Structural Unemployment in Bulgaria from 2007 Onward

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2014 passed under the sign of decreasing unemployment and increasing employment in Bulgaria. Although a big part of the population still hasn’t felt the benefits of these favourable tendencies, they are not only present in the leading economic centres, but also in some of the smaller regions of the country. At the same time the labour market continues to suffer from significant structural problems, and some of the policies, championed by the new government, threaten its recovery.

The structural characteristics of domestic unemployment are without any doubt one of the main obstructions before an even faster labour market recovery. In order to get a better picture of this problem, we will examine the movement of the so-called “Beveridge Curve” – one of the main tools for evaluating the efficiency of labour markets.

The Beveridge Curve shows the correlation between the unemployment rate and the vacancy rate. During an economic expansion the unemployment rate decreases, and the vacancy rate increases. During a recession the unemployment increases, and the vacancy rate decreases. The position of the curve depends on the efficiency of the labour market. A movement of the curve upwards shows a higher inefficiency of labour markets, because even though there are more vacant positions, they are not taken by the unemployed. If the movement of the curve upwards is combined with a movement along the curve towards a higher unemployment, this is a sign of structural problems of the labour market.

1 Figure 1: Beveridge Curve

The Situation Since 2007

The main structural characteristics of the domestic unemployment can be boiled down to:

  • Demand of labour is focused on the highly qualified personnel in several specific sectors;

  • Demand of unqualified labour remains stagnant or and with seasonal characteristics;

  • The labour market is characterized by low mobility and serious discrepancies between different regions.

In the time between the first quarter of 2007 and the third quarter of 2014 the movement of the curve for Bulgaria went through four highly distinct periods. With the goal of maximizing clarity, we are going to go over each of them.

First period (Q1 2007 – Q4 2008): decreasing unemployment and increasing vacancy rate

2Source: Eurostat, IME

The discrepancy between the qualification of the job seekers and the needs of the employers was visible even in the years before the crisis. In the period between the first quarter of 2007 and the last quarter of 2008 the share of the companies that had difficulties finding qualified personnel quickly increased, reaching 25% at the end of 2008. All of this happened while unemployment was constantly decreasing and meant that the growth in employment before the crisis could have been even more impressive, given a suitably educated workforce. In other words, if companies were able to find the employees they needed, even more Bulgarians would have been employed during that time.

Theoretically, the increasing share of qualified personnel starved companies is always present during times of economic expansion, because with lower unemployment and higher employment, the companies compete for fewer potential employees. At the same time reaching a share of 25% shows that the Bulgarian labour market is inherently inefficient, independent of the phase of the economic cycle (i.e. whether the economy is growing or shrinking).

Second period (Q1 2009 – Q4 2010): increasing unemployment and decreasing vacancy rate

3Source: Eurostat, IME

2009 passed under the sign of constantly increasing unemployment, combined with drastic drop of the share of the companies that point to the lack of qualified personnel as a factor limiting the increase of production. In 2010 the vacancy rate stabilized (between 7% and 8%), but unemployment continued to grow. This movement of the Beveridge Curve corresponds to the period of recession, in which firms restrict labour demand in response to shrinking aggregate demand.

Third period (Q1 2011 – Q4 2013): increasing unemployment and increasing vacancy rate

4Source: Eurostat, IME

In this difficult three year period we observed simultaneous increase of the unemployment rate and the share of the companies that classify the lack of qualified personnel as a production-restricting factor. This is a clear sign of increasing labour market inefficiency, because although an increasing potential for new jobs is present, the increasing number of unemployed are not capable to meet the necessary criteria. This unambiguous sign of the structural characteristics of the domestic unemployment is present for the entire three year period.

Fourth period (Q1 2014 – Q3 2014): decreasing unemployment and increasing vacancy rate

5Source: Eurostat, IME

Without any doubt the strongest three quarters of the labour market in the recent years lead to a change in the movement of the curve. Since the start of 2014 unemployment decreased, and the process was accompanied by an increasing share of companies that point to the lack of qualified personnel as a factor, limiting the increase of production.

The rapid shift of the curve upwards with still high unemployment shows clearly that structural unemployment is a problem that is becoming ever more serious and is restricting the long term growth potential of the economy.

Conclusions

In the long term, the solution of the structural unemployment problem must include a solution to the rather clichéd, but a real problem of the discrepancy of qualifications of the job seekers and business requirements. At the same time, the labour market in the country continues to be the subject of several government policies that exacerbate the problem by increasing the stay of the unemployed outside the labour market or by cutting the access to it altogether for a part of the able-bodied population.

The administrative increase of labour costs is one of these factors. Regardless of whether it is the increase of minimum wage or increasing social security taxes, these are steps that weigh in on the right side of the „worker skills” – “cost of labour” equation.

This vicious cycle dooms many unemployed to lower chances of finding a job. Keeping in mind the number of firms that even in high unemployment can’t find qualified employees, the potential for reaching a natural equilibrium on the labour market seems slim. The lack of demand for reform in labour relations and the designated course towards higher labour costs in the coming years don’t help higher labour market efficiency. On the contrary, structural problems are going to continue.

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