The interaction between labour costs, productivity and competitiveness is rather obscure for people who are not well versed in economic theory. It is understandable that people ask why employers fret so much when labour costs in Malta rise faster than in the rest of the eurozone. What is so wrong if our workers’ wages are catching up with those of other countries?

According to the latest Central Bank Quarterly Review, in the final quarter of 2012 labour costs in Malta rose by 3.5 per cent and then rose again by 3.1 per cent in the first quarter of 2013. During the first quarter of 2013, labour costs in the eurozone increased by only 1.7 per cent. Employers argue that, as long as labour costs outpace productivity gains, the competitiveness of Maltese businesses will suffer.

The Malta Employers Association goes further and warns that the “automatic wage increase mechanism” is a weakness that is damaging Malta’s competitiveness. They argue that even the IMF shares their concern. According to the MEA, it is a question of time before this mechanism causes unemployment to pick up “due to a fall in competitiveness”.

These arguments on the risks associated with rising labour costs are valid to a certain extent. For instance, in the financial services and the gaming sectors labour costs are not a major determinant of competitiveness. So keeping labour costs low in these sectors could cause more, rather than less, problems with competitiveness.

In the manufacturing sector, and to a lesser extent tourism, labour costs are important determinants of the competitiveness of the operators in these sectors. But even here one needs to emphasise that competitiveness is not solely dependent on labour costs.

One important factor that can improve labour productivity is investment in modern and efficient technology. So trade unions are right in arguing that employers should not just complain about rising labour costs without at the same time concentrate on the need of new productive investment.

In fact, the Malta Chamber of Commerce remarked that “indicators suggest that the loss of cost competitiveness was more due to weak productivity growth than to increasing labour costs”. There could be different reasons for this sluggish productivity growth. Undoubtedly, one could be related to outdated work practices or weak management of human resources. Another reason could be failure to modernise a business by investing in modern technology.

There are good reasons why business leaders as well as economic planners and trade unions need to be more granular in their analysis of why some of our industries are losing their competitiveness.

The first thing that may need to be done is to break up the labour costs, productivity and competitiveness statistics by the different economic sectors that contribute to our GDP. A comment about the negative effect of a statutory cost of living rise to workers in the financial services sector may not have the same relevance as it has on the wages of factory workers.

One critical success factor for our competitiveness often receives little attention from the media and economic analysts. It relates to the competence of our workers that in turn is the result of our training and educational systems. German workers receive much higher wages than most European workers but many would argue that they are the best trained and most competent workers.

Similarly, most modern economic activities are less labour intensive but need more capital investment.

We need to concentrate more on these factors in future.