Resisting downward wage flexibility

Countries increas­ingly face a com­mon set of problems in the labour mar­kets and seek institutional arran­gements that best address these problems. One of these arrangements is wage setting, an issue that has once more come to the fore following the ongoing bickering between the Nationalist and Labour parties over the minimum wage.

Generally, governments are concerned about the potential macroeconomic consequences of wage setting, which may cause a wage increase spiral that jeopardises the competitiveness of the economy. In spite of these concerns, governments, through the enforcement of certain pay levels and/or supplementation of pay for public funds, intervene in wage setting to ensure that workers are able to meet their subsistence needs.

One of these interventions has been the setting up of a minimum wage which established a wage floor above which every worker aspires to rise.

However, subsistence needs are strongly related to the purchasing power of the pay packet which is often taken as the indicator of the well-being of the citizens. There might be a number of workers who may feel that the purchasing power of their wages has diminished.

This is not simply due to the high rate of inflation which has characterised the Maltese economy but also due to a downward push in wages in certain sectors of the labour market.

The higher demand for skills and automated intermediate skilled jobs has created a congestion at the lower end of the labour market which has pushed down wages in those low-skilled jobs that cannot be automated.

In other words the shift to a service economy and post industrialism has brought about a segmentation in the labour market with high-paid lucrative jobs at one end while conversely at the other end one finds low-paid jobs where workers have to adjust to a downward wage spiral.

The policy of outsourcing of public utilities, which has become part of the privatisation policy, targeted at services that include low-paid jobs such as cleaners, caretakers, care workers and guard service providers, has exacerbated the plight of these workers.

Outsourcing/subcontracting is often associated with precarious jobs. Indeed, the defining feature of this post industrial society is the emergence of a more market-based system of employment relations characterised by outsourcing which has led to a growth of contingent labour.

This type of labour is associated with jobs in which an individual does not have an explicit or implicit contract for a long-term employment or one in which the minimum hours of work may vary in a non-systematic way.

A report published by the European Foundation for the Improvement of Working and Living Conditions, based on the findings of a survey conducted in the EU member and candidate states, reveals that 27 per cent of Maltese workers have no employment contract. This can serve as an indication of the prevalence of contingent labour in Malta. Only in Cyprus (28 per cent) and Greece (28 per cent) does one find a higher percentage of this type of contingent work.

Trade unions can resist this downward wage flexibility as they have amply shown in the negotiation with firms in the manufacturing sector hit by the recession through a meaningful dialogue with management and government. Organised workers may need less State intervention to maintain the purchasing power of their pay packet as they are in a better position, at least in the short term, to resist the downward wage pressure that is often found in non-union firms.

Thus unionisation can act as a very effective tool of equity in the labour market.

If the wage-setting role of collective bargaining were to become more encompassing, the self administration of the labour market may give rise to a better redistribution of wealth. It is to be noted that the minimum wage has been indexed to inflation rather than growth. This means that those workers who have had to content themselves with the minimum wage have not felt the trickle down effect of the increase in the Gross Domestic Product generated by the high value economic activities. Workers on minimum wage may not be in poverty because they may reside in multi-earner households

What the foregoing implies is that wage share can be more sensitive to collective bargaining than to minimum wage development. The ideal scenario would therefore be an all-unionised workforce with a government overseeing the macro economic consequences of collective bargaining in order to restrain the spiral trend of negotiated wage through the implementation of an income policy.

In such a scenario, the union negotiator would internalise the external (third party) effects of negotiated wage pressure by trying to mitigate the impact of the increase in the prices of goods produced and services provided by the company resulting from the wage increases negotiated by the union.

Of course, this is a utopian dream and it may sound as mere glib talk. There is no country which has managed to achieve this ideal scenario and, probably, there will never be one. Still this utopian map can be useful as a tool to gauge our bearings and see where we are heading.