Increasing participation in the labour market has long been recognised as a necessary condition for achieving economic growth, lifting people out of poverty and giving dignity to jobless people.

As long ago as 2002, the European Council and the European Commission had acknowledged that increasing the labour force participation rate and promoting active ageing in the context of the demographic change were key to progress. But it was not until 2014 that Malta took the first significant steps.

Since its independence, Malta had relied on a passive social welfare system, while developing a robust safety net. But, in 2014, the government committed to a paradigm shift and announced a number of initiatives aimed at assisting individuals find gainful employment, retain employment, enhance productivity and/or earnings, or improve the general functioning of the labour market.

Increasing participation in the labour market depends on enhancing opportunities for employment by fostering labour demand as well as supply. Well-functioning labour markets are an essential requirement in achieving this goal. This involves removing labour market barriers to participation and giving able-bodied persons a genuine opportunity to enter or re-enter the world of work. Favourable macro-economic conditions and efficient product and services market are also crucial for increasing employment and labour force participation.

The Maltese government’s Active Labour Market Policy (ALMP) has been a game-changer and received plaudits in the European Union. Its success has been instrumental in reducing unemployment levels to historic lows, increasing labour force participation rates, especially those of women, to historic highs and boosting family incomes to assure a higher standard of living. The main planks of the policy are the In-Work Benefit scheme and the Tapering of Benefits scheme, both of which have now undergone successive improvements.

In a 2023 Working Paper under the title ‘Impact of Malta’s Tapering of Benefits Scheme on Employment’, Kurt Sant, a senior economist at the Central Bank of Malta, had assessed the impact of Malta’s Tapering of Benefits (TOB) scheme on employment. This study was reviewed in the Times of Malta on December 5, 2023.

Based on an empirical framework characterised by survival analysis and Cox proportional hazard models, Sant concluded that the TOB scheme essentially doubled the probability of finding employment after a benefit spell for an eligible individual. Furthermore, the positive job-finding effects from the TOB were mostly enjoyed by younger age cohorts, while no markedly different impact between males and females was found.

Gozo residents experienced the largest improvement in terms of job-finding.

Now, Sant has expanded the original study by also analysing the fiscal implications of the scheme, focusing on the period 2014-2019. He quite rightly points out that ALMPs have the potential to be extremely costly, especially if not designed and implemented correctly.

Overall, the scheme added around 5,600 persons in employment- Frans Camilleri

What makes any TOB scheme costly is by far the so-called deadweight loss inherent in the scheme’s design. This loss arises when any individuals who would have moved into employment, even in absence of the TOB scheme, still enjoy the monetary gains from the scheme.

Using the probability results obtained in the 2023 paper, the TOB scheme gives rise to €19.4m in deadweight losses in the period between 2014 and 2019, that is, in the period preceding the outbreak of COVID-19. The loss peaks at €4.4m in 2017. The remaining outlays reflect the cost of the benefit working as intended. The bar labelled ‘efficient TOB outlays’ represents those tapered benefits transferred to individuals who would not have moved into employment in absence of the TOB scheme.

At the same time, the government made savings on expenditure on other social benefits. TOB beneficiaries would have continued to rely on unemployment benefits had the scheme not been in place. In this scenario, the benefits are inclusive of the cost-of-living adjustment (COLA) increments that would have been disbursed to recipients.

It is estimated that the TOB scheme enabled the government to save approximately €46.1m (around 0.3 per cent of GDP) that would have otherwise been disbursed as benefits. The government also earned additional tax revenue from the entry of TOB beneficiaries into the labour market. Between 2014 and 2019, the government is estimated to have earned at least €15.0m (around 0.1 per cent of GDP) in additional revenue from social contributions.

When comparing the complete TOB cost (not solely the deadweight loss) with the cost savings and additional tax revenue, the scheme appeared to exhibit a negligible negative fiscal impact in the first year of operation. However, over the next five years, the scheme made a positive contribution to the budget balance. The cumulative estimated impact amounts to around €7m by 2019. Overall, the TOB scheme added around 5,600 persons in employment  and is estimated to have raised the country’s labour supply by 1.3 per cent. The cumulative impact on the potential level of economic activity amounts to around 0.9 per cent.

The estimates only take into account the direct, first-round fiscal impact of having more people in employment. The full fiscal impact of this scheme is gauged in a counterfactual scenario in which the TOB scheme was not implemented and the above-mentioned 5,600 persons remained among the ranks of long-term unemployed. In turn, this lowered the potential output of the economy. If one were to exclude the positive impact of this policy on potential output, on average, the structural fiscal balance would have worsened by around 0.3 per cent of GDP each year between 2014 and 2019.

Sant rightly concludes that the TOB scheme has been an effective instrument to address the poverty trap and that the scheme’s positive fiscal impact extends well beyond the immediate savings, suggesting that it holds considerable promise for fiscal sustainability over time.

Frans Camilleri is an economist and opinion writer.