COLA, competitiveness and inflation: the economists’ verdict
Ever since GRTU Director-General Vince Farrugia told sister paper Illum two weeks ago that the Cost of Living Adjustment (COLA) would exceed €7 million a week at the current inflation rate of 4.7 per cent, a hornet’s nest has erupted among social partners. CHARLOT ZAHRA spoke to economist and Labour MEP Edward Scicluna, economic analyst John Cassar White, veteran economist Karm Farrugia and banking expert and University lecturer John A. Consiglio about the origins of COLA and the effects of a €7 increase on the economy
John Cassar White: “Competitiveness is not just about wage increases”
What is the COLA mechanism and how is the cost of living adjustment calculated? The Cost of Living Allowance (COLA) is granted by employers to compensate workers for increases in the cost of living experienced in the year previous to the application of the allowance.
It is also granted by the government to pensioners for the same reason.
What would be the consequences on the Maltese economy if the government had to grant a COLA increase of €7 a week? Will all the economic sectors be able to absorb the increase? Any increase in wages will have an impact on our competitiveness. But competitiveness is not just about wage increases.
It is about public and private productive investment, it is about the quality of management, it is about research, development and innovation, it is about training and the country’s educational system.
Last year the hourly rate of wages in Malta increased at a lower rate than in the rest of the euro zone countries.
Wage indexation should only be eliminated as a result of a tripartite agreement between the state, the unions and the employers where everyone commits himself to certain changes.
The government for instance should do more to manage inflation which is persistently higher than in other euro zone countries. It is only then that unions can be expected to moderate their wage increase demands.
Employers should also invest more in technology and the training of their workers to improve productivity.
Which are those economic sectors that will be able to absorb the blow and why? Tourism and manufacturing as well as local retail and service business are perhaps being harder hit by the recession.
The financial services sector and the online gaming industries are probably performing better. However, increases in one sector often create pressures on other sectors irrespective on how they are performing.
It is therefore important that government does not cave in to wage increase demands from public sector employees at least until the economy starts to recover.
What would be the consequences on those sectors that will not be able to absorb the blow? Would any jobs be lost as a result of the negative impact? If yes, can you quantify how much? Any company that accepts to grant wage increases that it cannot afford will untimely face bankruptcy.
But, as I said earlier, success also depends on capital investment, innovation, the quality of management and the competence of works that can be enhanced through training.
Labour costs on their own are rarely the only cause of business failure.
What effective measures should the government take to combat inflation effectively? In your view, do you think that the government is fighting inflation in an effective way?
The government can start with not fuelling local inflation by increasing the costs of the services that it provides.
Of course, I believe that consumers should pay at least the cost of energy services that the government provides, but these costs should not be loaded with management inefficiencies of the service providers and should also reflect price of the basic commodities from which our fuel products are made.
More needs to be done to ensure that this is in fact being done.
The government should also ensure that regulators are defending the rights of the consumers against the might of those businesses that enjoy a dominant position in the market or that can easily organise a cartel.
The newly-set consumer protection agency should identify why our inflation is higher than that in other euro zone countries and insist on corrections being made to stop these upside pressures on out cost of living.
Karm Farrugia: “With the current inflation rate, COLA is already above €6”
What is the COLA mechanism and how is the cost of living adjustment calculated? COLA was agreed by consensus between the social partners almost two decades ago as an insurance against any diminution in the Maltese worker’s standard of living.
It reflects the rise in the cost of living index on a standard wage equivalent roughly to that of an industrial semi-skilled worker.
The adjustment is given in advance as from the following 1 January each year but is calculated on the index as it stands on 30 September of the current year (that is, the year previous to its implementation), enabling the Finance Minister to announce it in his Budget speech.
Collective agreements between unions and employers negotiate wage rates independently of COLA since this is considered as statutory. Hence only wage increases over and above COLA are reckoned to be an improvement in real wages, that is, standard of living.
In view of the current inflation rate, do you agree with those like GRTU Director-General Vince Farrugia who are forecasting a COLA increase of €7 a week? If not, what is a more realistic forecast for the COLA mechanism given the latest inflation figures for Malta?
With the current inflation rate, even if based on the minimum wage alone, COLA is already above € 6 per week.
What will be the additional impact on the inflation figure for Malta after the hike in fuel prices by Enemalta and the issuing of the full-blown electricity this? Could you kindly quantify this? Inasmuch as inflation is cost-pushed, obviously COLA will itself spur further inflation – if the market in a recessionary mode, it can afford to increase prices. I doubt this is likely to happen, though.
What would be the forecast weekly COLA figure if these latest fuel hikes and the full-blown electricity bills are factored in? The recent fuel and electricity hikes will naturally enhance the adjustment factor by the time the line is drawn as at 30 September 2009.
It may well drive it to the touted €7, maybe even slightly higher. It all depends on other prices as well, and there is still 11 weeks to go.
What would be the consequences on the Maltese economy if the government had to grant a COLA increase of €7 a week? Will all the economic sectors be able to absorb the increase or not? Better to turn the issue on its head – what would be the consequences if the government does not go along with the COLA?
Possibly it would be jeopardising any attempt at a much-desired social contract by trampling on the only partial one ever agreed to in Malta.
Which are those economic sectors that will be able to absorb the blow and why? Those sectors operating mainly in the local market are likely to be able to pass on the increased cost to their buyers. The export-oriented ones, hotels included, will be hard hit.
What would be the consequences on those sectors that will not be able to absorb the blow? Would any jobs be lost as a result of the negative impact? If yes, could you quantify how much? Exactly as has happened with the increases in the prices of utilities – except that employment redundancies are possibly easier to implement than economising on consumption of electricity, water, fuel, and other things.
Quantifying is impossible; particularly since there might well be redundancies blaming wage increases instead of market contractions.
What effective measures should the government take to combat inflation effectively? In your view, do you think that the government fighting inflation in an effective way? Why?
The government owes it to itself and to the people to carry out an in-depth investigation as to how it came about that prices in certain sectors were increased to an extent that – given no increases elsewhere in the economy and particularly on imports – they caused an overall inflation more than double that of the EU in general.
There will surface a number of “gremlins” who must be operating in a non-competitive environment for essential commodities and, consequently, insensitive to the prevailing recession.
John A. Consiglio: “There is a moral duty for COLA irrespective of productivity issues”
The COLA mechanism, along with so many other elements, enters fully into that “realm of ideological battle” which is currently waging in both the European Union (EU) and Malta between “society” and “business”, between “social Europe” and “capitalist Europe”.
It is, as the name implies, a mechanism which aims at ensuring that workers do not fall back in their efforts to keep up with those inflationary pressures which, wherever they happen in any economy, have as their main manifestation the falling of purchasing power, the loss in money’s value, resulting in workers’ wages from precisely such inflation.
If there were to be no inflation – and even that is viewed as not such a good thing by most mainstream economists – there would theoretically not be the need for any COLA adjustments.
Looked at in this manner, the theme of “productivity” should simply not come into any argument about COLA at all.
Morally the question is simple: is ours a society where we agree that what workers get in their pay packets should never show any drop?
If the answer – in a morally Christian society – to such a question is “Yes”, then talk about linking COLA to productivity shouldn’t even ever be heard!
This is not to say that increases in productivity should not always be encouraged, but that is to be seen as an aim towards improving workers purchasing powers, not linking in any conditional manner that at bad times means less for workers and their families.
After all it is also true that many workers are hardly ever in a position to know whether – with inflation – employers’ profits take comparable nosedives!
This ‘linking COLA with productivity’ balderdash reminds me of that circus we had some years ago about the then proposed Social Pact.
It didn’t get off the ground simply because the Trade Unions realised that the employers’ side refused to be categorical and binding about what they were prepared to put into the pact tying them solidly up.
It would be suicidal of any self-respecting Trade Union to succumb to such COLA-productivity carrot where employers do not also accept that, for example, proposed Wages Policies are not in fact replaced by Prices and Incomes Policies.
In Malta the annual COLA is made on the basis of the figures which the NSO regularly produces with regards to the increases or otherwise of all the various components in the Cost of Living Index, applying the applicable weightings.
I do not have available all full data which would confirm or refute the GRTU Director-General’s calculations towards a COLA of €7 a week.
But if then employers are seeing as “too big” a potential €7 a week COLA increase – that is Lm3 a week in old terms – then we might do well to remember that there were times in the past when COLA adjustments of even more were given in past budgets.
Fuel hikes, and increased electricity bills, and prospective increases in rents following the coming into force of the now approved new Rent Law – these and others surely do feed into higher inflation – but then so do importers, and retailers, and lawyers, and doctors, and other professionals all increasing their operative costs and charges to make up for any drops in end-of-year net-after-tax profit figures.
In the rough-and-tumble of any normal economy’s operation this process would mean that some survive and others don’t.
Unionised workers should normally be best able to resist, but it would also be foolhardy not to expect losses of jobs in those sectors where entrepreneurs – seeing that they will not accept drops in their profits – decide to shift their investment elsewhere.
In any economy a high level of inflation is a cancer. It is even more dangerous in an open economy like ours.
Beyond seeing those obvious truisms, key decisions of both conscience and policy should then be of a type that does not kid itself with blind belief in such purely theoretical concepts as “the free market”, “the hidden hand” and “supply and demand”, among other things.
Interventionism in economic sectors which inherently “have it good”, through, for instance, fiscal tools, is also the hallmark of a caring society.
Edward Scicluna: ‘The consequences of COLA on the economy are the same as those incurred today with the current nonsensical inflation rate’
What is the COLA mechanism and how is the cost of living adjustment calculated? Malta has for long had the practice whereby a minimum increase in salary would be announced by the government during the budget for those income earners who were on a minimum wage or who were not unionised.
For those who were unionised, the increase was taken to be a partial increase with the rest being negotiated between the employers and the Unions.
The quantum was decided by the government according to what it thought the economy warranted at the time. There was no automatic mechanism.
In the early 1990s, the MCESD members agreed to a package, referred to as an incomes policy, whereby it was agreed that the COLA increase becomes automatically linked to the Retail Price Index and applied to a social wage. This wage was initially chosen as somewhat above the minimum wage.
The Minister driving these difficult negotiations was John Dalli and I was the advisor on the employers’ side. I undertook a study which showed that any increases not related to productivity increases would be inflationary and self defeating.
The unions accepted it. The agreed package also postponed any wage increases during a recession.
The package had a three-year duration, but after it elapsed there was an agreement that the COLA mechanism would continue to apply. The other clauses to the package including the recession clause were left out under the new workings.
In view of the current inflation rate, do you agree with those like GRTU Director-General Vince Farrugia who are forecasting a COLA increase of €7 a week? If not, what is a more realistic forecast for the COLA mechanism given the latest inflation figures for Malta? The system now is very simple to apply. The COLA would ignore any price increases but relates itself religiously to the inflation rate which is then applied to the previous year’s social wage.
If you multiply say 4 per cent to this wage and divide by 52 then it would not be surprising that the rumoured €7 would be derived. However I am not in a position to confirm these workings.
What will be the additional impact on the inflation figure for Malta after the hike in fuel prices by Enemalta and the issuing of the full-blown electricity bills? Could you kindly quantify this? The direct and indirect impact of these utility charges for an average income of a family with two children is reflected in the Retail Price Index. I believe it is very close to 4 per cent. In many other countries the inflation rate is close to zero.
What would be the consequences on the Maltese economy if the government had to grant a COLA increase of €7 a week? Will all the economic sectors be able to absorb the increase? The consequences on the economy are the same as those incurred today with the current nonsensical inflation rate. COLA would prolong them further.
Those who are not able to absorb the wage increases would do the same as those firms which were not able to absorb the utility rate increases. Shut down or shed more workers.
That is why policy makers cannot take decisions lightly. Go back to mid-October of last year and see what I mean.
Worse than the exorbitant increases themselves was the cavalier attitude taken by key Ministers with the social partners whose experience led them to warn of the impending grave consequences.
Now we need to go back to the drawing board.
The sectors which are the worse hit are those which cannot shift the costs increase on other businesses or consumers. During a recession one could say that this includes most sectors.