Developed countries aim to establish a high-productivity, high-income workforce. Reliance on low-skilled foreign workers undermines the achievement of this ambition and imposes high macroeconomic costs on the economy.
The National Statistics Office has confirmed that in the first nine months of 2022, the Maltese economy created 15,447 new full-time jobs, practically all in the private sector. Some could quickly conclude that this is evidence of the economy’s strength. A more critical analysis will reveal how labour market developments are distorting the actual state of health of the economy.
An economy that is input based and dependent on cost suppression as a source of competitive strength has structural weaknesses that threaten its sustainability.
The vision of Malta becoming an economy with the know-how and competitiveness to produce high-quality goods and services that command a market premium can only be achieved if it adopts policies that promote the quality of its labour force, technical skills, and product offerings.
Currently, Malta’s economic progress is built mainly on a broad reliance in the services sector on low-cost production models that depend on low-skilled imported labour while keeping a lid on wages to maintain business margins. The NSO said that “administrative and support services and accommodation and food services contributed the most to the increase in employment”.
Developed economies need transitory support to fill the vacancies businesses need to fill to grow. However, the ease and availability of low-skilled foreign workers at a cheap cost create deep distortions that disincentives firms to transform and upgrade their business models.
While grants and fiscal incentives for automation and technology adoption help, they are insufficient to push businesses to move up the value chain.
Reliance on low-wage, low-cost production methods is an untenable long-term strategy. The unsustainability risks become even more dangerous if the education system continues to underperform and Malta continues to occupy the lowest ranks in the educational achievement tables of EU member states.
Finance Minister Clyde Caruana, the mastermind behind promoting more liberal labour market policies before joining the cabinet, now admits that the strains these policies have put on the social and physical infrastructure are not sustainable. He now must define what needs to be done to adopt new approaches to promote sustainable economic growth.
Reforms on foreign worker policies are necessary for long-term benefit, even if they result in short-term adjustments.
These reforms will invariably result in industry pushback and, eventually, the relocation of labour-intensive and low-value-added services to other sectors. For instance, we may have fewer catering and accommodation businesses, but a better premium value to tourists.
The government has still not adopted a clear stance on the role of foreign workers for the coming decade. Gradual implementation and clear communication of policies is a pre-requisite for seamless transformation to an economic model focused on adding value through higher labour productivity.
Another essential reform must be embedding fair treatment of foreign workers in all sectors. Workers of all nationalities are not commodities that can be hired and fired to ensure consistent returns for employers.
The population growth of the last decade, driven by the growth-at-all costs strategy of the administration, has created immense pressures on our health, education, social and physical infrastructure. It is time we aim for growth by improving labour productivity rather than increasing production by relying on more imported labour.