COLA mechanism ‘contributing to wage stability’ - study

In spite of employers’ continuous lobbying to abolish it, the Cost of Living  Adjustment (COLA) mechanism may have been one of the factors that made wages in the Maltese private sector, stable.

This is one of the conclusions of a report on wages submitted by industrial relations expert Saviour Rizzo to the European Industrial Relations Observatory.

The report shows that over the last four years, the mean hourly labour cost in Malta went up by 9.3% to €12.30. But this rate remains far below the mean hourly rate of €23 in the EU states, and €28 per hour in the eurozone.

According to Rizzo this means that the mandatory annual wage increase based on the COLA mechanism, about which the European Commission had expressed a measure of alarm, has not caused “a surge in wages in Malta compared to the other European countries.”

Rizzo notes that the lack of collective agreements that are binding on whole industry sectors, as happens in other European countries, means that in spite of the relatively high percentage of unionised workers in Malta, a substantial number of workers do not benefit from wage increases apart from the annual COLA.

“Thus the point made by the Maltese government that COLA may be conducive to the stability of wage settlements may have a high level of validity,” Rizzo concludes.

Another major factor for the stability of wages in the private sector may have been the policy of wage moderation tacitly adopted by the trade unions in their collective bargaining.

“Following the threats to redundancies during the financial crisis of 2008 and the austerity measures that they were forced to accept, the trade unions were gripped by the fear that burdening the companies with higher labour costs may lead to redundancies or closures,” the report says.

It also shows that public sector wage growth in 2009 and 2010 was higher than in the private sector. However, wage growth in the public sector in 2011and 2012 slowed down to such an extent that the difference between the two sectors became minimal.

But wage growth in the public sector overtook that in the private sector again in 2013 due to a collective agreement signed in October 2012 covering a period of six years, giving civil service employees a 2.5% annual salary increase.

According to Rizzo the Maltese government played a “balancing act” by retaining COLA in order to maintain industrial peace, adjusting the pay of civil service employees while keeping the status quo of the highly decentralised system of collective bargaining which has been conducive to moderate wage increases in the private sector.

In June 2011 the EU Commission made a recommendation to the Maltese government to change the COLA mechanism.

The then Minister of Finance, Tonio Fenech expressed his disagreement with doing away with COLA, arguing that this had contributed substantially to industrial stability. The Commission agreed to change the text of its recommendation calling on Malta to ‘review’ rather than ‘change’ its wage indexation system.