## IMMIGRATION AND THE LABOR MARKET IN MALTA

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### A. Introduction
- Over 2013–19, average real GDP growth has been around 7 percent.
- Structural rebalancing toward high value-added and labor-intensive services (e.g., professional and scientific activities, remote gaming, tourism) has underpinned Malta’s strong growth.
- Foreign workers added an extra 18 percent to the size of the labor force over the period 2013–18 on top of the nearly 10 percent added from Maltese nationals.
- Total employment grew by 29 percent (2013–18), compared to around 9 percent in the period preceding the global financial crisis (2002–07).
- Paper’s overall finding: immigration has been positive for Malta, helping boost growth, employment, productivity and incomes and helping contain wage inflation (and hence probably also price inflation) in recent years.
- Data limitation noted: the paper does not assess the specific impact of immigration on labor market outcomes of native workers.

### B. Immigration and Labor Markets: Some Theoretical Insights
- Long-term effects:
  - Increase in labor supply from immigration increases the return on capital, driving investment which raises demand for labor (Peri 2010).
  - Long-term effect on overall wages largely depends on immigration’s effect on overall labor productivity.
- Short-term effects:
  - Ambiguous and depend on substitutability or complementarity between immigrant and native skills.
  - Labor demand channel: population growth from immigration can shift labor demand upward, increasing employment.
  - Substitutability case: immigration acts as an exogenous increase in labor supply, shifting labor supply rightward and potentially lowering wages.
  - Complementarity case: immigration can be modeled as upward movement along labor supply, potentially increasing wages.
  - Equilibrium depends on degree of substitutability/complementarity; full substitutability → higher employment and lower wages; full complementarity → higher employment and higher wages.
- Magnitude of short-term effects depends on size, speed, and profile of migrant inflows; large and rapid inflows can temporarily dampen aggregate wage growth, especially if migrants are substitutes and migration is broad-based across sectors.
- Productivity channels:
  - Highly educated immigrants clearly contribute to productivity.
  - Low- and medium-skill migrants can raise aggregate productivity if skills are complementary to natives’, supporting specialization and higher productivity (Catteneo, Fiori and Peri 2015; Peri 2016).
  - Adjustment channels: natives and firms can change occupations, skills, or invest in technology and capital to increase complementarity.
  - Immigration can create productivity-enhancing externalities: learning by doing, promoting innovation, agglomeration externalities, and greater variety of ideas, goods and services (Peri 2014 and 2016).
- Composition effects:
  - Changes in labor force composition can shape aggregate wages. Growing shares of young, low-wage immigrants may weigh down aggregate wage growth even if individual wages benefit from complementarity.
  - Composition effects can explain wage patterns not captured by aggregate supply and demand or business cycle dynamics (see Nickel et al., 2019; Klinger et al., 2019).

### C. Immigration and Malta’s Labor Market: Stylized Facts
- Net migration trends:
  - Net migration to Malta increased from 0.4 percent of the total population in 2011 to 3.2 percent in 2017.
  - Since joining the EU in 2004, Malta experienced one of the largest increases in the migrant share of the population in the EU (behind only Austria, Luxembourg and Sweden).
- Labor market integration:
  - Share of foreign workers in total employment rose from just over 3 percent in 2005 to over 22 percent in 2018.
  - Unemployment rate among foreign workers declined from 1.8 percent in 2011 to 0.3 percent in 2018.
  - Declining unemployment among Maltese workers as well indicates demand-pull migration.
- Job vacancies and labor demand:
  - Number of job vacancies nearly doubled between 2013 and 2018 even as the labor force expanded, employment rose, and unemployment declined.
  - Administrative data indicate increases in vacancies are widespread across sectors and occupations.
  - Sectors where vacancies at least doubled over 2013–18 and were at least 2,000 in 2018 included manufacturing, construction, accommodation and food services, and professional, scientific and technical activities.
  - Occupations with greatest unmet needs: services and sales workers, clerks and support workers, craft and related trade workers, plant and machine operators and assemblers, and elementary occupations. Vacancies for technicians and associate professionals rose by 40 percent.
- Broad-based foreign employment:
  - Largest increases in foreign employment by volume were in labor-intensive services across the skill spectrum: professional services, retail, accommodation and food services, arts/entertainment/recreation.
  - In percentage terms, largest increase occurred in arts, entertainment and recreation (including remote gaming): share of foreign workers in that sector’s total employment rose by over 47 percentage points in 2005–18.
  - Manufacturing and construction increases: 15 and 24 percentage points, respectively.
- Sectoral and occupational distribution:
  - Workers from the EU account for around 60 percent of foreign employment.
  - EU migrants accounted for the majority of net migrant inflows in years following the global financial crisis; trend reversed recently with non-EU inflows accelerating.
  - Foreign workers found across high, medium and low skill occupations and sectors. Higher-skill occupations (managers, technicians, professionals) have larger share of EU nationals; elementary occupations have larger share of non-EU nationals.
- Maltese worker upgrading:
  - Over 2012–17, Maltese workers employed in elementary occupations or as clerical support workers declined by nearly 18 percent and 9 percent, respectively.
  - These declines were more than offset by increases in higher and medium skill occupations: managers increased by 25 percent, professionals by 23 percent, services and sales workers by nearly 20 percent (2012–17).
  - Central Bank of Malta (2019) documents similar shifts prior to 2012.
- Educational attainment:
  - Based on 2014 Labor Force Survey: share of migrants with more than secondary education was just over 62 percent (around 39 percent had tertiary education) compared to 54 percent for non-migrants (around 23 percent had tertiary education).
  - Since 2014, these shares likely became more even as non-EU immigration increased.
- Composition effects and recent trends:
  - EU workers accounted for over three-quarters of incoming foreign workers over 2010–2016.
  - In 2018, net inflows of non-EU foreign workers accelerated and accounted for over 65 percent of the growth in foreign employment in 2018.
  - Non-EU foreign workers seem to disproportionately occupy low-skilled jobs (elementary occupations, services and sales), suggesting potential composition effects.
  - Coincidentally, productivity growth in Malta tended to decline and some measures of wage growth (e.g., compensation per employee) moderated in recent years, though a direct causal link to composition effects is unclear.

### D. Long-Term Income Effects of Immigration in Malta
- Cross-country IMF staff analysis (Jaumotte, Koloskova, and Saxena 2016) findings:
  - Modeled channels: increase in working-age population share and increase in productivity per worker via complementarity between migrants and natives.
  - Main finding: a 1 percentage point increase in the migration share can raise GDP per capita by up to 2 percent in the long run.
  - Effect comes mainly from labor productivity and to a lesser extent from an increase in the ratio of working-age to total population.
  - Gains in labor productivity are most evident where there is complementarity among workers.
- Note on methodology: the study used a restricted sample of advanced economies and empirical approaches to address endogeneity biases.

### 15. A simple extrapolation exercise — Long-term extrapolation results
- Applying Jaumotte, Koloskova, and Saxena’s (2016) estimated elasticity of real GDP per capita to the migration share to Maltese data indicates sizeable GDP per capita gains from immigration over selected periods.
- Periods and estimated contributions:
  - 2005–17 (7.3 pp rise in migrant share): immigration could have boosted real GDP per capita by 13 percent (or around 2,000 constant euros).
  - 2010–17 (4.6pp rise in migrant share): immigration could have boosted real GDP per capita by 8.4 percent (or around 1,300 constant euros).
- Nearly one-third of the actual increase of GDP per capita over 2005–17 and around one-fifth of the increase over 2010–17 could have been due to foreign labor inflows.

### Short-Term Effects: a Simple Empirical Analysis of Wage Dynamics
- Econometric specification:
  - Broadly follows Nickel et al. (2019).
  - Uses Maltese quarterly data from around mid-2000s until 2019Q2.
  - Dependent variable: year-on-year change in compensation per employee (4-quarter log change).
  - Regressors: own lags of the dependent variable (including t-1 and t-4), measures of labor market slack (unemployment rate, broad unemployment gap, job vacancies-to-unemployment ratio, unemployment gap), backward-looking inflation expectations (4-quarter log change of Core CPI, 4-quarter backward-looking moving average), labor productivity per employee (4-quarter log change), share of foreign workers in total employment (level and 4-quarter change (t-1)), and a constant.
- Data and limitations:
  - Estimation sample is 2005Q2-2019Q2; except for columns (2) and (4) where the sample starts in 2008Q1 and 2006Q2, respectively.
  - Limitations include inability to analyze granular channels (skill/age groups), potential composition effects, short sample coinciding with rapid structural changes.

### Empirical results and robustness
- Key baseline regression (Table 1, column 1) findings:
  - Dependent variable (t-1): 0.446***.
  - Dependent variable (t-4): -0.364***.
  - Unemployment rate: -0.596**.
  - Inflation Expectations (4-quarter log change of Core CPI, 4-quarter backward-looking moving average): 0.38**.
  - Labor productivity per employee, 4-quarter log change: 0.131***.
  - Share of foreign workers in total employment: -0.174***.
  - Constant: 0.066***.
  - Observations: 574.
  - Adj. R-squared: 0.726.
- Other reported coefficients across specifications (selected):
  - Share of foreign workers in total employment (column 2): -0.064***.
  - Share of foreign workers in total employment, 4-quarter change (t-1) (column 4): -0.256***.
  - Inflation Expectations (other columns): 0.496***, 0.5***.
  - Labor productivity (other columns): 0.112***, 0.145***, 0.124***.
- Robustness:
  - Signs and statistical significance of the immigration variable are qualitatively robust to alternative measures of labor market slack (broad unemployment rate gap, job vacancies-to-unemployment ratio, headline unemployment gap), to using the change in the share of foreign workers (lagged one period) rather than the level, to dropping or lagging lags of the dependent variable, lagging unemployment, lagging the share of foreign workers, and using growth in real compensation per employee as dependent variable.
  - Additional robustness checks (unreported) include using wage growth from the Labor Force Survey and adding controls (share of part-time workers, employment shares and gross value added by manufacturing or services, labor force participation rate, female employment share).

### Decomposition analysis: contributions to nominal wage growth
- Method:
  - Sequence of counterfactual simulations setting each explanatory variable to zero in turn, following Nickel et al. (2019) and Yellen (2015).
  - Historical contribution equals difference between actual wage growth and its simulated value with that variable set to zero.
- Findings:
  - Labor market slack (unemployment) exerted downward pressure on wages until 2014 but helped increase wage growth more recently.
  - Inflation expectations have dampened wage growth in recent years.
  - Immigration provides the largest negative contribution to wage growth, especially since 2017, in the baseline specification.
  - Decompositions using alternative specifications (broad unemployment gap or changes in the migration share) show smaller immigration contributions but in the same negative direction.

### Conclusions and policy recommendations
- Overall assessment:
  - Immigration has had overall positive effects on growth, employment and income in Malta.
  - Foreign workers have helped sustain fast economic growth by boosting employment gains and safeguarding Malta’s competitiveness.
  - Immigration likely facilitated important productivity and real wage gains and helped contain wage inflation and probably also price inflation in recent years.
- Policy recommendations:
  - Facilitate healthy long-term adjustment through structural reforms, including investment in human capital and innovation.
  - Invest in skills, education and innovation to increase potential productivity and wage gains from immigration by maximizing complementarity.
  - Foster innovation through stronger public investment in human capital and research and development (R&D).
  - Continue to support and refine ongoing measures aimed at closing skills gaps, notably through training programs.

*Source: IMF staff analysis — "IMMIGRATION AND THE LABOR MARKET IN MALTA" (March 25, 2020).*

### References ___________________________________________________________________________ 13

### IMMIGRATION AND THE LABOR MARKET IN MALTA

### A. Introduction
- Over 2013–19, average real GDP growth has been around 7 percent, one of the highest rates among EU countries and nearly four times higher than the EU average.
- Structural rebalancing toward high value-added and labor-intensive services (e.g., professional and scientific activities, remote gaming, tourism) has underpinned Malta’s strong growth.
- Foreign workers added an extra 18 percent to the size of the labor force over the period 2013–18 on top of the nearly 10 percent added from Maltese nationals.
- Total employment grew by 29 percent (2013–18), compared to around 9 percent in the period preceding the global financial crisis (2002–07).
- Paper’s overall finding: immigration has been positive for Malta, helping boost growth, employment, productivity and incomes and helping contain wage inflation (and hence probably also price inflation) in recent years.
- Data limitation noted: the paper does not assess the specific impact of immigration on labor market outcomes of native workers.

### B. Immigration and Labor Markets: Some Theoretical Insights
- Long-term effects:
  - Increase in labor supply from immigration increases the return on capital, driving investment which raises demand for labor (Peri 2010).
  - Long-term effect on overall wages largely depends on immigration’s effect on overall labor productivity.
- Short-term effects:
  - Ambiguous and depend on substitutability or complementarity between immigrant and native skills.
  - Labor demand channel: population growth from immigration can shift labor demand upward, increasing employment.
  - Substitutability case: immigration acts as an exogenous increase in labor supply, shifting labor supply rightward and potentially lowering wages.
  - Complementarity case: immigration can be modeled as upward movement along labor supply, potentially increasing wages.
  - Equilibrium depends on degree of substitutability/complementarity; full substitutability → higher employment and lower wages; full complementarity → higher employment and higher wages.
- Magnitude of short-term effects depends on size, speed, and profile of migrant inflows; large and rapid inflows can temporarily dampen aggregate wage growth, especially if migrants are substitutes and migration is broad-based across sectors.
- Productivity channels:
  - Highly educated immigrants clearly contribute to productivity.
  - Low- and medium-skill migrants can raise aggregate productivity if skills are complementary to natives’, supporting specialization and higher productivity (Catteneo, Fiori and Peri 2015; Peri 2016).
  - Adjustment channels: natives and firms can change occupations, skills, or invest in technology and capital to increase complementarity.
  - Immigration can create productivity-enhancing externalities: learning by doing, promoting innovation, agglomeration externalities, and greater variety of ideas, goods and services (Peri 2014 and 2016).
- Composition effects:
  - Changes in labor force composition can shape aggregate wages. Growing shares of young, low-wage immigrants may weigh down aggregate wage growth even if individual wages benefit from complementarity.
  - Composition effects can explain wage patterns not captured by aggregate supply and demand or business cycle dynamics (see Nickel et al., 2019; Klinger et al., 2019).

### C. Immigration and Malta’s Labor Market: Stylized Facts
- Net migration trends:
  - Net migration to Malta increased from 0.4 percent of the total population in 2011 to 3.2 percent in 2017.
  - Since joining the EU in 2004, Malta experienced one of the largest increases in the migrant share of the population in the EU (behind only Austria, Luxembourg and Sweden).
- Labor market integration:
  - Share of foreign workers in total employment rose from just over 3 percent in 2005 to over 22 percent in 2018.
  - Unemployment rate among foreign workers declined from 1.8 percent in 2011 to 0.3 percent in 2018.
  - Declining unemployment among Maltese workers as well indicates demand-pull migration.
- Job vacancies and labor demand:
  - Number of job vacancies nearly doubled between 2013 and 2018 even as the labor force expanded, employment rose, and unemployment declined.
  - Administrative data indicate increases in vacancies are widespread across sectors and occupations.
  - Sectors where vacancies at least doubled over 2013–18 and were at least 2,000 in 2018 included manufacturing, construction, accommodation and food services, and professional, scientific and technical activities.
  - Occupations with greatest unmet needs: services and sales workers, clerks and support workers, craft and related trade workers, plant and machine operators and assemblers, and elementary occupations. Vacancies for technicians and associate professionals rose by 40 percent.
- Broad-based foreign employment:
  - Largest increases in foreign employment by volume were in labor-intensive services across the skill spectrum: professional services, retail, accommodation and food services, arts/entertainment/recreation.
  - In percentage terms, largest increase occurred in arts, entertainment and recreation (including remote gaming): share of foreign workers in that sector’s total employment rose by over 47 percentage points in 2005–18.
  - Manufacturing and construction increases: 15 and 24 percentage points, respectively.
- Sectoral and occupational distribution:
  - Workers from the EU account for around 60 percent of foreign employment.
  - EU migrants accounted for the majority of net migrant inflows in years following the global financial crisis; trend reversed recently with non-EU inflows accelerating.
  - Foreign workers found across high, medium and low skill occupations and sectors. Higher-skill occupations (managers, technicians, professionals) have larger share of EU nationals; elementary occupations have larger share of non-EU nationals.
- Maltese worker upgrading:
  - Over 2012–17, Maltese workers employed in elementary occupations or as clerical support workers declined by nearly 18 percent and 9 percent, respectively.
  - These declines were more than offset by increases in higher and medium skill occupations: managers increased by 25 percent, professionals by 23 percent, services and sales workers by nearly 20 percent (2012–17).
  - Central Bank of Malta (2019) documents similar shifts prior to 2012.
- Educational attainment:
  - Based on 2014 Labor Force Survey: share of migrants with more than secondary education was just over 62 percent (around 39 percent had tertiary education) compared to 54 percent for non-migrants (around 23 percent had tertiary education).
  - Since 2014, these shares likely became more even as non-EU immigration increased.
- Composition effects and recent trends:
  - EU workers accounted for over three-quarters of incoming foreign workers over 2010–2016.
  - In 2018, net inflows of non-EU foreign workers accelerated and accounted for over 65 percent of the growth in foreign employment in 2018.
  - Non-EU foreign workers seem to disproportionately occupy low-skilled jobs (elementary occupations, services and sales), suggesting potential composition effects.
  - Coincidentally, productivity growth in Malta tended to decline and some measures of wage growth (e.g., compensation per employee) moderated in recent years, though a direct causal link to composition effects is unclear.

### D. Long-Term Income Effects of Immigration in Malta
- Cross-country IMF staff analysis (Jaumotte, Koloskova, and Saxena 2016) findings:
  - Modeled channels: increase in working-age population share and increase in productivity per worker via complementarity between migrants and natives.
  - Main finding: a 1 percentage point increase in the migration share can raise GDP per capita by up to 2 percent in the long run.
  - Effect comes mainly from labor productivity and to a lesser extent from an increase in the ratio of working-age to total population.
  - Gains in labor productivity are most evident where there is complementarity among workers.
- Note on methodology: the study used a restricted sample of advanced economies and empirical approaches to address endogeneity biases (e.g., reverse causality where high income attracts migrants).

*Source: IMF staff analysis — "IMMIGRATION AND THE LABOR MARKET IN MALTA" (March 25, 2020).*

### 15.      A simple extrapolation exercise

### 15.      A simple extrapolation exercise

### Long-term extrapolation results
- Applying Jaumotte, Koloskova, and Saxena’s (2016) estimated elasticity of real GDP per capita to the migration share to Maltese data indicates sizeable GDP per capita gains from immigration over selected periods.
- Periods and estimated contributions:
  - 2005–17 (7.3 pp rise in migrant share): immigration could have boosted real GDP per capita by 13 percent (or around 2,000 constant euros).
  - 2010–17 (4.6pp rise in migrant share): immigration could have boosted real GDP per capita by 8.4 percent (or around 1,300 constant euros).
- Nearly one-third of the actual increase of GDP per capita over 2005–17 and around one-fifth of the increase over 2010–17 could have been due to foreign labor inflows.

### Short-Term Effects: a Simple Empirical Analysis of Wage Dynamics
- Econometric specification:
  - Broadly follows Nickel et al. (2019).
  - Uses Maltese quarterly data from around mid-2000s until 2019Q2.
  - Dependent variable: year-on-year change in compensation per employee (4-quarter log change).
  - Regressors: own lags of the dependent variable (including t-1 and t-4), measures of labor market slack (unemployment rate, broad unemployment gap, job vacancies-to-unemployment ratio, unemployment gap), backward-looking inflation expectations (4-quarter log change of Core CPI, 4-quarter backward-looking moving average), labor productivity per employee (4-quarter log change), share of foreign workers in total employment (level and 4-quarter change (t-1)), and a constant.
- Data and limitations:
  - Estimation sample is 2005Q2-2019Q2; except for columns (2) and (4) where the sample starts in 2008Q1 and 2006Q2, respectively.
  - Limitations include inability to analyze granular channels (skill/age groups), potential composition effects, short sample coinciding with rapid structural changes.

### Empirical results and robustness
- Key baseline regression (Table 1, column 1) findings:
  - Dependent variable (t-1): 0.446***.
  - Dependent variable (t-4): -0.364***.
  - Unemployment rate: -0.596**.
  - Inflation Expectations (4-quarter log change of Core CPI, 4-quarter backward-looking moving average): 0.38**.
  - Labor productivity per employee, 4-quarter log change: 0.131***.
  - Share of foreign workers in total employment: -0.174***.
  - Constant: 0.066***.
  - Observations: 574.
  - Adj. R-squared: 0.726.
- Other reported coefficients across specifications (selected):
  - Share of foreign workers in total employment (column 2): -0.064***.
  - Share of foreign workers in total employment, 4-quarter change (t-1) (column 4): -0.256***.
  - Inflation Expectations (other columns): 0.496***, 0.5***.
  - Labor productivity (other columns): 0.112***, 0.145***, 0.124***.
- Robustness:
  - Signs and statistical significance of the immigration variable are qualitatively robust to alternative measures of labor market slack (broad unemployment rate gap, job vacancies-to-unemployment ratio, headline unemployment gap), to using the change in the share of foreign workers (lagged one period) rather than the level, to dropping or lagging lags of the dependent variable, lagging unemployment, lagging the share of foreign workers, and using growth in real compensation per employee as dependent variable.
  - Additional robustness checks (unreported) include using wage growth from the Labor Force Survey and adding controls (share of part-time workers, employment shares and gross value added by manufacturing or services, labor force participation rate, female employment share).

### Decomposition analysis: contributions to nominal wage growth
- Method:
  - Sequence of counterfactual simulations setting each explanatory variable to zero in turn, following Nickel et al. (2019) and Yellen (2015).
  - Historical contribution equals difference between actual wage growth and its simulated value with that variable set to zero.
- Findings:
  - Labor market slack (unemployment) exerted downward pressure on wages until 2014 but helped increase wage growth more recently.
  - Inflation expectations have dampened wage growth in recent years.
  - Immigration provides the largest negative contribution to wage growth, especially since 2017, in the baseline specification.
  - Decompositions using alternative specifications (broad unemployment gap or changes in the migration share) show smaller immigration contributions but in the same negative direction.

### Conclusions and policy recommendations
- Overall assessment:
  - Immigration has had overall positive effects on growth, employment and income in Malta.
  - Foreign workers have helped sustain fast economic growth by boosting employment gains and safeguarding Malta’s competitiveness.
  - Immigration likely facilitated important productivity and real wage gains and helped contain wage inflation and probably also price inflation in recent years.
- Policy recommendations:
  - Facilitate healthy long-term adjustment through structural reforms, including investment in human capital and innovation.
  - Invest in skills, education and innovation to increase potential productivity and wage gains from immigration by maximizing complementarity.
  - Foster innovation through stronger public investment in human capital and research and development (R&D).
  - Continue to support and refine ongoing measures aimed at closing skills gaps, notably through training programs.

*Source: IMF (2016), UN, and IMF staff calculations.*

---


_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1mltea2020002.pdf_