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21765163_10154928721606464_3342234590885195523_nTwo recently published reports by two reputable international institutions seem to arriveat the same conclusion: Malta’s economy is growing by leaps and bounds, but significant challenges can already be spotted on the country’s medium-to-long term horizon. In this three-part series, we will look at three key structural weaknesses identified by these reports which we think require swift intervention by the authorities.

The magnitude of the implications of these weaknesses, should they remain unaddressed, warrants a departure from the myopic 5-year political cycle and necessitate immediate decisive action.

Take the labour market, for instance. Both the International Monetary Fund and the European Commission are worried about the growing cracks in Malta’s labour market. At the current rate of economic growth, the domestic population reaching working-age is not enough to satisfy demand which is partially being met by foreign labour. While this is a positive sign in and of itself, it bears a reflection on what could happen should our economic fortunes reverse and foreign workers relocate. If international experience is anything to go by, the economic, budgetary and social outcomes that would arise after similar episodes do not paint a wonderful picture.

The work activation policies introduced in recent years which have successfully encouraged more women in the child bearing/rearing ages to seek work seem to have hit a limit when it comes to their effectiveness among elder age cohorts. The latter is a point into which Brussels does not delve deep enough in its report but which deserves further investigation, not least because of the huge potential being lost due to the substantial number of inactive females in this age bracket.

Granted, convincing elder women to move to employment is not a straightforward task. Some may not have ever experienced paid work, while others are not interested at all having taken on new family duties. However, our reading of the situation suggests that for specific pockets of the elder female cohort, certain institutional settings could be hindering participation, especially among the low-skilled. This is the case in the housekeeping services and similar sectors, largely characterised by workers engaged on a self-employment basis. Because of how our national insurance system works, elder women who would like to work reduced hours to improve their work-family balance are finding that social contributions are too steep in relation to what they earn (which in any case is not much in these sectors) and are being driven out of, or discouraged from taking up, employment.

Human capital challenges are not only related to numbers, but also quality. Both Institutions underline that Malta’s tight labour market conditions are compounded by skills shortages pretty much across all economic sectors and occupations. Employers have been for quite some time voicing their frustration about the difficulty they face sourcing workers with the right skills, not least because of higher public-sector recruitment. Poaching in the private sector is also rife.

Should this situation persist for long enough or even worsen, wages are bound to rise and will lead to a loss in Malta’s external competitiveness, without a complimentary increase in productivity. Indeed, there are already indications that, for certain sectors at least, productivity is declining since output has plateaued, while employment increased or at best remained unchanged. This could suggest that enterprises are underinvesting in new, more efficient technology. One reason for this is that Malta is becoming a higher cost base, particularly for foreign-owned manufacturing operators. This is borne out by recent figures published by the statistics agency which show that the rate of increase in foreign investment slowed down in the first half of 2017. What’s more, almost all of the increase in inward direct investment went to the financial and insurance sector, further indicating the difficulties being faced by Malta’s manufacturing industry.

Perhaps more worrying, the labour market outlook is not expected to change without well-thought interventions. Both reports underscore Malta’s rather poor standing in terms of educational attainment. Notwithstanding some improvement, Malta continues to rank last in the European league in terms of early school leaving metrics. One in five Maltese aged between 18 and 24 years still drops out from school to pursue employment. It is clear that for a significant part of the young generation, earning an immediate but lower income remains more attractive than being equipped with skills that will improve their prospects for higher future incomes. High drop-out rates present a serious loss of human potential, with implications for students’ future well-being and for our country’s future economic growth.

Although data on the socio-economic status of early school leavers is not available, some inference could be drawn by looking at the results of a recent assessment of learning outcomes carried out by the OECD. For Malta, the results remain bleak, albeit with some progress. Overall, even if we spend more on education as a percentage of GDP than the EU average, our 15 year olds fare worse than their European peers in terms of basic skills attainment. This does not bode well especially when considering that by 2025 most job opportunities in Malta will require tertiary education or medium-level qualifications according to projections prepared by the EU’s skills agency.

The OECD survey also shows that socio-economic background strongly affects a pupil’s educational performance. Policies and action should be pursued with urgency to break the vicious circle between low-income and poor learning outcomes that may have a discouraging effect leading to school drop-outs which ultimately would keep another generation stuck in poverty.

This guest post is submitted by one of the experts at Diplomatique |Expert. 

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