PART ONE — What it would mean for Malta

Malta has a problem that comes with success

Think about how a business grows.

A restaurant wants to serve more customers. It can hire another waiter, or invest in technology that allows its existing employees to work more efficiently.

A manufacturer wants to produce more goods. It can employ additional workers, or purchase machinery that increases production without needing as many new employees.

For years, hiring has often been the easier option in Malta.

And that approach has helped the economy grow.

In 2013, unemployment stood at 6.1%. By 2025, it had fallen to around 3.1%. Businesses expanded, more people found employment, and the economy grew rapidly.

But Malta also became increasingly dependent on adding more workers, including workers recruited from abroad.

That presents a challenge. More workers can mean more economic output, but they also increase demand for housing, transport, infrastructure and public services.

So the question is changing. Instead of asking only how Malta can create more jobs, we also need to ask how each worker can produce more.

One possible answer is technology.

But technology costs money. If hiring another employee is cheaper than buying a machine, why would a business invest?

This is where the minimum wage enters the discussion.

What if hiring became more expensive?

The government has two broad ways to encourage businesses to invest in technology.

It can make technology cheaper, through investment grants, tax incentives or access to finance.

Or it can make low-paid labour more expensive, giving businesses a greater incentive to find more productive ways of operating.

Raising the minimum wage does the second.

That does not mean businesses will automatically buy machines. They might instead increase prices, accept lower profits, reduce working hours or slow recruitment.

But the incentive to reconsider how they operate becomes stronger.

To understand the potential consequences, we tested a hypothetical policy: a one-off 20% increase in Malta's minimum wage in 2027, over and above the usual cost-of-living adjustment.

This is not an announced government measure. It is an economic experiment.

What would workers actually receive?

Malta's statutory minimum wage in 2026 is €229.44 per week, equivalent to approximately €994 per month.

After the projected cost-of-living adjustment, we estimate it would reach roughly €1,030 per month in January 2027.

A further 20% increase would bring it to approximately €1,236 per month.

That is a substantial increase for someone earning the legal minimum.

But not every worker would receive the full €206 monthly increase. Some already earn above the current minimum but below the proposed new one. Their pay would need to rise only enough to meet the new floor.

We estimate that approximately 22,000 employees would receive a direct increase. Another 5,000 to 10,000 could benefit indirectly if employers also increased wages immediately above the new minimum.

For a typical directly affected worker, our model estimates:

These are estimates for a typical affected worker, not the increase every worker would receive.

Across Malta, the policy could increase workers' combined take-home income by approximately €32 million to €47 million a year.

That is money low-paid employees could use for groceries, bills, housing or savings.

And because relatively few Maltese workers earn at or near the minimum wage, the increase would remain small relative to the economy's overall wage bill.

In other words, a very large pay rise for a relatively small group produces a fairly small increase in Malta's total labour costs.

Would everything become more expensive?

Not everything. But some things probably would.

Imagine a café employing several minimum-wage workers.

If its wage bill rises, the owner has to find the additional money somewhere.

The café could charge more for coffee, accept lower profits, or reorganise the way employees work.

Most businesses would probably use a combination of these responses.

SPUNTSIM estimates that the minimum-wage increase could add approximately 0.08 to 0.15 percentage points to inflation in 2027, depending on how much of the cost businesses pass on to customers.

Suppose Malta's inflation rate would otherwise have been 2%.

With the policy, it might instead be around 2.08% to 2.15%.

That is a relatively small difference nationally.

But the impact would not be uniform. Restaurants, cleaning services, retail and parts of hospitality could face greater pressure because they employ more low-paid workers.

There is another important distinction.

The policy could make prices somewhat higher than they otherwise would have been. But because the wage increase happens once, the additional effect on the annual inflation rate is expected to fade.

That does not mean prices fall back to their previous levels.

Would people lose their jobs?

This is one of the difficult trade-offs.

If employing someone becomes more expensive, certain businesses might recruit fewer people. Others might reduce overtime, shorten shifts or decide not to replace employees who leave.

The size of that response is uncertain.

International studies have reached different conclusions. Some find relatively small employment effects from minimum-wage increases. Others find larger reductions, particularly among workers whose employment becomes more expensive.

We therefore tested three possibilities.

These are not necessarily workers being dismissed.

For example, ten employees each losing four hours a week would represent approximately one full-time job's worth of working hours.

The model's central estimate is therefore equivalent to about 400 full-time jobs' worth of hours, not a prediction that exactly 400 individuals would be made redundant.

Even in the more adverse scenario, overall employment in Malta could continue to grow, just more slowly than it otherwise would.

The problem is also concentrated. A highly paid professional would generally be unaffected, while businesses relying heavily on minimum-wage labour would face a much greater adjustment.

Would businesses finally invest in technology?

This is the central question behind our experiment.

If wages become more expensive, businesses have a reason to consider machinery, automation and better technology.

For example, a supermarket may invest in self-service checkouts. A warehouse might install equipment that allows employees to move more goods. A manufacturer could purchase machinery that reduces repetitive manual work.

We included this response in SPUNTSIM.

The result was positive, but modest.

By 2030, the model estimates only around €6 million to €7 million in additional business investment per year because of the higher minimum wage.

For comparison, total annual investment in Malta is approximately €3.1 billion.

The additional investment would therefore represent only about 0.2% of that amount.

That is nowhere near an investment revolution.

Why?

Because making labour more expensive does not automatically give businesses the money to purchase technology.

And not every task can be automated economically. A cleaning company, a care provider and a software company have very different opportunities to replace repetitive work with machines.

A small business might also know that new equipment would improve productivity but lack the financing needed to buy it.

Higher wages can create a reason to invest. They do not guarantee that investment will happen.

So would Malta become richer or poorer?

To answer that question, we compared two possible versions of Malta in 2030.

In the first, the minimum wage follows its existing projected path.

In the second, the government introduces the additional 20% increase in 2027.

We then compare the economy in each case.

In all three simulations, GDP is lower than it would otherwise have been.

But the differences are small compared with Malta's economy.

In the central scenario, GDP would be approximately 0.14% lower by 2030.

To make that easier to understand, Malta's economy normally adds roughly €900 million in real output over a year. A €34 million difference is equivalent to around two weeks of normal economic growth.

This does not mean Malta would enter a recession or that the economy would stop growing for two weeks.

It means that, by 2030, the economy could be slightly smaller than it would have been without the policy.

There is significant uncertainty around that result.

Almost half of the central GDP loss comes from an assumed reduction in output when some businesses close. That effect is based on international evidence rather than an estimated Maltese relationship.

Furthermore, if workers move from less productive businesses into more productive ones, some of the apparent loss could be recovered. Our model does not fully capture that possibility.

It also does not capture any direct improvement in worker productivity from better pay, stronger motivation or lower staff turnover.

So the GDP figures should be read as conditional estimates, not precise predictions.

Is increasing the minimum wage worth it?

That depends on what the government wants to achieve.

If the objective is to improve the income of low-paid workers, a higher minimum wage has a fairly direct effect.

Our simulations suggest that tens of thousands of employees could benefit, while the overall economic cost might be relatively small.

But if the objective is to fundamentally change Malta's economic model, a minimum-wage increase on its own appears insufficient.

Our central finding is that businesses do respond to more expensive labour, but the additional investment is modest.

That points towards a different policy discussion.

What if a higher minimum wage were introduced alongside better access to investment finance, incentives for machinery and software, and practical support for small businesses to become more productive?

The wage increase would create the incentive to change. The accompanying policies could make that change possible.

The choice is not simply between higher wages and more jobs. It is about whether Malta can build an economy in which higher wages are supported by higher productivity.

Our experiment suggests that increasing the minimum wage could be one part of that transition.

It also suggests that expecting the minimum wage alone to deliver it would be a mistake.

PART TWO — The economic analysis

1. Model framework and identification

SPUNTSIM is Spunt's experimental macro-fiscal simulation model, using Maltese national accounts, labour-market and fiscal data.

The simulations use the DEV configuration, incorporating the re-estimated private consumption equation (DEV-3), government consumption equation (DEV-2) and imports specification F, estimated using 2001–2024 observations.

The three scenarios use a common underlying economic baseline. Each policy result is calculated against a corresponding no-policy simulation under the same assumptions.

The shock is specified as a one-off 20% increase in the statutory minimum-wage level in Q1 2027, additional to the projected cost-of-living adjustment. The percentage increase is not repeated in subsequent years.

The policy transmission operates through several channels:

1. The direct increase in employees' gross and disposable income.
2. The accompanying rise in employers' labour costs.
3. Changes in prices and business margins.
4. Employment and hours adjustment.
5. Capital–labour substitution and investment.
6. Changes in firm survival, represented by an external adjustment.
7. Macroeconomic feedback through consumption, imports and aggregate demand.

The scenarios vary behavioural assumptions, including employment responses, cost absorption, investment adaptation and firm exit.

Results must be distinguished from causal estimates. The model does not identify the behavioural effect of an equivalent minimum-wage shock using Maltese historical experience.

The reported scenario range is not a statistical confidence interval.

2. Minimum-wage baseline and earnings distribution

The statutory minimum wage for 2026 is €229.44 per week, or approximately €994.24 per month.

The projected COLA-adjusted January 2027 minimum is approximately €1,030 monthly. Applying an additional 20% gives a hypothetical floor of approximately €1,236 monthly, or €7.13 hourly for full-time employment under the calculation used.

The precise statutory baseline will depend on the eventual 2027 COLA and any additional agreed increases.

The simulated wage floor increases the minimum-to-median wage ratio, or Kaitz index, from approximately 49% to 59%.

For context, Directive (EU) 2022/2041 identifies 60% of gross median earnings as one possible indicative reference value when assessing the adequacy of statutory minimum wages. It is not a universally binding EU minimum-wage rate.

Estimating the directly affected population

The underlying earnings distribution is constructed from Malta's 2022 Eurostat Structure of Earnings Survey and projected forward using 3% annual nominal earnings growth.

The observed 2022 tenth-percentile full-time hourly wage was €5.94. Under the projection, it reaches approximately €6.89 in 2027.

The proposed €7.13 minimum therefore lies above the projected tenth percentile.

The estimated number of directly affected employees is approximately 22,000.

A further 5,000–10,000 employees are assumed to receive smaller spillover increases because their current earnings lie just above the new statutory floor.

Spillovers decline with distance from the floor and terminate at approximately 120% of the new minimum.

Workers covered by sector-specific Wage Regulation Orders with already-higher minima are not separately identified, creating an important limitation.

Aggregate labour-cost effect

The wage distribution and spillover assumptions imply an annual increase in gross employee earnings of €42 million to €63 million.

This corresponds to approximately 0.34%–0.51% of total employee compensation.

The small macroeconomic increase relative to the 20% statutory change reflects the limited share of workers whose wages are directly or indirectly affected.

The implied annual flows are:

The statutory calculations use 10% employee and employer social security contribution rates, subject to applicable limits, and an assumed 15% marginal personal income tax rate for the illustrative affected worker.

The representative worker's gross monthly gain of €162 and net gain of approximately €122 follow from applying these assumptions.

The gross monthly increase for a worker exactly at the pre-policy statutory floor would be larger, since the average directly affected employee is not assumed to begin precisely at that floor.

These are estimated distributions and liabilities, not payroll-level microsimulation results derived from administrative records.

3. Price formation and pass-through

The model passes the additional labour cost into the GDP deflator in proportion to the share not absorbed by businesses, weighted by the labour exposure of affected sectors.

Let a denote the proportion of incremental labour costs absorbed through reduced margins or other business-side adjustments.

The price-pressure channel is proportional to:

where ΔLC represents the relevant increase in labour costs.

Four absorption assumptions are evaluated.

The central plausible range is 15%–30% absorption.

Its empirical motivation includes Harasztosi and Lindner (2019), who examined Hungary's large 2001 minimum-wage increase and estimated substantial consumer pass-through, with approximately one-quarter of the associated cost borne by business owners.

Draca, Machin and Van Reenen (2011) documented reductions in profitability among affected UK firms following the introduction of the national minimum wage.

These findings establish plausible adjustment mechanisms but cannot identify a Malta-specific pass-through coefficient.

The model treats the shock principally as a one-off shift in the price level.

Consequently, the effect on the year-on-year inflation rate is transitory even if the difference in the price level persists.

The aggregate estimates may understate the concentration of price adjustments in labour-intensive activities such as hospitality, cleaning and certain retail services.

The analysis also depends on the relationship between domestic cost pressure, the GDP deflator and consumer prices; these are not interchangeable measures.

4. Employment effects

Employment effects are estimated using assumed elasticities applied to the directly affected workforce.

The approximation is:

where ε_L is the elasticity of employment among affected workers with respect to the minimum wage.

The body of the article reports rounded values of approximately 85, 400 and 1,300 respectively.

The conventional −0.1 to −0.3 range is associated with earlier minimum-wage literature, including work surveyed by Neumark and Wascher.

More recent research surveyed by Dube and Lindner (2024) finds cases where employment effects are small or near zero, particularly when employers possess wage-setting power.

These elasticities are not estimated from a Maltese natural experiment.

The estimate applies to the affected population rather than mechanically to the whole labour force.

Because SPUNTSIM uses labour hours in the relevant channel, the results are expressed as full-time-equivalent employment. They can represent changes in recruitment, hours worked, retention and headcount, without identifying their precise distribution.

The adverse scenario does not imply aggregate Maltese employment contraction. The original simulation has overall employment continuing to increase, although at approximately 2.6% rather than 3.0% in 2027.

The model does not produce sufficiently identified sectoral employment effects.

5. Capital–labour substitution

The investment response is represented using a constant-elasticity-of-substitution production framework.

The elasticity of substitution is set to approximately:

This parameter is drawn from SPUNTSIM's Stage 2b estimation for Maltese services.

Under the model's factor-demand mechanism, a 10% increase in the relative cost of labour raises the desired capital–labour ratio by approximately 3%, holding other relevant assumptions constant.

The response is gradual because the capital stock cannot adjust instantaneously.

The simulated minimum-wage increase generates approximately €6 million–€7 million in additional annual gross fixed capital formation by 2030.

Against an aggregate annual investment base of approximately €3.1 billion, this is an increase of around 0.2%.

According to the model decomposition, the additional capital response offsets approximately 60% of the GDP reduction generated by the wage-cost channel before the other adjustments are fully incorporated.

Identification limitations

The substitution parameter was estimated from services-sector relationships, not from an exogenous Maltese minimum-wage change.

Its application to businesses directly exposed to the wage floor is therefore uncertain.

Technological substitution is also heterogeneous.

Manufacturing, logistics and certain retail activities may have substantial automation opportunities. Cleaning, personal care and labour-intensive hospitality may have fewer economically viable alternatives.

The model does not separately identify financing constraints, the fixed costs of adopting technology, or whether capital investment is technologically feasible for a particular establishment.

The investment response should consequently be interpreted as a conditional adjustment under the specified production technology, not a causal estimate of how much Maltese businesses would invest following a statutory wage increase.

6. Firm exit and labour reallocation

The model supplements its internal mechanisms with an external firm-exit adjustment.

The calibration represents a reduction of approximately 0.1% of GDP for a 20% minimum-wage increase, with scenario-specific scaling.

This component is motivated by European evidence on firm exit following wage-floor changes.

It is also the least secure quantitative component.

In the central scenario, the firm-exit adjustment accounts for almost half of the reported €34 million GDP reduction.

Critically, the adjustment records output lost when establishments exit but does not fully incorporate productivity gains when workers subsequently relocate to more productive firms.

Dustmann and co-authors (2022), examining Germany's 2015 minimum-wage introduction, documented employment reallocation from smaller, lower-paying firms towards larger, more productive establishments.

This mechanism is economically important because firm exit and aggregate output loss are not equivalent.

An establishment can close without eliminating the full productive contribution of its former employees.

The central and adverse scenarios may therefore contain a downward bias arising from the treatment of firm exit.

This possibility is not quantified in the reported results.

7. Aggregate GDP results

The GDP results compare the real level of economic output in 2030 under the minimum-wage experiment against the matched no-policy baseline.

The baseline 2030 real GDP level is approximately €24 billion.

The comparisons with two days, two weeks or one month of normal economic growth use trend annual real output growth of approximately €900 million.

These comparisons express the magnitude of a difference in the GDP level, not a period during which economic activity or growth literally ceases.

All three simulated scenarios produce a negative difference, but the difference between −€4 million and −€73 million illustrates substantial behavioural uncertainty.

The results reflect assumptions about employment elasticity, business absorption, investment substitution and firm exit.

They do not represent probability-weighted confidence bounds.

Importantly, improved expenditure forecasting or better-fitting equations within SPUNTSIM do not independently validate the assumed causal transmission channels of the minimum-wage experiment.

That distinction is essential when interpreting the headline GDP figures.

8. Important omitted mechanisms

Several economically relevant effects are not included or are insufficiently identified.

Efficiency wages and worker productivity. Higher remuneration may reduce turnover, improve recruitment, encourage effort or support more productive employer–employee relationships. The simulations contain no separately estimated Maltese channel for these effects.

Reallocation following firm exit. Workers from closing establishments may move into more productive employment, offsetting part of the measured loss.

Sector-specific responses. The model cannot reliably distribute employment reductions or capital adjustments across individual industries.

Administrative wage distribution. Affected-worker estimates are based on earnings survey information rather than comprehensive payroll records.

Sectoral statutory wage floors. Higher sector-specific minima under Wage Regulation Orders are not separately incorporated.

Uncertainty in behavioural parameters. The employment and price elasticities are imported from international evidence or calibrated using broader economic relationships.

Data and specification uncertainty. Historical pseudo-out-of-sample performance does not establish that the model accurately predicts responses to a policy intervention that has not been observed at comparable scale in Malta.

The omission of productivity-enhancing mechanisms is potentially important, but it does not establish that including them would necessarily overturn the GDP results. Their magnitude is unknown.

9. Interpretation and policy implications

The exercise produces three substantive conclusions.

First, the distributional impact of an additional 20% minimum-wage increase could be much larger than its aggregate wage-bill impact. A relatively limited share of employees benefits directly, but the annual income increase for those employees is meaningful.

Second, the macroeconomic cost appears modest under the tested assumptions, although uncertainty surrounding employment, firm exit and business adaptation is material. The GDP results should therefore be treated as scenarios rather than precise forecasts.

Third, the endogenous capital response is not sufficiently large to support the claim that increasing the wage floor alone would fundamentally alter Malta's growth model.

The implication is that wage regulation and productivity policy should be assessed together rather than regarded as interchangeable.

Increasing the cost of low-paid labour changes relative prices and incentives. Improving the ability of firms to acquire machinery, software and other productive capital changes the feasibility of responding to those incentives.

Whether a combined policy would outperform the minimum-wage increase alone remains an open empirical question. That result has not been established by the simulations presented here.

The distinction matters for policy design: a higher minimum wage can redistribute earnings and encourage adaptation, but sustainably higher national productivity requires investment, technology adoption and productive reallocation that the wage increase cannot guarantee on its own.

Sources and research basis

• Malta's statutory minimum-wage rates for 2026, as used in the underlying research.
• Eurostat, Structure of Earnings Survey, Malta, 2022.
• Directive (EU) 2022/2041 on adequate minimum wages in the European Union.
• Lordan, G. and Neumark, D. (2018), People versus machines: The impact of minimum wages on automatable jobs, Labour Economics.
• Harasztosi, P. and Lindner, A. (2019), Who pays for the minimum wage?, American Economic Review.
• Draca, M., Machin, S. and Van Reenen, J. (2011), Minimum wages and firm profitability, American Economic Journal: Applied Economics.
• Dube, A. and Lindner, A. (2024), Minimum wages in the 21st century, Handbook of Labor Economics.
• Dustmann, C. et al. (2022), Reallocation effects of the minimum wage, Quarterly Journal of Economics.
• Neumark, D. and Wascher, W. (2008), Minimum Wages, MIT Press.
• SPUNTSIM Phase 10 and Phase 11 research outputs.

The original research also references a 2026 working paper on minimum wages and industrial robot adoption. Its complete bibliographic details require confirmation before publication.