The labour market needs to be energised

The social costs tied to employment impact both employers and employees.

The social costs tied to employment impact both employers and employees.

The dynamics of the Maltese labour market are often baffling. We have one of the lowest unemployment rates in the eurozone. Yet our employment rate is one of the lowest in the EU. An A level economics student knows that unless our employment rate goes up, there is little chance of our living standards as measured by GDP per capita reaching the levels of the better performing EU economies any time soon. So how do we energise our labour market to ensure that more workers join the official economy?

Granting concession to low-paid workers in a fiscally neutral way will be very challenging
- John Cassar White

We first need to acknowledge certain issues that characterise our economy. Malta’s black economy is one of the largest in the EU. Studies made by Friedrich Schneider, economics professor of Johannes Kepler University in Linz, show that Malta’s black economy amounts to about 26 per cent of GDP. Most of us know of a few people who are officially unemployed but are actually gainfully occupied in an unofficial way. We need to understand why some low paid workers prefer to work in the black economy, or rather why they are forced to do so.

One credible guess could be that these workers, often with low skills, really have no choice and as long as their take home at the end of a day’s work is the best they can secure, then it does not really matter to them whether they are working in the official or the black economy. One way to counter this worrying phenomenon is to decrease employment costs. The social costs tied to employment impact both employers and employees.

Many economists would argue that enforcing wages increases across the board by anything more than the cost of living allowances could result in employers holding back from employing more workers. In the present sluggish state of the economy, several small economic operators in Malta are only marginally viable from a financial perspective. If their operating costs were to increase in a stagnant market there would be a real risk that these operators will cease trading or else resort to utilising workers in the black economy.

When economic conditions improve, the government could, after proper consultation with social partners, improve the plight of low paid workers by signalling increases in wages for the lowest paid. The social agenda needs to be kept alive at all times so as to promote social justice which is one of the effective glues that keep our society united.

An administration can improve the living conditions of the lowest paid workers by fiscal management that avoids taxing employment: more favourable energy rates for the lowest paid workers, reduction in employment related taxes, like National Insurance contributions paid by the lowest paid workers.

The Monti government in Italy has, for example, just reduced the basic rate of income tax by one per cent for the lowest paid workers – a measure that will boost the take home pay of such workers without burdening employers.

The cost of every concession given by the government to low paid workers has to be measured and ways found to finance it. With the present fiscal pressures leaving little room for manoeuvre, granting concession to low-paid workers in a fiscally neutral way will be very challenging. By calibrating fiscal transfers equitably, one can justify the implementing of these socially necessary measures.

More needs to be done, for instance, to enforce fiscal discipline whereby all those who are obliged to pay tax in fact do so. In a pre-election period it may be too much to expect a sensible debate on how this can be done, even if many rightly contend that tax evasion or even avoidance is one of the reasons our public finances are still not as sound as they should be.

But if we do not tackle this moral issue and close an eye, if not two, when we get to know of cases of fiscal dishonesty, we will be committing and injustice to the weakest members of our society – especially low paid workers.

The role of the state in the modern economy has changed considerably from what it used to be in the 1960s, 1970s, and 1980s.

Today the role of government is to energise the labour market by keeping employment costs at low levels, using fiscal transfers to promote social justice, and to let the private sector operate in a way that creates decent job opportunities for all those who want to work.

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