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A recommendation made by the EU Commission to the Maltese government to change the wage indexation system was welcomed by employers’ associations and the Central Bank of Malta. However, it was strongly resisted by the Maltese trade unions. The government also resisted, fearing that a change or abolition of the system might jeopardize stable industrial relations, and managed to persuade the EU Commission to change its text. It has now asked Malta to review the mechanism.
Malta is one of the few EU Member States with a generalised wage indexation system. Every calendar year, wages are adjusted in accordance with the inflation rate as measured in percentage terms by the Retail Price Index (RPI).
The increase in wages, calculated on the minimum wage and referred to as the Cost of Living Allowance (COLA), is mandatory for all employers and given to all workers.
Noting that the Maltese economy is becoming less competitive, the European Commission, in its issue of recommendations to Member States in June 2011, advised the Maltese government to reform this automatic wage indexation mechanism to ensure that wage growth reflects developments in labour productivity and competitiveness.
The Governor of the Central Bank of Malta (CBM), Michael Bonello, has been calling for a similar reform of COLA, as he maintains that it has the potential to raise prices and thus exacerbates the situation of ailing industries in the manufacturing sector.
The Malta Employers’ Association (MEA) said the Commission’s recommendation should be seen as a reality check for the Maltese economy, as it highlights how this automatic wage increase is hampering the competiveness of the labour-intensive sectors of the economy.
The trade unions, however, have been resisting attempts to abolish the indexation system. They argue that COLA is a way to ensure that the purchasing power of workers’ pay is maintained, by basing the wage increase on the inflation rate.
Rather than abolishing it, the unions have suggested fine-tuning it by amending the mechanisms of how the RPI is measured. This would reflect the changing consumption patterns of the Maltese population and thus enable workers to cope better with the rising cost of living. Unions have also recommended that the increase should be worked out on the basis of the average wage rather than the minimum wage.
A report by a professor of economics at the University of Malta, Joseph Falzon, pointed out that the main cause of the spiralling rise in the unit labour cost has been the relatively high rate of inflation.
The Maltese government, now in its last two years of office (a general election is due in the first half of 2013), has also resisted this EU recommendation. It argues that COLA is conducive to harmonious industrial relations. Minister of Finance Tonio Fenech stated that the Maltese government has no intention of doing away with a system such as COLA, which is built on social dialogue and which has contributed substantially to industrial stability.
Following the meeting of EU finance ministers in Luxembourg on 20 June 2011, the EU Commission agreed to change the text of its recommendations to be more in line with the policy of the Maltese government. Its new recommendation stated that Malta should ‘review’ rather than ‘change’ its COLA mechanism.
Minister Fenech stated that it was agreed:
…that Malta will review its current mechanism, even through a study, and if this is found to be working well and responding to the market, as we think it is, there will be no need of changes to the present system.
Collective bargaining in Malta is conducted on a single-employer basis at company level. The lack of sectoral or intersectoral collective agreements that are binding on whole industry sectors means that, in spite of the relatively high trade union density in Malta, a substantial number of workers do not benefit from wage increases apart from the annual COLA. Thus for the sake of equity in the labour market, the abolition of COLA may entail the setting up of alternative mechanisms.
Saviour Rizzo, Centre for Labour Studies