a top-up twice a year remains trapped in the same low-value economic tier. The absolute value of their money remains low because the value of the labour they are providing hasn’t changed.

Increasing COLA or amplifying its payment frequency without an equivalent rise in productivity is economic tail-chasing.

When wages are legally mandated to rise without businesses generating more output or higher value, the immediate consequence is a spike in operational wage costs. To survive and maintain margins, businesses – particularly in low-margin sectors like retail, hospitality, and basic manufacturing – are forced to pass these costs directly onto the consumer.

The result is a classic wage-price spiral:

• Wages go up to match high prices;
• Increased wage costs force businesses to raise prices further;
• The worker returns to square one, needing another COLA increase because the previous one was swallowed by the new wave of inflation.

Ultimately, the tail is never caught, and the purchasing power never truly improves, while Malta’s international competitiveness slides downwards.

The only sustainable way to break this cycle and genuinely uplift low-wage earners is to transition from a quantity-driven economy to a quality- and value-driven economic growth model. The real solution lies in a much-needed increase in national labour productivity.

Rather than focusing on how to slice a stagnant economic pie more frequently, policy focus must shift toward aggressive investments in digitalisation and automation. By incentivising businesses to adopt advanced technologies, firms can produce higher-value outputs with greater efficiency. Crucially, these capital investments must be intrinsically linked to targeted upskilling programmes for the workforce. This is why it is so important to accelerate the rollout of additional attractive incentives that encourage businesses to expand their use of digital incentives.

When low-wage earners are trained to operate digital tools, manage automated systems, or pivot into high-value service roles, their productivity naturally increases. Businesses can then afford to pay substantially higher basic wages – not because they are legally forced to by an inflationary index, but because the worker is generating genuine, competitive value.

Malta cannot index its way to prosperity. True economic mobility for the country’s most vulnerable workers will not come from a bi-annual COLA mandated wage increase, but from an economy that empowers them to earn more through higher skills, better technology, and elevated labour productivity.