The effect of the rise in minimum wages on average wage growth

The Maltese Government has recently announced a rise in the national minimum wage for the period 2024-2026. Although the direct impact of such an increase is likely to be minimal as it affects only a small portion of employees, such an increase could have some spillover effects onto the rest of the wage distribution, especially for those whose wage is very close to the minimum wage. Hence, the increase in the national minimum wage could raise nominal wages by an amount higher than the direct impact.

The latest publication of the Central Bank of Malta Outlook for the Maltese Economy carries preliminary estimates of the effects of the rise in Malta’s minimum wage for 2024 on average wages.

A brief overview of Malta’s national minimum wage legislation

The first national minimum wage legislation in Malta was introduced on 2nd December 1974, through the Conditions of Employment Act when a minimum wage of €23.29 (then Lm10) per week was set. The minimum wage was increased in a discretionary manner until the cost-of-living adjustment (COLA) mechanism was introduced in 1990. Subsequently, Malta’s national minimum wage started to rise annually in line with the COLA, at the start of each calendar year.

However, in 2017 another social pact was agreed between social partners regarding the establishment of a low wage commission to advise Government every four years on possible additional increases to the minimum wage. The pact also stipulated increases in the minimum wage over and above COLA in 2018 and 2019, such that a person on the minimum wage would get an automatic increase after a full year on the minimum wage, and another increase after the second year.

In 2023 Malta’s weekly national minimum wage stood at €192.73 for those over 18 years. As announced in Budget 2024, the national minimum wage is set to rise during the period 2024-2026. In 2024, the national minimum wage will increase by €8 over and above the COLA. In the following two years, it is set to rise by €3 over and above the COLA. As the COLA for 2024 has been announced at €12.81, the weekly minimum wage for 2024 is set at €213.54.

How will the recent hike in national minimum wages impact average wages in 2024?

To quantify the impact of the increase in 2024 on the average wage growth, and in view of the uncertainty exhibited in the literature, a range of impacts from minimum wages to average wages has been estimated.

As a first step, Household Finance and Consumption Survey (HFCS) data from the 2020 wave was used to obtain a wage per hour distribution, which was then extrapolated until 2023 using the COLA increases between 2020 and 2023 for the lowest wage bracket and the average hourly wage growth for other wage earners.  For 2024, a baseline wage distribution was assumed, where the hourly wage increase is determined either by the COLA increment announced in the Budget 2024 or the hourly wage projection of the Central Bank of Malta.

To estimate the direct impact of the minimum wage increase, as a first scenario, it is assumed that only the minimum wage earners are affected by the proposed increase of €8 in their weekly wage over and above the COLA. Based on HFCS data this will affect only slightly less than three per cent of the employed population. The effect of such a measure on the average wage per hour is 0.04 percentage point and is thus minimal.

Two methods are then explored to estimate the spillover effect on other wage brackets apart from the direct effect. The first method sets the elasticity of the hourly wage increase for different groups on the basis of the gap between their wage and the minimum wage. This approach suggests that the effect on average wage growth is estimated to be around 0.11 percentage point. In the other scenario, an individual’s wage growth is set according to one’s placement along the wage per hour distribution.  This method accounts for stronger spillover effects and suggests an impact of 0.69 percentage point above the baseline.

Based on the above assumptions, the impact of minimum wages on average wage growth in 2024 is thus being estimated to fall within the range of 0.04 to 0.69 percentage point.

Such estimates are preliminary and may be reviewed as new information becomes available.