Wage increases not matching productivity gains, businesses face wage price spiral – MEA

Last Updated on Monday, 31 July, 2023 at 4:33 pm by Andre Camilleri

The Malta Employers’ Association said that the increase in wage bills isn’t being reflected in an increase in productivity, as the country’s businesses face threats such as a wage price spiral and a weak infrastructure. 

Revealing the results of the wage inflation survey among employers of different sectors of the economy, the MEA on Monday said that the inflation pressures currently being experienced in the country are largely affecting wages, and conditions offered by employers in Malta.

MEA President Joanne Bondin said that the survey pointed towards a wage price spiral, whereby employers continued to sustain wage inflation over the past two years, and are attempting to neutralise the hit by increasing prices for their products or services.

The survey also shows that this practice is expected to continue in the face of forecasted wage bill increases fuelling further cost-push inflationary pressures in the local economy, Bondin said.

She said that the survey reflects the structure and change in the country’s demography, impacting the labour force as well as how it is composed.

Director General Joe Farrugia presented the salient points of the survey, which was conducted between 7 July and 24 July, gathering around 300 responses, translating to around 400 companies.

The operations of over 90% of respondents depended on foreign workers to varying degrees. The survey revealed that in 24% of cases, respondents said that more than half their workforce was foreign, compared to the 14% registered in a similar MEA survey in 2019.

On minimum and low wages, 93.95% of companies said that they do not have any employees on minimum wage, whilst 6.05% said that they do. 53.33% of companies said that they have less than 10% of employees on minimum wage, whilst 13.33% of companies said that they have more than 25% of their workforce on minimum wage.

The survey also showed the main reasons of what is causing wage inflation, with the highest score being labour market shortages, followed by an increase in general living costs, the Cost of Living Adjustment payments, unreasonable expectations from candidates which do not match productivity, and company profitability.

The survey also spoke about the impact of the 2022 COLA increase, that of €9.90, where 60% of respondents felt a high, or a very significant impact on their business.

56% of respondents have had to face a wage inflation which is greater than the inflation registered in the country.

Respondents were asked if productivity over the past two years has increased in line with wage increases, and 50% of businesses said ‘No’, and that they were paying higher salaries, whereas productivity has not increased.

24% said that productivity has increased, albeit to a smaller proportion than the increase in average wages. 19% said that productivity was in line with average wages, while 7% said that productivity was higher than the increase in wages.

The survey also showed that 75% of respondents claim that the increase in their entities’ wage bills is not being matched with productivity gains, greatly undermining the competitiveness position of their companies which, when taken collectively, will invariably impact national competitiveness.

Despite these challenges, the survey showed that 38% of surveyed companies intend to increase their workforce over the next five years. 73% of these companies aim to do so by importing labour.

17.34% of surveyed companies said that they could absorb an increase in labour cost without affecting competitiveness, with Farrugia pointing out that these are mostly export companies, who are competing internally with branches across countries in the same organisation.

To try and attract human resources, employers generally seek to offer both increased remuneration packages and enhanced flexible work arrangements. A greater push towards the provision of training opportunities has also been registered.

When asked how companies are addressing wage inflation in the short term, most said that they will have to increase the price of services and products, which Farrugia said was worrying when facing the threat of wage price spiral.

“If we have an accentuated wage price spiral, we risk losing competitiveness as a country,” Farrugia said.

The survey showed that other measures of addressing wage inflation were cost cutting across other elements related to cost of sales, investing in increased productivity, consolidating business lines or divesting, or not recruiting further.

The survey also looked at the impact of the projected 2023 COLA increase, which is expected to be €13 per week, a new record.

73% of respondents feel that this will lead to a high, to a very significant impact on their businesses.

Farrugia said that the MEA had proposed a revision to the COLA mechanism, to a stabilisation mechanism, which would entail a minimum and maximum COLA increases, calculated depending on inflation. He said that this, unfortunately, was interpreted as a COLA decrease, when it is not the case.

On addressing wage inflation in the long term, in the face of the 2023 COLA increase, respondents again said that they will have to increase prices of their services and products, which Farrugia deemed as another indication of wage price spiral.

Some mentioned closing down, or moving away from Malta, which Farrugia pointed out that this should be taken into account, to avoid losing local companies.

When asked if the companies will retain their own workers despite all that was mentioned, 43.55% said that they would remain constant in retaining their workforce. 37.90% said that they will need more people, and 18.55% said that they would reduce their workforce.

On turnover of labour over the past three years, around 52% of respondents stated that turnover is higher than normally experienced in previous years, due to increasing foreign workers who change work more often affecting aspects of work such as training.

The survey also showed an increase in the cost of recruitment, in terms of money, time, and lost productivity.

The survey looked into why there is a higher labour turnover, with 66% saying that the main reason being was better renumeration package offers.

35% said more flexible working conditions in 2023, quite a rise from the 21% recorded in 2019.

26% said that their workforce found employment within the public sector, which Farrugia said that government should pay attention to this, so that there is no drain of workers from other sectors.

Farrugia also said that it is becoming more difficult to find people who are skilled.

64% of surveyed companies also said that they felt wage inflation in all sectors across the board, an increase from the 45% registered in 2019.

Asked how companies are dealing with labour market shortages, the survey showed that 73% address this issue by employing foreign workers, up from the 58% recorded in 2019.

The survey conclusions saw that employers are still seeking to recruit further. Given the shortage of local human resources, companies will continue to resort to foreign labour resources.

“This shall continue to give rise to demographic challenges as addressed by the MEA. Urgent action needs to be taken on the type of population Malta will be facing over a medium to long-term timeframe,” Farrugia said.

To partly mitigate this, the MEA is suggesting shifting focus on maintaining an ageing workforce for longer. The MEA specified that this does not mean increasing retirement age, but rather provide fiscal incentives for pensioners to remain active on a voluntary basis, as well as reducing, or removing tax on pensions.

The MEA is also suggesting further investment in skills and education to give more knowledge to the labour force, and increase added value.

“Problems caused by skills shortages, wage inflation and a weak infrastructure undermine the country’s competitiveness,” Farrugia said, mentioning the recent power outages as weak infrastructure, making it difficult for companies to compete and increase employees’ wages.

The MEA said that excessive labour turnover remains a critical issue for employers, impacting the focus on training, investment in innovation and technology and increased cost of sales.

Farrugia said that the country needs a holistic national vision to re-engineer the economy, as companies are currently emphasizing on bringing in more foreign workers, which are often unskilled.

The Association reiterated its calls for long-term economic growth strategies which are based on efficiencies and higher output per person, rather than on a simple extension of the workforce.

He said that the country did not have any plan to this issue, and that government needs to direct employers to a suitable alternative.

Farrugia said that there should not be any wasting of human resources, as well as the need for added participation from the retirement sector.

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