A topical issue in the ongoing debate about the Maltese booming economy is how to ensure that the wealth being created filters to all sections of society. A policy of adjusting wages to the whims of the economy may not, however, be in line with the Stability and Growth Pact which binds all eurozone members.
Although the European Commission may have no legal competence in areas of the wage policy of EU member states, it has intervened in the national wage policy of Ireland, Portugal, Greece and Italy. Internal devaluation based on wage cuts was presented as one of major solutions needed to overcome the financial crisis.
As the crisis in these EU member states came to be interpreted largely as a crisis of competitiveness, wages were seen as a core adjustment variable for internal devaluation which is supposed to restore competitiveness by reducing labour cost.
There has been no such intervention by the EU in the Maltese economy. But in 2011, even though the Maltese economy was registering growth, the EU Commission had advised the Maltese government to change the automatic wage indexation system, known as Cost of Living Allowance (COLA), to ensure that the Maltese economy retained its competitive edge.
The previous government informed the Commission that it had no plans of changing a mechanism which has contributed substantially to harmony in the industrial relations scenario. Following this reaction by the Maltese government, the EU Commission urged the Maltese government to review rather than change this wage mechanism.
The present government has not shown any signs of changing or reviewing this wage increase mechanism. This recommendation by the EU Commission was however fully endorsed by the Malta Employers’ Association (MEA) as it believes COLA is one of the rigidities in the labour market that is hampering the competitiveness of the labour intensive sectors in the Maltese economy. In a competitive market, increases in wages based on inflation rather than productivity are perceived by employers to be artificial rises that can have a harmful effect on industry. The wildly diffused view held by employers is that wages are mainly an adjustment for competitiveness – a view highly reinforced by the EU Commission during the 2008 financial crisis.
There is a constant and widespread fear among employers that this policy of moderation may be easily derailed if the minimum wage is increased
To a certain extent wage policy has always been related to productivity trends because the difference in unit wage tends to have an impact on profit levels and medium-term prospects for development. The belief in this dictum has made wage moderation the most adjustable variable to productivity and consciously or unconsciously has been instrumental in instilling a higher consensual ethic among the social partners during the bargaining process.
However, in the new discourse about wage policy the call for moderation has become much more vocal. This is because there is a constant and widespread fear among employers, and maybe even policy makers, that this policy of moderation may be easily derailed if the minimum wage is increased.
The legal minimum wage is the government’s most direct lever for influencing wage levels, especially for workers in a weak bargaining position.
Local employers’ associations – always afraid that the government may eventually succumb to the pressure exerted by various social movements to increase the minimum wage – are continuously warning the government of the negative effect of such a wage increase.
The minimum wage – being considered as a tool to provide a floor and address the problems of inequality and in-work poverty – serves as a basic labour standard. In the eventuality of an increase in minimum wage, workers in the low wage sectors, where the pay packet is just above this minimum, would expect a pay rise to maintain their relative position. In other words, unionised workers would expect an adjustment to their pay packet to restore the relativity to the minimum standard set by law.
What this implies is that, once this standard is set higher by an increase in the minimum wage, unionised workers would probably expect, or rather demand, an increase in their wages so as to maintain the relativity of their pay packet. This chain reaction is likely to have a spiralling effect on wages – this is the main cause of concern among employers who are constantly urging the government to desist from increasing the minimum wage. The government is heeding such warnings but at the same time is aware that the minimum wage may be too low to lift families out of poverty. Indeed studies, such as the one conducted by Caritas in 2012, have shown that the minimum wage is below subsistence minimum standard.
One of the government’s policies to attenuate low wage earners is by raising the threshold of income tax payment to ensure that minimum wage earners are exempted from paying income tax. This balancing act appears to be justifiable but it does not tally with the common belief that wages and employment grow simultaneously in a virtuous circle linked to high investment and rising wages. Increasing productivity without increasing wages would lead to growth of income inequality or its solidification and therefore social or economic crisis.
However sound and logical the argument appears to be that wages should be tied with the rate of productivity, the rate of the change in prices is also a significant variable to wage policy. Awareness of this variable makes the task of wage policy much more complex.
Saviour Rizzo is a former director of the Centre for Labour Studies, University of Malta.