Of wages, productivity...and national debt

Only a day after the Central Bank governor warned that an upward pressure on unit labour costs was likely to lead to a loss in competitiveness, the EU statistical agency, Eurostat, released figures showing that Malta’s average hourly labour costs are less than half the eurozone standard. Does this make a difference to his argument? It does not. The governor is of course not arguing in favour of the payment of low wages but only of backing wage increases with productivity gains as otherwise the country risks losing its competitive edge.

This is an argument that invariably crops up at budget time when the government decrees the annual wage allowance to make up for the rise in the cost of living (COLA). Both the government and the trade unions have been in favour of retaining the allowance, but employers argue that wage increases ought to be based on productivity. The new Central Bank governor, Prof. Josef Bonnici, is making the same plea made before him by his predecessor but it would seem that, on the basis of past experience, the appeal is unlikely to fall on fertile ground.

The argument usually advanced in favour of retaining COLA is that, by adopting this system, the country has managed to avoid industrial strife. That may very well have been the case, but should the adoption of a different system automatically lead to industrial strife? Is it not also in the interest of the workers to ensure that the firms that employ them do not find themselves edged of their market? Managements and trade unions are expected to be responsible enough to see that common sense prevails, as is usually does; it is in fact only in exceptional cases that serious disputes arise.

The Central Bank governor said that one proposal would be to apply the COLA only in cases where workers are not covered by a collective agreement.

The parties engaged in collective bargaining “would still be informed of the inflation rate, but it would be up to them to decide on wage awards that will take into consideration the need to ensure that compensation for inflation does not prejudice competitiveness and hence the viability of employment.”

One problem though is that the number of workers not covered by collective agreement is substantial. The issue deserves much greater national attention than it has received so far, and the sooner it is tackled, and settled, preferably within the Malta Council for Social and Economic Development, the better it would be for Malta’s prospects to remain competitive.

The Central Bank governor brought up the subject when he presented the bank’s annual report for last year. As is usual, he also spoke of economic projections and, also, about a number of other important points, such as the need for banks to continue to strengthen their capital buffers to mitigate risks associated with non-performing loans. With the growth in the number of new banks, all out to tap the excess cash available in circulation, the need to ensure that they keep to the rules of the game becomes even more important than ever.

The presentation of the Central Bank’s report also came against the background of the rising national debt, now standing at 72 per cent of gross domestic product. The fact that part of the rise is due to the island’s fiscal obligations to the EU’s bailout arrangements does not reduce the size of the challenge the island has to reduce the debt.