Following an intensive campaign by a group of NGOs to increase the minimum wage the Prime Minster asked the social partners at the Malta Council for Economic and Social Development (MCESD) to discuss this issue with the aim of reaching a consensus about such an increase.

In their deliberations the social partners perused two reports drawn by two Maltese economists who were commissioned to give advice. It looks as if this increase in minimum wage is imminent as the Prime Minister announced that the social partners are very close to an agreement which is fully endorsed by government.

The minimum wage earners who would directly benefit from such an increase tend to be concentrated in particular sectors generally retail, hotels, restaurants, residential social care and cleaning. The beneficiaries can also be workers not covered by a collective agreement or employees in firms engaged in work which has been outsourced to the company in which they are employed.

The aim of the statutory minimum wage is to improve the situation of low-paid workers and reduce their risk of falling into destitution. The argument by the employers is that an increase in minimum wage can turn out to be counterproductive as it may threaten the economic viability of certain low jobs at the lower earning distribution, precisely that section of the working population that the minimum wage is intended to help. However the employers seem to be more concerned about the spillover or ripple effect on the whole wage structure which such a wage increase may cause.

The minimum wage can play a wage compression role by increasing the starting wage at the lower end of the labour market and helping the situation of the workers at the bottom of the wage distribution compared to workers further up the scale. This wage compression depends directly on the spillover effect of the minimum wage increase.

If the wage increase in the minimum wage induces the entire wage structure to go up by the same amount the spillover effect would be 100 per cent. In such a scenario the wage compression is nil while the impact on the minimum pay on wage inflation is maximised. At the other extreme, if only the wages of those on minimum wage is increased while the wages of the other workers remain unchanged, the spillover effect is zero while the wage compression effect is maximised.

The effect of the minimum wage increase on the wage structure thus depends on the elasticity of wages to minimum wage increase. This effect is generally higher for those categories of employees just above the minimum wage whereas the effect tends to be lower for upper wage categories.

Thus spillover effect can never be 100 per cent nor can the compression effect be zero. An estimation of the spillover and compression effect is important in assessing the impact of minimum wage increases. A wage policy aimed at a fairer distribution of the wealth being produced has to be bold in its designation but at the same time it has to keep a balance between economic and social considerations. Maybe this is what prompted the Prime Minister to urge the social partners to compromise on some of their demands.

Wage increase has to be progressive and moderate in order to attenuate any jitters it may cause to the labour market and the economy. To achieve this objective the two Maltese economists in the report they submitted to MCESD, proposed the setting up of a low wage advisory committee to monitor the situation. This is similar to the low pay commission which was set up in UK.

Made up of employee and employer representatives and persons with academic background this commission carries out extensive research and consultation and actively encourages the Office of National Statistics to establish better estimates of the incidence of low pay. The MCESD which at the moment is being actively involved in this issue can take the initiative to set up such a commission following consultations with the government.

The principle that should guide the operations of such a commission is that work which does not offer a route out of poverty becomes meaningless to the worker. Wages have to keep pace with productivity. It appears to me, of course I stand to be corrected, that the two economists who submitted their report to MCESD believe that a trickle-down effect caused by an increase in minimum wage may stimulate the economy.

The trickling down from higher productivity gains to labour can be defined as the main redistributive tool because it makes it possible for the gains of growth to be more broadly shared. According to Habermas, the German sociologist and philosopher, a democratic state deserving its name engages in a continuous trade-off between capitalist growth and the populace share.

Saviour Rizzo is a former director of the Centre for Labour Studies, University of Malta.