The population of Bulgaria will decrease by more than 640 thousand people by 2035

The last weeks have activated (again) the discussion about the way to determine the minimum wage, the continuing increase in the cost of labor and labor market problems in general. To the extent that the amount of unemployment insurance already mechanically follows the average wage, the expected attention is focused on the growth of remuneration. Economist Lachezar Bogdanov from IPI spoke on the topic.

By the middle of the year, Bulgaria was the second country in the EU (after Croatia) in terms of annual labor cost index growth. Compared to the second quarter of 2023, salaries in our country increased by 15.4%, while the average increase for the EU was 5.1%. The tendency for salaries in Central and Eastern Europe to grow significantly faster than those in Western – a natural process of convergence in an open market. This is neither accidental nor recent – for the last six years in the region of Central and Eastern Europe, wages have grown by 80%, and Bulgaria is in third place after Lithuania and Hungary with nearly 97%. For comparison – in the same period, on average in the EU, labor costs increased by 24.7% – or four times slower than Bulgaria.

All this makes it necessary to consider the state of the labor market beyond the visible short-term numerical indicators. The search for workable solutions, including the formation of a program of reforms and measures, must take into account (at least) several deep, structural and often – with a long-term genesis – problems:

Decline in the working-age population

Human capital is a major factor for achieving high economic growth, which is necessary for the continuation of Bulgaria's convergence towards the average European levels of income and development. At the same time, the Bulgarian economy is facing serious challenges related to long-term demographic processes and having a significant impact on the labor market, the state of the workforce, investments and the expansion of production potential.

The 2021 census showed that Bulgaria lost more than 840,000 people in a decade (or an 11.5% decline), with just over half of the decline due to natural growth and the rest – of migration processes. The trends of population aging are deepening, with the share of people over 65 approaching 24%. For the decade since the previous census, the population of working age (from 18 to 64) shrank by nearly 890 thousand people – by as much as 18.4%, and according to the current data of the NSI, by the end of 2023, the decline in this age category will be by another 40,000 people.

The unfavorable dynamics are to a significant extent the result of profound demographic changes that began as early as the 1970s. They are also a factor for permanently maintaining a negative natural increase in the last decades of an average of over 6 per thousand. The so far timid improvement in birth rates in 2022 and 2023 cannot yet lead to a reversal of the trend.

The long-term maintenance of negative net external migration affects both the current demographic picture and the expected development of the birth rate and the age structure of the population in the near future. The mechanical growth rate is negative for a prolonged period until 2020, when the pandemic leads to positive net migration. In 2022 and 2023, the influx of population to Bulgaria is due to a greater extent to citizens of other countries, mostly outside the European Union, than to returning Bulgarian citizens.

This implies the preservation of unfavorable dynamics in the short and medium term, which will be extremely difficult to influence with social or economic policy measures. The official demographic forecast of the NSI foresees in the base scenario a drop in the population by 2035 by more than 640 thousand people, with a decrease of nearly 420 thousand in the age group from 15 to 64.

Shortage of qualified personnel

The adverse impact on the labor market and business environment in general is significant and is confirmed by all analyzes and studies. According to NSI's regular observations of the business climate, labor shortage is the second most important factor hindering the activity of enterprises, indicated by 33% of companies in industry, 29% of companies in trade and over 26% of companies in services, respectively. At the same time, the latest survey of employers' workforce needs by the Employment Agency reveals an expected business demand of 243,000 specialists with higher education and 244,000 specialists with secondary education in the next 3 to 5 years.

The problems of the labor market occupy an increasingly important place in the regular analyzes of the European Commission for Bulgaria within the framework of the European Semester. According to the 2024 report, "the country faces a serious shortage of workers due to a shrinking labor force, low economic activity among vulnerable groups in the population, a lack of skills adequate to needs and ineffective state policies”, such as "a shortage of labor and skills risk worsening due to demographic trends“.

A number of indicators on the state and dynamics of the labor market confirm the presence of serious structural challenges. In a decade from 2013 to 2023, the workforce – the total number of employed and jobseekers – decreases by about 300 thousand, and in the age group under 45 the decrease is by about 500 thousand. If in 2013 the share of persons in the labor force up to the age of 45 was close to 57%, in 2023 it will already be 47%.

Rising labor costs

Increasing demand for labor in the face of shrinking supply also means an outpacing rise in labor costs for employers. Over the last 7 years, according to Eurostat data, Bulgaria has had the largest increase in the labor cost index in the economy. In the period from 2017 to 2023, the average wage of employees increased by 94%, while GDP – with 79%. Although so far this process has not led to a limitation of the international competitiveness of the Bulgarian globally oriented enterprises thanks to structural improvements in productivity, in the medium term the challenges will grow significantly.

Faced with these realities, employers must increasingly rely on older workers. If in 2013 the share of employed persons over 55 years of age, according to labor force monitoring, was 18.3% of total employment in the economy, then in 2023 it will already approach 25%; after 2021, the number of employed persons over 55 years of age will already be greater than the number of employed persons under the age of 35.

Low unemployment and unused labor supply reserves

The prolonged period of economic growth, almost uninterrupted by the shock of the pandemic in 2020-2021, led to a significant improvement in the main indicators of the state of the labor market. The employment rate in the 20 to 64 age group is rising from about 63% a decade ago to 76.2% in 2023 – a value exceeding the average for the countries of the European Union. The unemployment rate has decreased threefold in the last ten years, reaching 4.3% of the population over 15 years of age in 2023 – a value significantly below the EU average, and ranking Bulgaria among the 10 economies with the lowest unemployment in the common market. Considerable regional differences, fragmenting the labor market, should also be taken into account, as in some regions and municipalities there is almost full employment with close to zero unemployment, while in other parts of the country there are a large number of permanently unemployed or inactive persons.

Economic growth, increased productivity and global competitiveness in recent years have led to an increasingly full use of labor resources. As a wider range of labor force groups are included in employment, employers will be faced with increasingly limited untapped reserves of labor supply. According to NSI data, the permanently unemployed (over 12 months) are more than half of all unemployed, many of them have low qualifications and employability. The number of discouraged persons has fallen from nearly 210,000 ten years ago to only 38,000 in 2023. In total, inactive persons aged between 15 and 64 have fallen by more than half a million over the decade, with the majority of students, carers of young children and sick family members, and people with disabilities and reduced working capacity remaining in this group.

The age structure of the population also gives an unfavorable outlook for the expected dynamics of labor supply. The demographic replacement rate, taking into account the ratio between those entering working age (15-19) and those leaving (60-64), is 69 per 100, and in many areas it is much lower (up to and around 50 per 100). This suggests that, over a long period of time, young people starting work are significantly fewer than those who end their working life due to retirement.

Growing burden of the insurance system

The adverse effects on the insurance system are also deepening. According to NOI data, the dependency ratio, reflecting the ratio of pensioners to insured persons, is 72.4 to 100. Total expenditure on pensions increases from 9.3% of GDP in 2022 to 10.4% in 2023. expected to reach 10.8% in 2024. Regardless of the growth in the number of insured persons in recent years and the significant increase in insurance income, the shortfall in the "Pensions" of the state social insurance is growing and is expected to reach BGN 10.8 billion in 2024.

How to respond to imbalances?

These and many other structural imbalances must motivate both short- and long-term changes. Improving, in general, the productivity of human capital and expanding the labor supply can be achieved through various tools. For example, a relatively faster effect would be the release of a part of those engaged in non-productive activities in the public sector, who can immediately be available to the private sector, as well as the easing of labor force access from third countries to the Bulgarian labor market. labor. Bulgaria, however, is not the only country in the Central and Eastern Europe region facing severe demographic challenges – in the last two years alone, the Czech Republic, Romania, Slovakia (and others) have taken steps to make it easier to attract workers.

Increasing the employability of inactive persons of working age is one of the medium-term answers, although this also depends to some extent on the efforts of the private sector. Separately, solving seemingly trivial problems before labor market participation – for example, the lack of places in kindergartens in Sofia, the lack of long-term care services for people in difficulty, etc. under. – would "return“ several tens of thousands of people of working age. Expanding dual education for children in vocational high schools will also pay off in a few years when these students enter the market.

Long-term solutions are more complex and practically all over the "map" – education, healthcare, overall social infrastructure and quality of life, etc. The overall increase in educational outcomes, including by reducing dramatically the lowest performing students, carries over into future labor force productivity. More people in good health are more and longer engaged in productive activity. Separately, productivity is not only increased by improving human capital – on the "other side” of the equation is investment in new technology and capital, and this requires an institutional environment conducive to entrepreneurship, innovation and risk-taking.