Employer organisations have warned that changes to Malta's COLA mechanism aimed at better reflecting rising living costs could place further pressure on businesses, with export-oriented companies in particular at risk of being squeezed by higher labour costs.

While supporting greater predictability in the system, the Malta Employers' Association and Malta Chamber stressed that sustained wage increases must be matched by productivity gains if Malta is to protect its international competitiveness.

Employer organisations have spoken on the impact revising COLA to more closely reflect current living costs could have on businesses, particularly at a time when many are already facing rising operational and labour expenses.

MEA director general Kevin J. Borg said any reform should seek to improve fairness and predictability for workers and employers alike, while also making the system more effective and affordable.

He stressed that the cost of COLA ultimately falls on businesses.

"It is important to note that COLA is paid by employers, not by the government, as is sometimes mistakenly believed, and that it generates an increase in salaries which is often not matched by gains in productivity," Borg said.

He warned that particularly large COLA awards could be "devastating" for certain large employers serving export markets and operating on tight margins and high volumes.

Such difficulties could arise when businesses are required to absorb substantial wage increases during periods in which productivity has either failed to grow or increased only marginally.

The MEA has also consistently argued that COLA should not be taxable.

Borg said this was because COLA represented "a compensation payment to neutralise inflation rather than income earned from employment or business activity".

The Chamber of Commerce similarly warned of the consequences for Malta's international competitiveness if changes to the COLA basket resulted in higher or more frequent payments.

It singled out export-oriented sectors such as manufacturing, maritime and technology, which operate in international markets where businesses have less control over the prices they can charge.

"They cannot pass domestically inflated wage costs on to overseas customers. A sudden surge in mandatory labour overheads risks pricing Maltese goods and services out of the market," the Chamber said.

It said sectors heavily reliant on entry-level labour, including cleaning, security, retail and hospitality, would likewise face more frequent cost increases.

There could also be implications for employees whose employers currently offer wage increases based on individual performance, it said.

"When a larger share of a firm's annual payroll budget is consumed by statutory, non-performance-based COLA increases, employers have significantly less financial headroom to award merit-based raises, performance bonuses or career development opportunities for high-performing employees."

Asked what changes it would support if the COLA mechanism were to be reformed, the MEA proposed a different approach intended to make annual increases more stable and predictable.

Borg said the association had previously suggested introducing minimum and maximum annual COLA increases.

One possible model, he said, would establish a range of between €2 and €6 per week, meaning the annual COLA could neither fall below nor rise above those thresholds in any particular year.

"Every five years, the total COLA that should have been paid would be compared with the total actually paid. If employees had received less than their full entitlement, the difference would be paid from the sixth year. If more had been paid, the adjustment would be recovered in the same way," Borg explained.

"This approach would smooth out sharp fluctuations while ensuring that employees ultimately receive the full COLA they are entitled to over time," he said.

The Chamber, meanwhile, argued that reforming COLA would not address what it described as Malta's more fundamental economic problem: weak productivity growth.

It pointed towards Eurostat data on real labour productivity per person, indexed to a baseline of 100 in 2010.

The Chamber noted that Ireland's figure rose to 225.8 by 2025, while Denmark's increased to 130. Malta, by comparison, peaked at 109.6 in 2019, fell to 100.1 in 2020, recovered to 104.9 in 2022 and stood at 103.6 in 2025.

"This shows that our labour productivity is stuck, and we cannot keep pushing wage increases if this is not met with increases in labour productivity, as not doing so erodes our competitiveness," it said.

"Real, sustainable purchasing power improvements come from higher labour productivity - not statutory indexing."

The Chamber said the government should further expand direct grants and funding incentives for companies investing in digital transformation, automation and artificial intelligence, while matching these measures with programmes to upskill workers.

"When workers produce higher-value output, employers can naturally afford higher salaries," it said.

"This is why improving Malta's productivity should be Malta's top priority based on a holistic approach, as it would serve to help both employers and workers alike."

Tony Zahra, Malta Hotels and Restaurants Association president, placed emphasis on retaining dialogue between employers and unions before changing a system which the MHRA believes has served Malta well for decades.

"As MHRA, we value the very cordial discussions we have with our other social partners, particularly the unions, and we augur that this very positive disposition can carry us forward to ensure the continued success of the COLA system, which has served the country so well over the past 30 years or so," he said.

The first part of the story which related to the General Workers' Union suggestion to give COLA increases twice a year was carried yesterday