It appears that one reason why labour costs and the cost of living adjustment mechanism from time to time return under the spotlight is because of this strange reluctance of employers to rock the government in the face of spiralling government-induced costs.

There is no doubt that there have been successive steep increases in administered prices, consistently the highest among EU countries, at about 14 per cent annually between 2005 and 2009 (barring for 2007 – the pre-election year). This is one reason that is constraining employers to increasingly turn to labour costs as a source of cost containment.

What is really worrying about local wages is that the government is increasingly accommodating demands made by unions representing workers in the public sector. It is understandable that the present government is often willing to accommodate such demands given the political bias of most civil servants and those employed in public authorities, recruited over the past 20 years.

Between 2000 and 2009, the hourly wage rate for the overall economy including the public sector grew at a faster rate than that excluding the public sector. This clearly indicates that public sector wages since 2000 have grown at a faster pace than in the private sector. Moreover, the accompanying data shows that Malta is among the top four EU countries in this regard, with the financially-stricken Greece topping the list. This suggests that prudence in public sector wages is a virtue, especially since these are rarely accompanied by increased productivity or efficiency.

In this regard, the latest public finance statistics for Malta show that the public sector wage bill in 2009 was just over 26 per cent higher than that incurred in 2004, and at a time when we are told that employment in the public sector has been diminishing!

Another factor is the steep decline in investment. Also a reason for eroding competitiveness, investment in Malta fell from 23 per cent of GDP in 2000, to just 14 per cent by 2009, which is the lowest among all EU countries. At the same time, on average, investment in the EU, despite the severe recession, declined from 20.6 per cent in 2000 to just 19.2 per cent of GDP in 2009. Needless to mention we did not need to bail out any of our banks and in the government’s own words Malta was spared the worst of the recession. These are indeed worrying trends which suggest that the growth potential of the Maltese economy is being increasingly impaired.

The government itself has also resorted to cutting down on investment spending in its attempt to limit the deterioration in public finances. In 2009, investment spending by government fell by eight per cent, and was almost 30 per cent lower than in 2004, despite the fact that in the Budget for 2009 the Minister of Finance had then hailed his fiscal strategy for planning a 26-per-cent increase in public investment!

While the struggle between employers and trade unions on the COLA mechanism and on wage negotiations will undoubtedly continue and probably intensify, it would nevertheless be a serious mistake to focus solely on the wage as a source of enhancing competitiveness. Choosing a competitiveness strategy based on cheap labour is a non-starter for a country and its citizens with ambitions to converge their living standards to those of developed economies.

Employers and trade unions need to focus more on pushing government to improve the effectiveness of its expenditure on education as a means to enrich the skills of its labour force, to instil good governance in the public sector; to boost investment and to cut down inefficiencies in the public provision of goods and services.

DR GAVIN GULIA LL.D., M.P.

(Dr Gulia is the Opposition’s Main Spokesman on the Economy and the Self-Employed)