Estimating the impact of foreign workers on the Maltese economy

Abstract

The main aim of this dissertation was to quantify the effect of foreign labour on economic output in Malta between 2002 and 2014. Following an overview of the existing literature from abroad, it was concluded that due to the limited amount of data available, the most adequate approach to quantifying the impact of foreign labour on the Maltese economy was through the estimation of a log-linear Cobb-Douglas production function with the share of foreign workers in employment as an additional regressor. From the estimation, it was found that an increase of 1 per cent in the share of foreigners in employment would result in an increase in Gross Domestic Product (GDP) of about 0.06 per cent. This positive relationship between the proportion of foreign workers and GDP was possibly driven by the fact that a large proportion of foreigners were employed in high-skilled jobs. This could be taken as an indication that the foreign proportion of the workforce has not only contributed to the economy simply by increasing the number of persons in employment, but also by bringing new skills and aiding the development of sectors in which local specialized labour was lacking. Evidence that the Maltese economy is transitioning towards becoming a more service oriented economy was also found. For this reason it was argued that a greater emphasis is to be placed on professional and vocational training, so as to equip the workforce to meet the needs of the changing labour market. Overall, this dissertation sheds light on the impact of foreign workers on economic output in Malta over the past decade. Although a positive impact has already been recorded, it is thought the full impact of foreign workers will be substantially more important in the future. As fertility rates decline and life expectancies increase, this inflow of foreign labour may serve as a possible solution to the aging pressures the country is facing.