Factors affecting labour demand in a small open economy - the case of Malta

Abstract

Like many other small countries, Malta is characterized by limited natural resources and a relatively high reliance on exported output to create employment and to finance a large import bill. Moreover, Malta's lack of resources has led to a high degree of specialization and dependence on a few ranges of goods and services, such as clothing, electrical components and tourism. The recent international recession has clearly exposed Malta's reliance on the export market for job creation, since between 1980 and 1982, the rate of unemployment increased from about 4% to about 10%. This paper proposes a simple macro-model to explain and quantify Malta's dependence on exports for generating employment. Output is assumed to be determined by domestic demand and by exports, and the latter are assumed to be influenced by economic conditions in foreign countries and by Maltese export competitiveness. The model allows for the interaction of price effects arising from changes in the exchange rate of the Maltese lira on the import content of exports.