Issue link: https://maltatoday.uberflip.com/i/1505128
8 INTERVIEW Raphael Vassallo rvassallo@mediatoday.com.mt Malta needs a clear economic The MEA's latest survey warns of a 'wage-price spiral': whereby inflation leads to higher wages; which fuels demand for more goods; which leads to further wage hikes, etc. Meanwhile, some foreign industries operat- ing in Malta – 'i-Gaming' being a classic example – are able to offer disproportionately high wages, compared to Maltese employers. Given that these companies also benefit from a much lower corporate tax-rate, than the 35% imposed on local businesses: how much of an impact does Malta's tax regime itself have, on this 'wage-price spiral' phenomenon? First of all, there are many fac- tors contributing to the current situation. It's not just about the tax regime. Bear in mind that different sec- tors of the economy have a dif- ferent 'value-added'; and there- fore, some sectors which we have managed to attract to Mal- ta, can offer much better condi- tions than others. This creates an element of competition in the labour market: we see many cas- es where public sector employ- ees – even teachers, for example - leave their employment, to go and work within i-Gaming. And it's the same for many other are- as in the private sector, too. Now: there is a positive element to this sort of labour mobility; in the sense that employees try to seek the best opportunities for themselves... and rightly so. For this reason, I don't necessarily see labour mobility as a 'nega- tive', in itself. What I do see as a negative, however, is when you have wage pressure, which is not commen- surate with productivity. Let's say, for example, that I run a manufacturing company. If my business suffers an increase in costs... what what can the com- pany do? It can either transfer that cost onto the client, in terms of higher prices – and by 'clients', bear in mind that we're not talk- ing only about 'consumers'. Cli- ents could be other businesses; which also means that you could have inflation, running across the entire supply chain... Another thing the company can do, is absorb the cost itself... which could be conducive to lower productivity. Now: not all companies can just decide to 'up and raise their prices', from one day to the next. First of all, there is competition. Secondly, there is also 'elasticity of demand'. It's not always the case that, when you increase your prices, sales will simply remain as they are. You could be operating in a sector where - if you put up your prices, even marginally - you might lose a more-than-proportionate per- centage of your sales. Now: we have a system in this country, whereby there is an au- tomatic wage-inflation indexa- tion, through the cost-of-living adjustment (COLA). The COLA mechanism automatically grants a wage increase, which is de- pendent on the rate of inflation. Naturally, this has often been criticized in the past: by un- ions, when COLA is low; and by employers, when COLA is high. However, the mechanism itself is objective. I, personally, have never criticized the CO- LA mechanism. One can always criticize COLA, as a 'concept'... but not the mechanism, which is linked to the retail price index. On the subject of 'COLA criti- cism', though: last September, the MEA called for COLA to be 'capped'. Also, when this year's COLA was fixed at €9, the GWU issued a statement calling on the MEA not to object: on the basis that employers had al- ways benefitted from very low COLA increases, in the past... [Shrugs] No one has 'benefit- ted', really. Remember that if inflation is 0.5%, COLA will be very low. If inflation is 9%, CO- LA will be very high. That is the situation this year. And we also know that, in 2024, the COLA adjustment will be somewhere in the region of €13-14 a week (give or take one euro): which is very bad news for quite a few employ- ers, right now. This is why, last year, the MEA suggested that there should be a stabilization element to the COLA mechanism. Unfortu- nately, we were misinterpreted as having said that we wanted to 'reduce COLA'. But that's not the case at all. What was stated was that there should be a mech- anism which subsidizes COLA, between a minimum and the maximum amount. So if COLA falls below €3, for example, the amount giv- en would still be €3, regardless: because that would be the mini- mum. If, on the other hand, CO- LA exceeds €8... then €8 would be the ceiling. And every five years, a balance would accrue: either in favour of the employer, or the employee. That way, we would avoid any sudden spikes: whereby COLA is only 50c one year; but then shoots up to €13, the next. That is very destabilizing for busi- nesses: because even if they plan their costs three years down the line, it is not easy; especially, for the labour-intensive industries. But let me repeat: the COLA mechanism itself is objective, and fair. I have never criticized that mechanism; I have nev- er said that 'it is not measuring inflation properly'. On the con- trary: it is accurately measuring inflation, as it is. All the same, however: a COLA of €13, next year, spells out very bad news for many companies. And many of them - especially those catering for the domestic market - will seek to transfer this increase to their clients: which could be other businesses, as I said; or it could be the consumer. And that is where the wage- price spiral sets in: when you have an increase in wages, which - when not matched with a cor- responding increase in produc- tivity - will result in a second round of inflation; and this time, not 'imported' inflation. This is the danger we warned about. Because when we have inflation, due to the increased price of imported goods and ma- terials, then... well, it's not ideal, naturally; but at least, we're at the same level as all other countries. If the cost of, let's say, 'grain' or 'cereals' has gone up in Italy, due to the Ukraine-Russia war... it will have gone up for everyone. But when wages surpass pro- ductivity, they will then start to rise - not because of imported inflation; but due to domestical- ly-generated inflation; and also, other labour market pressures. Because ultimately, it is not only inflation that is pushing wages up. Malta Employers Association president JOE FARRUGIA argues that – to avoid the danger of a 'wage-price spiral' - Malta needs to radically rethink its entire economic model maltatoday | SUNDAY • 6 AUGUST 2023