Malta now has close to a full employment economy, one where the unemployment rate equals the non-accelerating inflation rate of unemployment (NAIRU), no cyclical unemployment exists, and GDP is at its potential.
Our unemployment rate in 2024 was 3%, NAIRU has been estimated by the central bank to be around 3.6%, the cyclical element of unemployment is relatively contained when one compares Malta’s performance with that experienced in a number of EU member states. Indeed, in some respects, one could say there is an element of overheating.
In December, Malta’s seasonally adjusted unemployment rate was the third lowest in the EU, compared to an average 5.9%. In the second quarter of 2024, Malta had the second highest employment rate of the bloc, at 78.4%, beaten only by the Netherlands at 82.4% and compared to the lowest rate (Italy) at 62.3%.
Real GDP growth in Malta in 2025 is projected by the European Commission to reach 4.3%, compared to 1.3% in the eurozone. Given the Commission’s traditional conservativeness, growth is likely to be higher than estimated.
Against this background, it is important to understand current labour supply dynamics, particularly given that the influx of third-country nationals to boost labour supply has become the subject of heated political controversy.
All too often, the discussion has descended into the realms of racism and bigotism, which have nothing to do with economic realities.
It is therefore very fortunate that last month we were regaled with a well-researched paper by Aaron Grech, the Central Bank of Malta’s chief economics officer. In it, Grech sought to quantify the impact of labour market activation policies, examine the narratives surrounding the increase in demand for foreign labour, and address the trade-off between labour shortages and the pressures of a growing population.
The CBM’s chief economist marshals an array of statistics to show how the labour market in the last decade has grown beyond all expectations, largely due to a sharp rise in the employment rate which underpinned the near-doubling of the economy in just a decade.
Labour activation policies accounted for two-thirds of the increase in labour supply.
On the other hand, he debunks misleading narratives regarding the claimed large-scale emigration of Maltese youths and an equally false claimed rise in the size of the public sector.
Grech shows conclusively that the cause of the rise in the demand for foreign labour was undoubtedly the very rapid pace of economic growth, combined with the contributing factors of the ageing of the Maltese labour force in several sectors and the changing preferences of Maltese youths reflecting their educational attainment.
In absolute terms the number of employed grew by more than in the preceding 50 years taken together, with an annual average growth rate more than six times the historical average.
There was a rise of over 30,000 in the number of Maltese workers, a third of which surprisingly occurred among those who had already reached the pension age.
It is remarkable that, while the working age population of Maltese citizens, defined as those aged 16 to the early pension age, fell by nearly 15,000 between 2013 and 2023, the actual number of Maltese in either full-time employment or working primarily as part-time rose from 171,036 to 201,008.
Then we had a significant increase in the labour participation rate of women, thanks to free childcare, an in-work benefit scheme, and a social benefits tapering scheme; these together increased labour supply by around 11,500 workers.
Grech usefully reminds us that, according to a EUROPOP-2010 projection, Eurostat had assumed that there would be strong outward migration of Maltese till 2015. Yet, he shows that rising demand for foreign workers did not lead to emigration of Maltese youths: in fact net migration of Maltese remained positive, with some 2,260 Maltese citizens returning to the islands in 2023, while just 1,767 emigrated.
The cause of the rise in the demand for foreign labour was undoubtedly the very rapid pace of economic growth- Frans Camilleri
In fact, net immigration of Maltese citizens was larger than the natural rise in the population.
Even before the pandemic, the number of emigrating Maltese youths had halved compared to 2012, and after 2020 the number halved again.
By 2023, there were 117,685 foreign persons of working age in Malta ‒ an increase of more than 100,000 compared to 2013. They accounted for around three-quarters of the rise in employment numbers since 2013.
Grech estimates that, had the public sector somehow limited the intake of Maltese nationals, the impact on foreign worker demand would have been negligible, maybe reducing it by a mere 2%.
In 2013, there were nearly 46,000 persons employed in the public sector, either on a full-time or part-time basis ‒ about a quarter of the total workforce of the Maltese economy. By 2023, the share had fallen to less than a fifth of the workforce, even though the number of employed had risen to just over 55,000.
Of the increase in public sector employment, more than 40% was in education and health, a natural consequence of the increased demand for services.
The rest of the public administration workforce grew by an annual average of less than 450 during this period. This was less than 5% of the annual average increase in the foreign workforce.
Demand for foreign labour reflected the very fast pace of economic growth, though characteristics of the Maltese workforce, such as the ageing profile in some sectoral workforces, also contributed. Young Maltese workers also shifted towards higher paying sectors that could better valorise their higher educational attainment.
By a deep dive in the labour market, Grech identified the policy reforms that sustained the labour market supply changes of the last decade. They include the positive impact of pension age policies, starting with the rise in the pension age but also with the introduction of a pension top-up for those who continue working past retirement age.
Interestingly he finds that, had these reforms not occurred, there would have been about 8,600 fewer Maltese in employment aged between 61 and 71. The impact of the pension age policy will still be felt in the future when younger women reach retirement age.
In his conclusion, Grech acknowledges that reliance on foreign workers has brought its own challenges.
Recently, the government started acting to limit inflows to bring them more in line with those at the start of the growth decade. The bank’s chief economist believes that it is important to develop a human capital investment strategy that goes beyond the current focus on academic education.
He also suggests that activating the potential pool of older workers, though it might prove difficult, could serve as a basis for the creation of a lifelong learning culture, and the beginning of a new phase of labour activation policies that would sustain the continued growth of the Maltese economy.
Frans CamilleriFrans Camilleri is an economist.