Determinants of Labour Productivity in Malta: Evidence from a Firm-Level Survey

Abstract

IntroductionThe Maltese economy has been one of the best performing members of the euro area after the global financial crisis. Growth has been job-rich with the increase in employment after the crisis being four times higher than that achieved in the decade before the crisis. The resilience of the Maltese economy is attributed to a more diversified economic base, which since around EU membership in 2004 has gradually shifted from traditional activities towards higher-value added ones, mostly in services.Labour productivity, however, has been sluggish after the crisis, underperforming most other European economies (Micallef, 2015). In addition, the absence of sectoral price deflators renders an in-depth analysis of sectoral productivity particularly challenging at a time when it is being increasingly recognised that economy-wide measures of productivity have to be complemented by sectoral and, if available, firm-level developments (Di Mauro and Ronchi, 2015).The changing structure of the Maltese economy further complicates the analysis of productivity. The main sectors generating growth since EU membership have similar value added multipliers compared to those in the previous decade but much higher employment multipliers. Grech (2015) argues that the expansion of these labour-intensive services industries has played a key role in the slowdown of Malta's apparent productivity in recent years and the associated rise in unit labour costs, despite moderate increases in wage growth. These trends complicate the assessment of competitiveness using aggregate measures of unit labour costs.This paper adds to the empirical literature on productivity in Malta by exploiting information from a unique firm-level survey carried out by the Central Bank of Malta in 2014 as part of the Wage Dynamics Network (WDN) project. Such a survey provides rich evidence, directly from firms, with a detailed breakdown by sector and size classes that are not available from existing statistics. Using this dataset, developments in labour productivity compared to costs are investigated within an empirical multivariate framework that controls for the firm's characteristics (such as size and sector of activity), production technology, the characteristics of the workforce, restructuring efforts, exposure to foreign markets, as well as the nature of shocks hitting the firm. To the best of my knowledge, this is the first study that looks at the determinants of labour productivity in Malta by using survey information to fill the gap imposed by severe data limitations, both at a micro and macro level.The main results are summarized as follows. Labour productivity is more likely to be lower in firms with a higher share of labour in total costs, thus confirming that the significant shift towards more labour-intensive services observed in recent years is likely to be an important driver behind the slowdown in productivity. Firms implementing changes to their production structure by out-sourcing part of their operations are more likely to experience an improvement in productivity. The characteristics of the workforce, such as a higher share of skilled workers and workforce stability, are positively related to productivity. On the contrary, credit constrained firms are less likely to experience an improvement in productivity. Adverse demand shocks are negatively related to labour productivity, possibly due to labour hoarding, although this result is not robust across the various model specifications.The rest of the paper is organised as follows. Section 2 provides a brief review of the literature on the main determinants of productivity. Section 3 gives an overview of the WDN survey. Section 4 looks at the survey results on productivity, focusing in particular on the empirical model. A discussion of the results and some policy recommendations are found in section 5. Section 6 concludes.1.Literature reviewThere is a broad consensus among economists that productivity plays a key role in economic success and is the main driver of per capita growth in the long-run (Krugman, 1994; Hall and Jones, 1999). …