## _wp12131

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### Introduction
- After the 2008 global financial crisis, GDP and incomes in Bulgaria plunged in 2009 and the ensuing recession produced massive job losses that largely erased boom-era gains; as Bulgaria enters its fourth year since the 2008 shock, growth, incomes and job creation had yet to show convincing signs of recovery.
- Projection and policy-relevance:
  - Assuming that GDP growth reaches 2 percent per year it would take more than 10 years to bring the unemployment rate back to its pre-crisis low of 5.6 percent.

### Stylized facts on the Bulgarian labor market
- Slow Convergence–Low Productivity Nexus:
  - Bulgaria was the second poorest country in 2000 and did not catch up its EU New Member States peers during the following decade.
  - The income differential with the EU average was about €13,800 ($18000) in 2011.
  - Working age population shrunk by 7.7 percent over 2000–10.
  - Working age population expected to shrink about another 18.9 percent (relative to its value in 2000) by 2025.
  - If sustained productivity growth of 4¼ percent per year is achieved until 2040, convergence to Portuguese income levels would be possible.
  - If sustained productivity growth of 5¾ percent per year is achieved until 2040, closing the gap with average EU income levels would be feasible.
  - Past decade average productivity growth stated as 3¾ percent.
  - Firms’ payroll cuts during the crisis led to an estimated productivity growth of 5.3 percent in 2011.
  - Decline in real unit labor costs in 2011 was about 3.7-3.9 percent (NSI and Eurostat estimates), but real unit labor costs at end-2011 were 6.9 percent higher than in 2008.
  - Large gap between real wage and productivity growth in services (wholesale and retail trade, transport, hotels) suggests skill mismatches; service sector job vacancy rate close to industry but low compared to EU average.
  - Fall in firms’ gross operating surplus since the boom indicates productivity gains in services were shared with workers rather than translated into profits.
  - Between 2000 and 2006, Bulgaria’s productivity rose by 40 percent during 2000–06 and productivity growth was the main engine of growth.
  - Real GDP growth averaged 5.7 percent per year in that period, with contributions: labor 1.1 percentage points, capital 0.9 point, total factor productivity 3.7 percent.

- A track record of high structural unemployment:
  - Since the start of the crisis through end-2011 employment in Bulgaria fell by 12 percent.
  - Around 133,000 jobs per year were lost in the crisis, compared to 100,000 jobs created per year during the boom.
  - Registered unemployment rose by 5.5 percentage points and stood at 11.1 percent of the labor force; long-term unemployment reached 6.3 percent.
  - Job creation elasticity to GDP growth of 47 percent (i.e., a one-point increase in GDP growth brings about a 0.5 point increase in employment growth) — highest among the NMS.
  - Because post-crisis growth has been weak, progress in reducing unemployment has been slow; a 2 percent annual GDP growth leaves unemployment reduction requiring more than 10 years to return to 5.6 percent.
  - Boom job creation concentrated in construction, services, and low value-added manufacturing; downturn job losses concentrated in same sectors.
  - Manufacturing accounted for a larger share of losses in the downturn than of jobs created during the upturn.
  - Long-term unemployment represented a share of total unemployment consistently above 50 percent for much of the period.
  - Youth unemployment rose to 26 percent in 2011 (double that in 2008).
  - Total labor force declined by 6.7 percent since 2008.
  - 16 percent of the population reportedly emigrated in 2010 and an additional 20 percent were willing to do so.
  - High youth unemployment and low wages have been major drivers of emigration.

### Structural drivers of productivity growth
- Determinants highlighted by economic studies:
  - The most important determinants of growth include higher education, goods market efficiency, innovation and sophistication, and quality of infrastructure and institutions.
  - Growth of real per capita GDP is positively related to initial human capital proxied by school enrollment rates.
  - Information and communication technology investments and the role of labor market regulation in adoption are important factors of productivity divergence and concentration of employment among more productive workers.

### International indicators and cross-country empirical analysis
- Sample and estimation:
  - Cross-sectional Ordinary Least Square (OLS) model estimated on country averages over 2000-2010.
  - 76 countries (mainly advanced and middle income countries); the poorest LICs and oil producers are excluded.
  - Annual productivity growth in logarithms is the dependent variable; each right-hand-side coefficient represents the percent change in productivity for a one unit change in the corresponding indicator.
- Model structure (conceptual):
  - Log of productivity regressed on 11 categories: institutions, infrastructure, financial market development, goods market efficiency, health and primary education, higher education, innovation and sophistication, labor market efficiency, macroeconomic environment, market size, and technological readiness, plus capital and a constant.
- Regression summary:
  - Variables with significant positive effects on labor productivity growth: institutions, infrastructure, goods market efficiency, higher education, innovation and sophistication, and education.
  - Technological readiness coefficient reported as -0.3.
  - Health and primary education coefficient reported as -0.2.
  - Constant = 11.4***.
  - R-square = 0.7.
  - Observations = 76.

### Simulation: Closing Bulgaria’s gaps to EU levels — projected productivity effects
- Method:
  - Estimated coefficients from the cross-country regression applied to Bulgaria by multiplying each coefficient by the differential of the corresponding indicator between Bulgaria and the EU (equation (2)).
- Key projected effects:
  - Closing the gap with the EU average in the key areas would permanently boost productivity growth by a total of 1 percentage point for Bulgaria.
  - Bulgaria’s average productivity growth over the past decade is described as about around 3¾ percent.
  - Largest individual gains:
    - Raising infrastructure quality to EU levels would yield one third a percentage point of productivity growth.
    - Raising goods market efficiency to EU levels would yield one third a percentage point of productivity growth.
  - Despite a large gap with the EU in institutional quality, the small regression coefficient for institutions implies the smallest gains from addressing institutional deficiencies.
  - When benchmarking instead to countries at the lower end of the euro area (Portugal representative), similar gains are achievable by targeting higher education, goods market efficiency, innovation and sophistication, infrastructure and institutions; the magnitude from each area differs depending on the differential of standards.

### Identified constraints and diagnostics from international indicators
- Weakest rankings for Bulgaria in the World Bank Doing Business Indicators and the Global Competitiveness Index are primarily in:
  - Institutions
  - Infrastructure
  - Goods market efficiency
- Additional diagnostics:
  - Bulgaria ranks 73rd out of 178 countries in the Corruption Perception Index.
  - The burden of customs procedures, cumbersome rules and regulations, inconsistent enforcement, and excessive administration fees and local taxes hinder goods market efficiency and FDI.
  - A mismatch of educational skills and employers’ needs is a large impediment to productivity (vocational skills, language, computer, and management skills).
  - Lack of technological absorption capacity and financing constraints limit innovation and adoption of productivity-enhancing technologies.
  - Poor quality of roads, railways, and energy infrastructure increases firms’ operating costs and impedes trade and labor mobility.
  - Firms face major obstacles in terms of time and consistency when dealing with the judiciary, particularly in contract enforcement.

### Policy recommendations and reform priorities (elements of the National Reform Program (NRP) and complementary measures)
- General orientation:
  - The Bulgarian NRP (2011-15) targets reforms in higher education, goods market efficiency, innovation and sophistication, infrastructure quality, and institutions — areas identified as holding the greatest potential to boost productivity.
  - Many NRP reforms also aim to reduce corruption and the grey economy.
- Higher education and labor skills:
  - Immediate measures: better job placement services (including centralized computer matching services), targeted vocational, technology and language training programs (some financed with EU social funds).
  - Longer-term measures: coordinate tertiary and vocational education design with employers’ needs (especially in tradable sectors), establish a national system for skills forecasting, apprenticeships, and individual counseling through labor offices, and programs to update skills of older workers.
- Goods market efficiency and administrative burden:
  - Continue public administration and regulatory reforms (e.g., down-sizing of staff; reducing the cost of starting a business from almost 10 to 0 percent of per capita income between 2008 and 2010).
  - Targeted measures at local governments:
    - Reduce the number of procedures and implement e-governance infrastructure organized to provide a single point of contact for complying with central and local licensing, permits, and fees.
    - Draft a law on Local Self-governance and Local Administration restricting local authorities’ ability to administer regulatory regimes not stipulated in the law.
    - Improve enforcement through training central and municipal authorities and random monitoring.
    - Implement silent approval for business registration (automatic approval if authorities do not respond within a certain amount of time).
  - Additional proposal outside the NRP: across-the-board implementation of automatic approval of most procedures, including applications for licenses and permits (not just initial business registration).
- Innovation, technological absorption and R&D financing:
  - Promote public-private coordinated research targeted at technology adoption (for example through technology parks financed with EU funds).
  - Coordinate national and EU research via Bulgaria’s scientific research fund (financed by EU funds).
  - Ease financing constraints through competitive use of the National Science Fund, better protection of intellectual property rights, and educating banks on lending for research and development.
- Infrastructure investment and management:
  - Major investment needed to improve roads, railways, and energy infrastructure to reduce firms’ costs and strengthen Bulgaria’s role as a conduit for trade.
  - Ongoing and planned projects: restructuring the railway sector (supported by the World Bank) to modernize the railway network over three years; projects for Trakia Motorway, Struma Motorway, and bridges financed with EU funds.
  - Emphasize monitoring quality and maintenance and outline plans for revamping energy infrastructure beyond basic efficiency-enhancers while maintaining macroeconomic stability under a currency board.
- Judicial and institutional reforms:
  - Comprehensive judicial reform is needed but will take time.
  - Interim measures: district court internet portals posting time to resolution and decisions to increase transparency; measures to improve enforcement of contracts to reduce breaches and reduce firms’ costs.

### Conclusions and policy implications
- Low labor productivity is constraining Bulgaria’s convergence with the EU amid an aging population; weaknesses in the business environment and higher education are key factors.
- Increased competitiveness would raise investment, production, labor demand, incomes, and jobs; however, achieving sustained high productivity growth requires ambitious structural reforms whose effects take time.
- Policy priorities with the largest potential payoffs include:
  - Raising standards in higher education and aligning skills with employers’ needs to boost productivity and reduce unemployment.
  - Increasing research and development and technological absorption to adopt advanced productivity-enhancing technologies.
  - Improving road and railway transport to support trade with Europe and reduce regional disparities.
  - Increasing transparency, predictability, and reducing administrative burdens at regional and local levels to improve goods market efficiency.
  - Judicial reforms to improve contract enforcement and reduce institutional barriers.

*Source: IMF staff estimates based on World Bank Doing Business Indicators and Global Competitiveness Index (content unit: _wp12131 - 17.      International indicators point to various factors hindering labor productivity).*

### References...............................................................................................

### _wp12131 - References...............................................................................................

### Introduction
- After the 2008 global financial crisis, GDP and incomes in Bulgaria plunged in 2009 and the ensuing recession produced massive job losses that largely erased boom-era gains; as Bulgaria enters its fourth year since the 2008 shock, growth, incomes and job creation had yet to show convincing signs of recovery.
- Projection and policy-relevance:
  - Assuming that GDP growth reaches 2 percent per year it would take more than 10 years to bring the unemployment rate back to its pre-crisis low of 5.6 percent.

### Stylized facts on the Bulgarian labor market
A. Slow Convergence–Low Productivity Nexus
- Cross-country income and convergence:
  - Bulgaria was the second poorest country in 2000 and did not catch up its EU New Member States peers during the following decade.
  - The income differential with the EU average was about €13,800 ($18000) in 2011.
- Demographics and labor supply:
  - Working age population shrunk by 7.7 percent over 2000–10.
  - Working age population expected to shrink about another 18.9 percent (relative to its value in 2000) by 2025.
- Productivity growth scenarios and implications:
  - If sustained productivity growth of 4¼ percent per year is achieved until 2040, convergence to Portuguese income levels would be possible.
  - If sustained productivity growth of 5¾ percent per year is achieved until 2040, closing the gap with average EU income levels would be feasible.
  - Past decade average productivity growth stated as 3¾ percent.
- Recent productivity and cost dynamics:
  - Firms’ payroll cuts during the crisis led to an estimated productivity growth of 5.3 percent in 2011.
  - Decline in real unit labor costs in 2011 was about 3.7-3.9 percent (NSI and Eurostat estimates), but real unit labor costs at end-2011 were 6.9 percent higher than in 2008.
- Sectoral patterns and skill mismatch:
  - Large gap between real wage and productivity growth in services (wholesale and retail trade, transport, hotels) suggests skill mismatches; service sector job vacancy rate close to industry but low compared to EU average.
  - Fall in firms’ gross operating surplus since the boom indicates productivity gains in services were shared with workers rather than translated into profits.
- Productivity versus employment contributions:
  - Between 2000 and 2006, Bulgaria’s productivity rose by 40 percent during 2000–06 and productivity growth was the main engine of growth.
  - Real GDP growth averaged 5.7 percent per year in that period, with contributions: labor 1.1 percentage points, capital 0.9 point, total factor productivity 3.7 percent.

B. A track record of high structural unemployment
- Aggregate employment and unemployment changes:
  - Since the start of the crisis through end-2011 employment in Bulgaria fell by 12 percent.
  - Around 133,000 jobs per year were lost in the crisis, compared to 100,000 jobs created per year during the boom.
  - Registered unemployment rose by 5.5 percentage points and stood at 11.1 percent of the labor force; long-term unemployment reached 6.3 percent.
- Job creation elasticity and recovery prospects:
  - Job creation elasticity to GDP growth of 47 percent (i.e., a one-point increase in GDP growth brings about a 0.5 point increase in employment growth) — highest among the NMS.
  - Because post-crisis growth has been weak, progress in reducing unemployment has been slow; a 2 percent annual GDP growth leaves unemployment reduction requiring more than 10 years to return to 5.6 percent.
- Cyclicality and sectoral composition of job flows:
  - Boom job creation concentrated in construction, services, and low value-added manufacturing; downturn job losses concentrated in same sectors.
  - Manufacturing accounted for a larger share of losses in the downturn than of jobs created during the upturn.
  - Ease of laying off staff and cyclical exposure contributed to large labor shedding.
- Long-term and youth unemployment:
  - Long-term unemployment represented a share of total unemployment consistently above 50 percent for much of the period.
  - Youth unemployment rose to 26 percent in 2011 (double that in 2008).
  - High youth unemployment and low wages have been major drivers of emigration.
- Labor force and migration:
  - Total labor force declined by 6.7 percent since 2008.
  - 16 percent of the population reportedly emigrated in 2010 and an additional 20 percent were willing to do so.

### Structural drivers of productivity growth
- Determinants highlighted by economic studies:
  - The most important determinants of growth include higher education, goods market efficiency, innovation and sophistication, and quality of infrastructure and institutions.
  - Growth of real per capita GDP is positively related to initial human capital proxied by school enrollment rates.
  - Information and communication technology investments and the role of labor market regulation in adoption are important factors of productivity divergence and concentration of employment among more productive workers.

*Italic: Source: _wp12131 - References...............................................................................................*

### 17.      International indicators point to various factors hindering labor productivity

### 17.      International indicators point to various factors hindering labor productivity

### Cross-country empirical analysis and key quantitative results
- Sample and estimation:
  - Cross-sectional Ordinary Least Square (OLS) model estimated on country averages over 2000-2010.
  - 76 countries (mainly advanced and middle income countries); the poorest LICs and oil producers are excluded.
  - Annual productivity growth in logarithms is the dependent variable; each right-hand-side coefficient represents the percent change in productivity for a one unit change in the corresponding indicator.
- Model structure (conceptual):
  - Log of productivity regressed on 11 categories: institutions, infrastructure, financial market development, goods market efficiency, health and primary education, higher education, innovation and sophistication, labor market efficiency, macroeconomic environment, market size, and technological readiness, plus capital and a constant.
- Regression summary (Table 1):
  - Variables with significant positive effects on labor productivity growth: institutions, infrastructure, goods market efficiency, higher education, innovation and sophistication, and education.
  - Technological readiness coefficient reported as -0.3.
  - Health and primary education coefficient reported as -0.2.
  - Constant = 11.4***.
  - R-square = 0.7.
  - Observations = 76.

### Simulation: Closing Bulgaria’s gaps to EU levels — projected productivity effects
- Method:
  - Estimated coefficients from the cross-country regression applied to Bulgaria by multiplying each coefficient by the differential of the corresponding indicator between Bulgaria and the EU (equation (2)).
- Aggregate and country-specific projections:
  - Closing the gap with the EU average in the key areas would permanently boost productivity growth by a total of 1 percentage point for Bulgaria.
  - Bulgaria’s average productivity growth over the past decade is described as about around 3¾ percent.
  - Largest individual gains:
    - Raising infrastructure quality to EU levels would yield one third a percentage point of productivity growth.
    - Raising goods market efficiency to EU levels would yield one third a percentage point of productivity growth.
  - Despite a large gap with the EU in institutional quality, the small regression coefficient for institutions implies the smallest gains from addressing institutional deficiencies.
  - When benchmarking instead to countries at the lower end of the euro area (Portugal representative), similar gains are achievable by targeting higher education, goods market efficiency, innovation and sophistication, infrastructure and institutions; the magnitude from each area differs depending on the differential of standards (e.g., greater gains from innovation and sophistication where the differential is greatest).

### Identified constraints and diagnostics from international indicators
- Bulgaria’s weakest rankings in the World Bank Doing Business Indicators and the Global Competitiveness Index are primarily in:
  - Institutions
  - Infrastructure
  - Goods market efficiency
- Other diagnostic points:
  - Bulgaria ranks 73rd out of 178 countries in the Corruption Perception Index.
  - The burden of customs procedures, cumbersome rules and regulations, inconsistent enforcement, and excessive administration fees and local taxes hinder goods market efficiency and FDI.
  - A mismatch of educational skills and employers’ needs is a large impediment to productivity (vocational skills, language, computer, and management skills).
  - Lack of technological absorption capacity and financing constraints limit innovation and adoption of productivity-enhancing technologies.
  - Poor quality of roads, railways, and energy infrastructure increases firms’ operating costs and impedes trade and labor mobility.
  - Firms face major obstacles in terms of time and consistency when dealing with the judiciary, particularly in contract enforcement.

### Policy recommendations and reform priorities (elements of the National Reform Program (NRP) and complementary measures)
- General orientation:
  - The Bulgarian NRP (2011-15) targets reforms in higher education, goods market efficiency, innovation and sophistication, infrastructure quality, and institutions — areas identified as holding the greatest potential to boost productivity.
  - Many NRP reforms also aim to reduce corruption and the grey economy.
- Higher education and labor skills:
  - Immediate measures: better job placement services (including centralized computer matching services), targeted vocational, technology and language training programs (some financed with EU social funds).
  - Longer-term measures: coordinate tertiary and vocational education design with employers’ needs (especially in tradable sectors), establish a national system for skills forecasting, apprenticeships, and individual counseling through labor offices, and programs to update skills of older workers.
- Goods market efficiency and administrative burden:
  - Continue public administration and regulatory reforms (e.g., down-sizing of staff; reducing the cost of starting a business from almost 10 to 0 percent of per capita income between 2008 and 2010).
  - Targeted measures at local governments:
    - Reduce the number of procedures and implement e-governance infrastructure organized to provide a single point of contact for complying with central and local licensing, permits, and fees.
    - Draft a law on Local Self-governance and Local Administration restricting local authorities’ ability to administer regulatory regimes not stipulated in the law.
    - Improve enforcement through training central and municipal authorities and random monitoring.
    - Implement silent approval for business registration (automatic approval if authorities do not respond within a certain amount of time).
  - Additional proposal outside the NRP: across-the-board implementation of automatic approval of most procedures, including applications for licenses and permits (not just initial business registration).
- Innovation, technological absorption and R&D financing:
  - Promote public-private coordinated research targeted at technology adoption (for example through technology parks financed with EU funds).
  - Coordinate national and EU research via Bulgaria’s scientific research fund (financed by EU funds).
  - Ease financing constraints through competitive use of the National Science Fund, better protection of intellectual property rights, and educating banks on lending for research and development.
- Infrastructure investment and management:
  - Major investment needed to improve roads, railways, and energy infrastructure to reduce firms’ costs and strengthen Bulgaria’s role as a conduit for trade.
  - Ongoing and planned projects: restructuring the railway sector (supported by the World Bank) to modernize the railway network over three years; projects for Trakia Motorway, Struma Motorway, and bridges financed with EU funds.
  - Emphasize monitoring quality and maintenance and outline plans for revamping energy infrastructure beyond basic efficiency-enhancers while maintaining macroeconomic stability under a currency board.
- Judicial and institutional reforms:
  - Comprehensive judicial reform is needed but will take time.
  - Interim measures: district court internet portals posting time to resolution and decisions to increase transparency; measures to improve enforcement of contracts to reduce breaches and reduce firms’ costs.

### Conclusions and policy implications
- Low labor productivity is constraining Bulgaria’s convergence with the EU amid an aging population; weaknesses in the business environment and higher education are key factors.
- Increased competitiveness would raise investment, production, labor demand, incomes, and jobs; however, achieving sustained high productivity growth requires ambitious structural reforms whose effects take time.
- Policy priorities with the largest potential payoffs include:
  - Raising standards in higher education and aligning skills with employers’ needs to boost productivity and reduce unemployment.
  - Increasing research and development and technological absorption to adopt advanced productivity-enhancing technologies.
  - Improving road and railway transport to support trade with Europe and reduce regional disparities.
  - Increasing transparency, predictability, and reducing administrative burdens at regional and local levels to improve goods market efficiency.
  - Judicial reforms to improve contract enforcement and reduce institutional barriers.

*Source: IMF staff estimates based on World Bank Doing Business Indicators and Global Competitiveness Index (content unit: _wp12131 - 17.      International indicators point to various factors hindering labor productivity).*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12131.pdf_