The Malta Independent
Rendering the economy more market driven by moving away from COLA wage increases and adopting only increases in minimum wage level to keep the protection for non-unionised employees who normally operate at or near minimum wage levels
No real restructuring exercise can be effective if it focuses solely on restraining government`s share of the economy by economising on expenditure and containing the impact of taxation.` Although government is a very important part of the economy and its actions or inactions have a direct bearing on economic performance, it does not constitute the whole economy.
It is out there in the real economy which produces the goods and services with which we interact with the outside world, given that our smallness renders us highly integrated with the global economy as we export most of what we produce and import most of what we consume, that we really create the wealth that can sustain true economic growth. And this can only come from investment which in turn will only come if we can offer a competitive and vibrant efficient economy.
So it is a virtuous or a vicious circle depending on what we make out of it. If we are competitive we pull in investment that produces growth and makes us even more competitive. If we lose our competitiveness we lose the growth momentum and fail to attract real investment without which we cannot regain competitiveness.
Clearly years of neglect to our international competitiveness has landed us on the vicious side of circle.` Unless we do something pretty extraordinary we cannot stem the momentum of the spiral. To do so we must challenge the things we take for granted, the things we have been accustomed to consider as a right as if someone owes us our living. We must re-evaluate whether systems introduced when we were a low-wage country are still effective in this day and age where we have to compete on value-added rather than cost structures.
One such system is the COLA where each year a general across the board wage increase is legislated by government to supposedly provide an adjustment for the cost of living increases. The general idea was laudable. At a time when union membership was largely restricted to the public sector, the State protected employees in the private sector through such COLA mechanism to preserve the real value of their wages.
In due time this system started to price out our competitiveness. So we have already had to make two major revisions to its applicability. In the first half of the eighties as the economy stalled we had a centrally enforced wage freeze on the whole economy. Rather than free the COLA to more market discipline we froze the whole economy to ensure that the COLA mechanism would not continue to erode our competitiveness.
After the wage freeze was lifted in 1987 we had to revisit the COLA again in 1990 through the Incomes Policy in an attempt to halt its eroding powers. Through this policy the applicability of COLA wage increases was linked to a minimum wage base so that on a percentage basis the overall wage increase legislated by COLA was well below the general inflation level.
We have survived with this system for 14 years so that whilst its eroding power was contained, over such a long term it has accumulated enough baggage to start impinging seriously again on our competitiveness. We have come to a ridiculous situation where people earning upwards of Lm10000 p.a. get a COLA enforced wage increase of 75c0 per week. We have come to a ridiculous situation where people doing a trivial unskilled job, command, through the accumulation of COLAs, twice the market rate for a similarly unskilled new entrant.
Blind believers in adherence to market mechanisms would argue for the total abolishment of COLA and minimum wage. I am not a blind believer in the market and whilst I believe that nothing should be done to compromise our international competitiveness, as no one owes us our living, we have to have a social protection where the least resourceful are kept above the poverty line.
In the context of a low inflation economy it is time to consider a further adjustment to the COLA so that the annual legislated increase is rendered applicable only to the minimum wage. This is necessary to protect non-unionised employees who normally operate at or near minimum wage levels from suffering a reduction in the real wage value which is just about necessary to keep their body and soul together.
For the rest, wage setting has to be market driven. Employers and unions are not to be usurped their negotiating position by the State through legislated increases which in no way reflects the reality within the micro-units.
Rendering the economy more market driven by moving away from COLA wage increases and adopting only increases in minimum wage level to keep the protection for non-unionised employees who normally operate at or near minimum wage levels
No real restructuring exercise can be effective if it focuses solely on restraining government`s share of the economy by economising on expenditure and containing the impact of taxation.` Although government is a very important part of the economy and its actions or inactions have a direct bearing on economic performance, it does not constitute the whole economy.
It is out there in the real economy which produces the goods and services with which we interact with the outside world, given that our smallness renders us highly integrated with the global economy as we export most of what we produce and import most of what we consume, that we really create the wealth that can sustain true economic growth. And this can only come from investment which in turn will only come if we can offer a competitive and vibrant efficient economy.
So it is a virtuous or a vicious circle depending on what we make out of it. If we are competitive we pull in investment that produces growth and makes us even more competitive. If we lose our competitiveness we lose the growth momentum and fail to attract real investment without which we cannot regain competitiveness.
Clearly years of neglect to our international competitiveness has landed us on the vicious side of circle.` Unless we do something pretty extraordinary we cannot stem the momentum of the spiral. To do so we must challenge the things we take for granted, the things we have been accustomed to consider as a right as if someone owes us our living. We must re-evaluate whether systems introduced when we were a low-wage country are still effective in this day and age where we have to compete on value-added rather than cost structures.
One such system is the COLA where each year a general across the board wage increase is legislated by government to supposedly provide an adjustment for the cost of living increases. The general idea was laudable. At a time when union membership was largely restricted to the public sector, the State protected employees in the private sector through such COLA mechanism to preserve the real value of their wages.
In due time this system started to price out our competitiveness. So we have already had to make two major revisions to its applicability. In the first half of the eighties as the economy stalled we had a centrally enforced wage freeze on the whole economy. Rather than free the COLA to more market discipline we froze the whole economy to ensure that the COLA mechanism would not continue to erode our competitiveness.
After the wage freeze was lifted in 1987 we had to revisit the COLA again in 1990 through the Incomes Policy in an attempt to halt its eroding powers. Through this policy the applicability of COLA wage increases was linked to a minimum wage base so that on a percentage basis the overall wage increase legislated by COLA was well below the general inflation level.
We have survived with this system for 14 years so that whilst its eroding power was contained, over such a long term it has accumulated enough baggage to start impinging seriously again on our competitiveness. We have come to a ridiculous situation where people earning upwards of Lm10000 p.a. get a COLA enforced wage increase of 75c0 per week. We have come to a ridiculous situation where people doing a trivial unskilled job, command, through the accumulation of COLAs, twice the market rate for a similarly unskilled new entrant.
Blind believers in adherence to market mechanisms would argue for the total abolishment of COLA and minimum wage. I am not a blind believer in the market and whilst I believe that nothing should be done to compromise our international competitiveness, as no one owes us our living, we have to have a social protection where the least resourceful are kept above the poverty line.
In the context of a low inflation economy it is time to consider a further adjustment to the COLA so that the annual legislated increase is rendered applicable only to the minimum wage. This is necessary to protect non-unionised employees who normally operate at or near minimum wage levels from suffering a reduction in the real wage value which is just about necessary to keep their body and soul together.
For the rest, wage setting has to be market driven. Employers and unions are not to be usurped their negotiating position by the State through legislated increases which in no way reflects the reality within the micro-units.
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