The Malta Fiscal Advisory Council (MFAC) recently published an analysis that provides insights into Malta’s position within Europe with regard to its labour costs and productivity. The analysis is aimed at identifying trends, challenges, and opportunities for Malta’s economy, particularly in terms of its ability to compete in the international market.

It sought to assess how labour costs and productivity have evolved over time, especially in the context of global events and economic crises, to provide insights into Malta’s economic performance and highlight areas for improvement.

Despite facing high exposure to foreign shocks, Malta’s economy has seen rapid growth and development, particularly by reallocating resources to higher-productivity sectors like services. Challenges arose in the early 2000s within the secondary sector, impacted by global events like the dot-com boom and 9/11, as well as Malta’s EU accession.

The 2008 and 2011 financial crises further affected labour productivity across Europe, prompting Malta to diversify towards high-value services and invest in human capital. While the COVID-19 pandemic caused a productivity slowdown, Malta’s economy rebounded, driven by sectors such as wholesale and retail trade, transportation, and accommodation. A key term emerging from this study is Relative Unit Labour Costs (RULCs). RULCs serve as a quantitative metric evaluating the expenditure allocated to labour in proportion to the resultant productivity in relation to other countries. In essence, RULCs provide a gauge to ascertain the efficiency and efficacy of labour expenditure, elucidating the degree of value derived per unit of labour input.

An RULC value above 1 signifies a scenario wherein labour costs surpass the value generated by labour input, thereby implying overcompensation. Conversely, an RULC value below 1 indicates a favourable cost-effectiveness ratio. From 2000 to 2022, Malta’s RULCs consistently exceeded 1 when compared to the Euro Area average.

This points to higher labour costs relative to productivity in Malta.

Although the gap has shrunk over time, Malta still faces challenges in its competitiveness.

Looking at different industries in Malta, some sectors stand out. Malta does really well in areas like entertainment, agriculture and fishing.

However, in manufacturing and trade, there are challenges that are mainly attributable to small size and lack of economies of scale.

For example, Malta’s construction industry does quite well when compared to five other European countries with similar level of development to Malta, except for Spain in some years. But our real estate sector has seen a drop in competitiveness. This is likely because more people are buying properties, which pushes up costs.

Productivity can improve through more investment in new technologies

When compared to Greece, Spain, Cyprus, Portugal, and Slovenia, Malta’s performance varies. Malta outperforms Portugal and Slovenia but lags behind Spain. Our relationship in terms of RULCs with Greece has improved over time, but with Cyprus, it has been inconsistent throughout the years.

Labour costs are not the sole determinant of competitiveness. Energy prices, regulations, taxes, and government policies also play significant roles. These factors can either give businesses a boost or hinder them. The European Commission’s 2023 report highlighted a need for improvement in Malta’s research and innovation.

Productivity can improve through a higher investment in new technologies. Incentives for research and development can lead to the adoption of new technologies, making businesses more efficient. Investing in education and training is essential for boosting productivity.  By developing skills and vocational training, we can equip our workforce for the modern economy and enhance Malta’s reputation as a hub for skilled workers.

Infrastructure plays a vital role in business support and investment attraction. Improving transportation networks and digital infrastructure can reduce costs for businesses and make Malta more appealing to investors.

SMEs are crucial to Malta’s economy. By offering targeted support, such as grants, loans, and business development programmes, we can help SMEs overcome challenges and thrive, leading to job creation and innovation. Sustainability is becoming increasingly important in today’s global market.

By adopting green initiatives and eco-friendly technologies, businesses can become more competitive and attract environmentally conscious investors.

Malta’s journey to enhance price competitiveness based on labour costs and productivity is complex but essential. By addressing challenges in labour costs, investing in education, infrastructure, supporting SMEs, promoting sustainability, and fostering innovation, Malta can strengthen its relative competitiveness.

Kurt Davison and Kylie Spiteri are a senior economist and an economist respectively within the Malta Fiscal Advisory Council (MFAC) specialising in macroeconomics.