The introduction of a nationwide minimum wage of €8.50 per hour in Germany hit the world headlines lately. Although a minimum statutory wage that has been in force in Malta since 1974 provides a base for bargaining between the social partners, wage settlement is often determined by other factors. Indeed, there are different approaches on how wages are bargained and settled, how minimum wages are set, how wage increases are indexed to reflect price developments or how they are adjusted.
In line with the incomes policy agreed between the Maltese social partners in 1990, every calendar year, wages are adjusted in accordance with the inflation rate as measured by the retail price index. This wage increase, referred to as cost of living allowance (COLA), is given to all workers because it is mandatory. It is based on the 12-month average rate of inflation as standing at the end of September over the previous 12 months.
In money terms, the increase is based on the basic wage and is given at a flat rate. The highest weekly increase ever given was €5.82, in 2010, and the lowest was €1.16, in 2011. To the unionised workers, wage setting is not solely determined by COLA but also by the wage increase agreed in the collective bargaining process. Such increase, agreed between union and employer, is over and above COLA. Employers have often expressed disapproval to this system as they argue that the increases given through this mechanism, which tend to be above the productivity gains, could compromise the economic viability of individual companies and slow down economic growth.
Indeed, the Malta Employers Association and the Chamber of Commerce, Enterprise and Industry have been consistently claiming that a higher cost of labour, brought about by COLA and other rigidities in the labour market, may make firms operating in the Maltese labour market less competitive.
Conversely, the trade unions have been insisting that economic growth should not be pursued by a low wage policy, which is likely to cause a social deficit. They argue that if COLA were to be abolished they would demand higher wage increases in their collective bargaining.
Wage bargaining in Malta is highly decentralised in the sense that, normally, it takes place at company level. There is no sectoral, multi-employer and/or industry-wide agreement that would guarantee workers employed in a particular sector or industry uniformity of wages. The only sectoral agreement is the one covering the employees in the civil service, which is signed by a number of unions representing different categories of workers employed by the government.
To the non-unionised workers making up about half the Maltese workforce, whose wage structure is not governed by a collective agreement, the pay packet increase may be solely based on COLA, which is the only wage rise agreed at national level. The lack of sectoral or industry-wide agreements binding on all firms operating in that particular sector/industry means that a substantial number of workers do not benefit from any wage increase apart from COLA.
On the other hand, having the wage structure regulated by a collective agreement does not guarantee unionised workers a uniform wage structure. Once a trade union obtains benefits from an employer it tries to use that settlement as a base to obtain equal or better benefits elsewhere. But this is not always the case because the union, taking into account the financial situation of the firm and its economic viability, may opt for a different settlement.
The government has been performing a balancing act by retaining COLA to maintain industrial peace
The fact that employers and unions can agree to cut their cloth according to the coat rather than conform to a uniform system of pay is considered to be one of the main benefits of a decentralised collective bargaining system. The social partners seem to be satisfied with this system.
What this implies is that, in a highly decentralised wage bargaining system, as is the case in Malta, wage disparities would be much more in evidence because the pay packet is determined more by the bargaining power of specific groups of employees rather than by economic factors.
In this highly-decentralised wage bargaining system, COLA has become a mechanism to increase statutory minimum wage and, at the same time, provide an important reference point for the entire wage structure. The inflation-adjustment mechanism through COLA and the statutory minimum pay give a semblance of an egalitarian wage progression.
From the economic point of view, there seems to be a high level of validity in the argument of the employers about the rising cost of labour and its adverse effect on competiveness. On the converse side, it can, however, be claimed that in such a fragmented system of collective bargaining, COLA may have become one of the factors that made wage mechanism in the private sector stable.
In this scenario, the government, both now and in the past, has been performing a balancing act by retaining COLA to maintain industrial peace, showing flexibility and willingness to adjust the pay of civil service employees and, at the same time, keeping the status quo of a decentralised system of wage bargaining. By default rather than design, such system has been conducive to moderate wage increases.