Malta’s Labour Shortage and Productivity Problem Starts with Property

Malta does not have a labour shortage problem. It has a capital allocation problem that translates into a productivity problem and eventually becomes a labour shortage.

That is the point missing from the productivity debate. We keep asking where the next worker will come from, but we rarely ask why the economy needs so many workers to grow. A productive economy expands by raising the value created by each worker. Malta has too often expanded by adding workers instead.

When a business earns a profit, it can reinvest in machinery, technology, automation, training and better management. Or it can buy property. In Malta, property looks safer, it is tangible, rentable, saleable and useful as collateral. Banks can value and repossess a building. Returns on restructuring, software or staff development are harder to measure. Eurostat data illustrate the imbalance: over the past five years between 2021 and 2025, a total of €8,403 million were spent on property while only €485 million and €3,445 million were spent on ICT and machinery respectively. More than 2 times as much flowed into property than productive investment.

So, capital follows property. What looks rational for each investor, however, can damage the economy as a whole. More capital chasing property raises prices and rents. Businesses then carry higher premises costs before producing anything. Every extra euro spent on rent, loans or space is a euro unavailable for equipment, digitalisation, training, innovation and process redesign.

Businesses that do not modernise remain labour-intensive. To grow, they add people rather than improve systems. Headcount substitutes for productivity. This can look successful: more workers generate more output. But it is growth through volume, not efficiency, and it depends on an endless labour supply.

That supply has limits. Malta’s domestic workforce cannot expand indefinitely, particularly as more workers retire and fewer enter the labour market. A tighter pool creates both shortages and weaker matches as firms are forced to hire the closest available candidate. The worker may be capable and diligent, but the fit is not always ideal. The job is filled, but output suffers. Many so-called skills gaps are therefore not just training failures. They are symptoms of an economy trying to recruit too many people from too small a pool.

Foreign workers have become essential. Many sectors could not function without them. Yet dependence on transient labour carries a hidden cost. Nobody reaches peak productivity on day one and workers need time to learn the firm, its customers and systems. This is the issue with foreign workers who stay in Malta only for a couple of years.

The shortage is not solved; it is continually managed. Firms replace people instead of accumulating knowledge. Output continues, but productivity remains weak.

This leads to a self-reinforcing cycle. Capital flows to property rather than productive investment. Property demand pushes up rents and costs. Firms have less money to modernise, so they remain labour-intensive and need more workers to grow. The domestic workforce cannot expand fast enough, while government employment absorbs part of the pool. Private firms face shortages, recruit from limited choices and accept more skills mismatches. Foreign labour becomes indispensable, but high turnover repeatedly strips firms of experience before workers reach peak productivity. Weak productivity then makes transformation look risky, and property look safe again.

Labour shortages are therefore not the starting point. They are the dashboard warning light. The engine problem is a growth model that rewards property accumulation more reliably than productive investment and asks for more workers instead of asking how existing workers can create more value.

Breaking the cycle requires changing incentives. Tax policy should reward profits reinvested in automation, machinery, software, training and process redesign more strongly than profits recycled into passive property. Productivity grants should fund genuine transformation, not box-ticking or activity for its own sake. Their test should be simple: will this investment help a firm produce more value with the workforce it already has?

Finance must change too. As long as a property project is easier to fund than a credible productivity project, capital will keep choosing buildings over efficiency. Banks cannot remove every risk, but they can improve how they assess investment in technology, systems and organisational change.

Foreign workers are not the root problem. Neither are skills gaps or vacancies. They are consequences of an economy that has preferred labour expansion to productivity growth and property accumulation to business investment.

Malta does not simply need more workers. It needs fewer business models that depend on constantly finding them. The real test is whether growth can come from better systems, better investment and better use of human talent. Until then, Malta will keep searching for the next worker while avoiding the harder question: why did the fastest growing economy in Europe fail to make the current worker more productive?