The Malta Independent 1 February 2023, Wednesday
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PKF studies relationship between inflation and unemployment

George M Mangion Tuesday, 11 October 2022, 09:56 Last update: about 5 months ago

The Maltese labour market has undergone substantial transformation over the past 10 years, whereby strong economic growth has led to historic low unemployment levels.

On a national level, Malta's economy remains resilient together with our labour market. Unemployment remains at record lows and well below European averages. Challenges remain. Shortages of staff are still a daily issue for firms and matching the right talent for the jobs required is also a challenge. It goes without saying that the essential metric is the true rate of unemployment.

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This provides policymakers with important information about the labour market. Different metrics are used to measure such rate, hence different figures may be reported over the same period of time. Inflation has historically had an inverse relationship with unemployment. This means that when inflation rises, unemployment drops. Higher unemployment, on the other hand, equates to lower inflation.

When more people are working, they have the power to spend, which leads to an increase in demand. As the demand for products and services rises, leading businesses increase their output and are generally in need of more workers. In view of the upcoming Budget speech for 2023, whereby there are speculations that the COLA will be between €8 and €10, a PKF study analyses the potential economic implications of this exceptional COLA rate on the labour market.

The study also provides recommendations for policies that can mitigate the potential of a wage-price spiral, as a result of the COLA for 2023. The impact of the Covid year crisis on the labour market was countered by extra government borrowing to support measures totalling €1.6bn.

As at 2021, Eurostat figures show that the unemployment rate in Malta stood at 3.5% (compared to the EU's average of 6.4%), being the third lowest rate reported following Czechia (2.8%) and Poland (3.4%). Therefore, theory suggests that a trade-off between inflation and unemployment exists in practice. Inflation in Malta is less than the rate for Europe because government is heavily subsidizing energy and cost of imported grains.

Back to the jobless, the LFS indicates that as of the second quarter of 2022, 8,446 people were unemployed in Malta while the NSO declares that less than 1,000 are unemployed. Castille informs us that recently Malta Enterprise approved 33 new projects employing 800 workers. Notwithstanding this dichotomy, Malta is currently experiencing a serious shortage of employees. During 2021, a survey was administered by Jobsplus among a sample of employers to identify those occupations for which there was a shortage or a surplus, which skills were lacking and how employers in Malta tackled these issues.

Findings indicate that almost one third of employers experienced a shortage of employees and/or skills. The hardest vacancies to fill in 2020 were for delivery persons and heavy truck and lorry drivers.

Again, unfilled vacancies were registered within the Wholesale and Retail Trade and Repair of Motor Vehicles and Motorcycle sector. All professions (audit, legal, surveying, medical, and so on) are experiencing shortages and are looking to employ foreigners.

In the same year, Jobsplus prepared and launched the Employers' Satisfaction Survey to measure the level of employers' satisfaction with Jobsplus' services. Labour market policies, underpinned by the recently launched National Employment Policy (NEP) 2021-2030 (prepared by Mimcol), are set to prioritise upskilling and reskilling programmes focusing on improving educational achievement, raising student retention rates and increasing participation in lifelong and adult learning. It is too early to assess if the NEP targets are being met.

The positive decline in unemployment in Malta was predominantly brought about due to labour market policies (LMP) undertaken by government. The LMP, as introduced in Malta, took the form of two main types of policies - work-first oriented schemes and human-capital oriented schemes.

The former type of policies aim to incentivise the unemployed to re-enter the labour market and subsequently help prevent them from falling back into unemployment after a period of time. These include the free childcare scheme, the In-Work benefit scheme and the tapering of benefits scheme.

On the other hand, the human-capital oriented schemes are intended to make the unemployed more attractive to potential employers. These include the youth guarantee scheme, the training pays scheme and the work programme initiative.

Government's spending on LMPs increased from circa 5% in 2006 to 14% in 2016, mainly due to the introduction of a number of new policies in 2014. In line with economic theory, the spending on LMPs as a percentage of GDP has declined since 2016 to around 8% in 2019.

This is because as the level of unemployment declined, the need to spend more on labour market policies diminished as well. Let us try to fathom the disparity in unemployed figures as reported by LFS and NAO. The labour force survey (LFS) categorises the unemployed into the short-term unemployed and the long-term unemployed. The mystery of conflicting figures of unemployed persons can be partially solved when considering a large number of persons refuse to register with JobsPlus as they are active in the shadow economy. Shadow or informal economy are productive activities and legal but are deliberately hidden from authorities to avoid taxation or meet regulatory standards. In the case of Malta, the underground economy is estimated to be at 21% of its GDP in 2019 (targeted to reach 26% in 2022) making the sector a significant contributor to providing work opportunities.

Individuals, who have long been employed in this sector, may opt to not register with Jobsplus during their unemployment spells due to the fear of being heavily taxed or being subject to regulations that can affect their income.

In conclusion, one needs more empirical data to test the Philips Curve, which explains the relationship between unemployment and inflation. Reading the Vector Autoregression model, this was used to estimate the relationships between unemployment, inflation and wages in Sweden. Their findings indicate that between 2002 and 2017, the unemployment rate and wages do not adequately explain the trends in Swedish inflation.

Additionally, this research demonstrates that there are no significant changes in employment as a result of an increase in wages, which is consistent with other similar empirical findings. Readers are encouraged to download the full PKF study for more clarifications on this interesting topic.

 

George M. Mangion is a partner in PKF, an audit and business advisory firm

 

[email protected]

 


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