Strong Wage Growth Amidst Rising Unemployment in Bulgaria

The Bulgarian labour market adjustment during the economic crisis stands out by significant job losses, but at the same time strong average wage growth. The predominance of job cuts over wage cuts is most problematic for vulnerable groups, sectors and regions. Wage adjustments have hardly helped limiting unemployment. Strong increases in unit labour costs (ULC) and real effective exchange rates (REER) seem not (yet) to have eroded external competitiveness as exports have remained strong. This can be explained by economic convergence, lower wage growth in tradable sectors and possibly only temporarily favourable export price developments on world markets. Rapid wage growth is influenced by a combination of factors. At first sight the institutional features of the Bulgarian labour market seem rather flexible. Some factors only impact the statistical average even without actual wage increases (like job cuts being concentrated in low paid jobs and a reduction in undeclared wages). However, actual wages have probably also increased, impacted by convergence from the lowest wage levels in the EU, skills and regional mismatches. One of the key features identified in this paper is a unique system of hundreds of different minimum income thresholds across sectors and occupations applied for the calculation of social security taxes. These thresholds are set close to the average wages prevalent in the same sectors and occupations, especially for the low-wage segment where unemployment is also the highest. To minimise the negative implications for employment, the minimum social security thresholds might usefully be reviewed. Recalibration of the thresholds could be combined with a wider set of labour market measures (ALMPs, training and education policies) to improve the employability of crisis-hit employees.