Malta’s workers getting smaller slice of the pie

The share of Malta’s national income going to workers has declined significantly over the past three decades, with Malta now ranking among the lowest in the euro area, according to a new report by the Central Bank of Malta.

The ‘labour share’ fell by 11.7 percentage points (p.p.) between 1995 and 2023, reflecting a long-term shift as Malta’s economy moved from being manufacturing-based to service-driven. The report suggests that while the decline was particularly pronounced between 2011 and 2015, it was partly reversed in 2020 during the pandemic. However, the downward trend continued over the next three years.

The report, published in the Central Bank’s quarterly review, concluded that although the decline is partly driven by increases in productivity and technological progress, which reflect “positive economic development,” the drop in labour share may also be “indicative of higher income inequality.”

What is Labour share?

The term ‘labour share’ refers to the proportion of a country’s economic output that is paid to workers in the form of wages, salaries, and social contributions. It is often expressed as a percentage of Gross Value Added (GVA), which measures the total value of goods and services produced in an economy.

A falling labour share means that wage growth is not keeping pace with overall productivity, resulting in a larger portion of national income being retained by businesses and investors, rather than being distributed as wages.

While the traditional method of calculating labour share considers only employees’ wages, the Central Bank’s analysis is also based on an adjusted measure that includes the estimated earnings of the self-employed. Both indicators show a clear downward trend over time.

A Long-term decline

The report revealed that Malta’s labour share has been on a downward trajectory since the late 1990s, with notable declines in the early 2000s, the years leading up to 2010, and again between 2011 and 2015. Although there was a brief recovery from 2018 to 2020, partly due to the government’s job-retention schemes introduced during the COVID-19 pandemic, the labour share has declined again in recent years as these temporary measures were phased out. Compared to other euro-area countries, Malta’s labour share has consistently been lower, and the gap has widened since 2010. While the euro area’s average labour share has hovered between 65% and 70%, Malta’s share has remained well below this range, making it one of the lowest in the bloc.

Explaining the decline

The decline in labour share does not necessarily mean that individual wages have fallen, but rather that a smaller portion of the economy’s total earnings is being allocated to workers. The report noted that this trend is partly due to changes in the structure of Malta’s economy. As the country has moved towards a more services-driven economy, sectors with traditionally lower labour shares, such as financial services and professional services, have expanded, while higher-labour-share industries like manufacturing have declined.

However, even within individual sectors, labour share has been falling, suggesting that workers are receiving a shrinking share of the profits generated in their industries. The report found that the largest declines in labour share have occurred in industry and certain services sectors, such as information and communication, financial services, and professional activities.

These are sectors that have become increasingly important to Malta’s economy in recent decades, further reinforcing the trend.

Implications

A declining labour share has broader economic consequences, particularly in terms of inequality and household purchasing power. When a smaller proportion of national income goes to workers, it can lead to weaker consumer spending, which in turn affects overall economic growth. The report highlighted that in many cases, workers tend to spend a larger share of their income compared to business owners and investors, meaning that a lower labour share could dampen domestic demand.

The Central Bank report noted that factors such as automation, globalisation, and changes in labour market policies are frequently cited as contributing to this trend globally. In Malta, further research is needed to determine the precise causes and potential measures to address the issue. However, since higher-skilled workers typically enjoy higher labour income shares than workers with relatively lower skills, “continuous investment in the skill levels of Malta’s workforce” could also be a crucial tool to broaden the sharing of productivity gains and enhance workers’ welfare.