The effect of raising the minimum wage is one of the most studied topics in economics. The opponents of raising the minimum wage say it could have potential adverse effects on employment and lead to inflation. Its supporters say it reduces workers’ inequality and could even help raise productivity.

After years of empirical research, international studies seem to point reasonably uniformly to the slight negative effect of higher minimum wages on employment and unemployment. So why should we care about the impact of raising the minimum wage?

Just last week, Prime Minister Robert Abela said Malta’s minimum wage must be increased. The Chamber of Commerce argues that increasing the minimum wage risks fuelling higher inflation.

The Malta Employers’ Association director Joseph Farrugia argues that ultimately, an increase in wages must be matched by an increase in productivity.

While ideally, wage increases should be matched by improved productivity, many low-paid, low-skilled workers are engaged in activities with little potential for productivity improvement

This year, the statutory Cost of Living Allowance will be high due to the persistently high inflation that impacted workers’ take-home pay last year. However, according to Finance Minister Clyde Caruana, only 2,372 workers are paid the minimum wage. So, a minimum wage increase should not significantly affect employers.

The realities that low-paid workers face today are that the effects of inflation are pushing them to the unenviable category of the working poor. This category of workers with precarious work conditions have had their bargaining power reduced in recent years.

The government’s liberal labour market policies have resulted in tens of thousands of third-country, low-paid, low-skilled workers flooding the labour market. Despite acknowledging that the dependence on low-paid imported labour is not sustainable, policymakers have not done much to define an alternative, more sustainable strategy.

Employers have for too long become dependent on the almost unlimited availability of low-cost foreign labour. One effect of this dependence is that some economic activities are not sustainable unless taxpayers’ money is pumped into their operations through subsidies. Ultimately, investment in people is one critical step to reform the current economic model.

While economic theory supports the view that, ideally, wage increases should be matched by improved productivity, many low-paid, low-skilled workers are engaged in activities with little potential for productivity improvement. Some will understandably argue that the compensation for such workers must not depend solely on productivity arguments but on society’s moral obligations towards vulnerable workers.

In light of the socio-economic realities, policymakers must find ways of achieving the goal of improving workers’ wellbeing. Forcing low-paid workers to join a union is not a solution.

One potential approach is to couple the minimum wage increase with additional mechanisms designed to ensure consistent schedules and adequate hours for part-time and gig workers. Changes are needed in labour market regulations to ensure employers provide workers with greater stability and predictability in their work schedules. Such measures will help improve the wellbeing and productivity of workers.

When wage increases are discussed among social partners, the elephant in the room is often the absence of a comprehensive action plan on how to shift from a low-cost labour model to create higher value-added employment. The longer the delays to define and implement this plan, the more painful the transition will be.