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19 maltatoday | SUNDAY • 6 SEPTEMBER 2026 OPINION Fabri Growth, wages and the competitiveness question Economist decline occurred within sectors themselves, including some of the service industries that be- came increasingly important to Malta's economic model. The question therefore cannot sim- ply be whether wages are rising today. It must be whether Malta is constructing an economy in which wages can continue rising tomorrow without eroding com- petitiveness. This is where the discussion becomes more complicated, be- cause higher wages are both eco- nomically desirable and economi- cally demanding. We should want wages to rise. A development model that produces impressive GDP figures without eventually translating those gains into bet- ter incomes and living standards would have limited social legit- imacy. But wages cannot sus- tainably be separated from pro- ductivity. If compensation rises because workers are producing more value per hour, higher wag- es strengthen rather than weak- en the economy. Businesses can pay more because every worker generates more value. If labour costs rise persistently faster than productivity, however, unit la- bour costs increase and compet- itiveness eventually comes under pressure. The same wage increase can therefore represent economic progress or an emerging competi- tiveness problem depending upon what is happening underneath it. This is perhaps the next dimen- sion that Malta's economic debate needs to confront. Malta should not aspire to compete with low- er-cost jurisdictions by suppress- ing wages. The objective must in- stead be to become a high-wage, high-productivity economy. Ger- many, Denmark, the Netherlands and other successful European economies do not compete inter- nationally because their workers are inexpensive. They compete because high labour costs are supported by skills, technology, capital intensity, organisational sophistication and productivity. The relevant economic question is therefore not whether Maltese wages are becoming too high. It is whether the productive capac- ity of the economy is rising suf- ficiently quickly to support sub- stantially higher wages. That changes the way we should interpret the current data. Strong- er compensation of employees is welcome, but we should not auto- matically interpret wage growth itself as evidence that Malta's de- velopment model has successfully shifted towards productivity. In a very tight labour market, wages can rise because firms are com- peting for scarce workers. Mi- gration can expand labour supply and moderate those pressures, but it can also allow some busi- nesses to continue labour-inten- sive models for longer than would otherwise have been possible. Neither mechanism necessarily tells us much about underlying productivity. What matters over the longer term is whether busi- nesses are investing, reorganising, automating and moving workers towards activities where every hour of labour produces greater economic value. This is where the Central Bank's longer-term labour-share anal- ysis becomes particularly useful. A falling labour share is not in- herently evidence of economic failure, something the Bank itself stresses. Technological change can raise productivity sufficiently that workers enjoy substantially higher real incomes even while labour receives a smaller propor- tion of a much larger economic pie. The more revealing question is what happens to the growing capital share. If higher profits are reinvested into technology, machinery, research, intellectu- al property, skills and businesses capable of scaling internationally, they can create the productivity that supports the next round of wage increases. Capital and la- bour then become complements rather than competitors. The concern arises if that trans- mission mechanism is weak. Mal- ta has powerful incentives direct- ing capital towards scarce assets, particularly property. Land is fi- nite, population and tourism have expanded and property-backed investment is familiar to both investors and the financial sys- tem. At the same time, relatively abundant labour has historically made expanding headcount a ra- tional alternative to undertaking the harder work of redesigning production. Neither decision is irrational at firm or investor lev- el. The problem emerges at the aggregate level if capital dispro- portionately chases asset appreci- ation while businesses dispropor- tionately expand through labour accumulation. GDP can continue growing impressively while pro- ductivity struggles to become the principal engine of higher wages. This is why labour competitive- ness should not become another argument for cheap labour. It should become an argument for investment. If wages are going to rise, as they should, firms must be given both the incentive and the capability to increase out- put per worker. Technology and artificial intelligence are part of that transition, but so are better management practices, access to risk capital, infrastructure, com- petition and organisational inno- vation. Our financial system also matters enormously. An econo- my seeking higher wages cannot simultaneously maintain an in- vestment architecture that makes financing another property de- velopment considerably easier than financing productivity-en- hancing investment in a growing firm. Capital allocation ultimately shapes productivity, and produc- tivity determines how far wages can rise without damaging com- petitiveness. Education becomes equally fundamental. The Central Bank analysis notes that higher-skilled workers tend to command higher labour income shares and argues that investment in skills can si- multaneously raise productivity and broaden the distribution of its benefits. This is the virtuous circle Malta needs to create. Bet- ter skills allow workers to operate more sophisticated technologies and perform higher-value tasks. Firms employing more produc- tive workers can afford higher wages. Higher wages strengthen incentives to acquire skills, while greater productivity allows busi- nesses to remain competitive de- spite higher labour costs. The op- posite equilibrium is considerably less attractive. Weak productivity constrains wages, low wages en- courage labour-intensive business models, firms remain reluctant to invest in automation and the economy compensates by contin- ually adding workers. The latest GDP figures also pro- vide a reminder that we need to examine the anatomy of growth rather than celebrate the headline alone. A percentage point gen- erated through productivity-en- hancing investment is economi- cally different from one generated through additional consumption, just as wage growth generated by productivity is different from wage growth generated primarily by labour scarcity. This is ultimately why Malta's next economic transformation has to move beyond the language of simply attracting "higher-value sectors". We need higher-value work. A country can host sophisticated multinational companies while significant parts of its domestic economy remain relatively labour intensive. It can import advanced technology without developing technological capability. It can generate substantial corporate profits without those profits nec- essarily being reinvested into do- mestic productive capacity. And it can experience rapid nominal wage growth without achieving the productivity improvements required to sustain those wages over decades. Malta's first great economic transformation was fundamen- tally about scale. We expanded the labour force, diversified the economy, attracted investment, increased tourism and built new industries. It worked remarkably well. The next transformation has to be about depth—more output per worker, more innovation per euro invested, more productive use of capital, better skills, strong- er firms and ultimately higher real wages supported by higher productivity. That is also how the apparently competing objectives of wages and competitiveness can be reconciled. The latest figures therefore con- tain both encouragement and a warning. Labour income is cur- rently contributing strongly to Malta's nominal growth, and that should be welcomed. The longer- term challenge is making sure this becomes part of a sustainable transition towards higher-value work rather than simply the con- sequence of a tight labour market and continued expansion. Malta has already demonstrated that it can make its economy bigger. The harder test now is whether it can make each worker more pro- ductive, allow that productivity to translate into higher real wages and still compete successfully in- ternationally.