WORLD BANK TECHNICAL PAPER NO. 494 lurope atndZ Central .sia Poierq Reduction andl EL)nomiz Al'anagement D)evelopmu'ntS eries Work In progress WTP494 for pubic dislcussion May 2001 From Transition to EU Accession The Bulgarian Labor M11arket During the 1990s 00,~~~~~. 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Copyright C) 2001 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing May 2001 1 23404030201 Technical Papers are published to communicate the results of the Bank's work to the development community with the least possible delay. The typescript of this paper therefore has not been prepared in accordance with the procedures appropriate to formal printed texts, and the World Bank accepts no responsibility for errors. Some sources cited in this paper may be informal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. 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For permission to reprint individual articles or chapters, please fax your request with complete information to the Republication Department, Copyright Clearance Center, fax 978-7504470. All other queries on rights and licenses should be addressed to the World Bank at the address above or faxed to 202-522-2422. ISBN: 0-8213-4916-3 ISSN: 0253-7494 Pietro Garibaldi, Mattia Makovec, and Gabriella Stoyanova are consultants to the Europe and Cen- tral Asia Poverty Reduction and Economic Management Departrnent at the World Bank. Library of Congress Cataloging-in-Publication Data Garibaldi, Pietro 1968- From transition to EU accession: the Bulgarian labor market over the 90s/ Pietro Garibaldi, Mattia Makevoc, Gabriella Stoyanova p. cm. - (World Bank technical paper; no. 494. Europe and Central Asia poverty reduction and economic management series) Includes bibliographical references and index ISBN 0-8213-4916-3 1. Labor market-Bulgaria. 2. Industrial relations-Bulgaria. 3. European Union-Bulgaria. I. Makovec, Mattia, 1974-. II. Stoyanova, Gabriella, 1972-. III. Title. IV. World Bank technical paper; no. 494. V. World Bank technical paper. Europe and Central Asia poverty reduction and economic management series. HD5811.5.A6 G35 2001 331.12'09499-dc2l 00-054977 CONTENTS EXECUTIVE SUMMARY ..................................................................V THE ADJUSTMENT PROCESS IN THE LABOR MARKET ..................................................................V A SEEMINGLY SCLEROTIC LABOR MARKET ................................................................. VI LABOR MARKET INSTITUTIONS AND COMPLIANCE WITH THE ACQUIS COMMUNA UTIRE ............... ........................ VIl KEY POLICY RECOMMENDATIONS ..................................................................VIII CHAPTER 1: LABOR ADJUSTMENT DURING THE TRANSITION ............................................................. 1 EMPLOYMENT DYNAMICS AND STRUCTURAL CHANGE ..................................................................1 EMPLOYMENT REALLOCATION OVER THE TRANSITION ................................................................. 3 DYNAMICS OF UNEMPLOYMENT AND LABOR FORCE PARTICIPATION ................................................................. 5 CHAPTER 2: REAL WAGES, PRODUCTIVITY AND LABOR COSTS ........................................................ 18 AGGREGATE WAGE DYNAMICS .............................................................. .. 18 REAL WAGES AND PRODUCTIVITY DYNAMICS ACROSS SECTORS ............................................. .................... 20 THE STRUCTURE OF LABOR COSTS ................................................................. 20 PRODUCTIVITY BASED DOLLAR WAGES ................................................................. 23 CHAPTER 3: MOBILITY AND LABOR MARKET FLOWS IN BULGARIA ................................................ 31 DATA SOURCE, CONCEPTS AND DEFINITIONS ................................................................. 31 AGGREGATE LABOR FLOWS IN BULGARIA AND OTHER CEE ECONOMIES .............................................................. 33 THE STRUCTURE OF LABOR MARKET FLOWS BY AGE, GENDER AND EDUCATION .......................... ........................ 36 CHAPTER 4: LABOR MARKET INSTITUTIONS, POLICIES, AND COMPLIANCE WITH THE ACQUIS COMMUNAUTAIRE .............................. 46 TRADE UNIONS AND LABOR RELATIONS .............................. 47 PASSIVE MEASURES FOR THE UNEMPLOYED: THE UNEMPLOYMENT BENEFITS AND ................................................ 52 SOCIAL ASSISTANCE SYSTEM ........................................................... 52 ACTIVE LABOR MARKET POLICIES ........................................................... 54 COMPLIANCE WITH THE ACQUIS COMMUNA UTAIRE .......................................................... 55 EQUAL OPPORTUNITIES FOR MEN AND WOMEN ........................................................... 56 HEALTH AND SAFETY AT WORK ........................................................... 57 CO-ORDINATION OF SOCIAL SECURITY SCHEMES ........................................................... 58 LABOR LAW AND WORKING CONDITIONS ........................................................... 58 BOXES Box 4.1: Bulgarian Labor Market and Eurosclerosis ....................................................... 51 Box 4.2: Bulgarian Labor Market and the Acquis Conmmunautaire ....................................................... 60 FIGURES 1.1. Employment dynamics in Bulgaria and other CEE economies ....................................................... 2 1.2. Unemployment flows in Bulgaria ....................................................... 6 1.3. Unemployment and vacancies in Bulgaria ....................................................... 6 1.4. Standardized regional unemployment rates: 1993-97 ....................... ................................ 8 2.1a. Real wage growth: "First Round" candidates ....................................................... 19 2.1b. Real wage growth: "Second Round" candidates ........................................................ 19 (continued) 2.2a. Employment rates and payroll taxes (1995) ........................................................................ 21 2.2b. Payroll taxes and "systemic dependency ratio" (1995) ................................................................... 22 2.3. Actual and estimated dollar wages in manufacturing ....................................................................... 24 3.1. Labor market flows ........................................................................ 33 3.2. Labor market flows for selected countries ........................................................................ 34 4.1. Union membership in Central Eastern Europe (mid '90s) ............................................................... 49 4.2. Relationship between employers and the unions ....................................... ................................. 49 4.3. Bargaining level determining the basic wage ........................................................................ 50 TABLES 1.1. Yearly employment change of European Union candidates for enlargement: 1989-98 ...................9 1.2. Labor shedding and employment restructuring in Bulgaria ............................................................. 10 1.3. Distribution of employment growth by industry: 1989-96 ............................................................... 11 1.4. Growth rate of GDP of European Union candidates for enlargements: 1989-98 ............................. 12 1.5. Annual net and gross job flows ......................................................................... 13 1.6. Annual average gross and net job flows rates according to ownership type .................................... 14 1.7. Labor force participation rates ........................................................................ 15 1.8. Unemployment structure by age, gender, and skills ........................................................................ 16 1.9. Evolution of regional unemployment ........................................................................ 17 2.1. Yearly change of aggregate wage of European union candidates for enlargements: 1989-97 ......... 25 2.2. Top to bottom decile ratio of earning distribution ........................................................................ 26 2.3. Dynamics of real wages and productivity ........................................................................ 26 2.4. Real wages and productivity by sector in Bulgaria ........................................................................ 27 2.5. Non wage components of labor costs in selected countries ............................................................. 28 2.6. Non wage components of labor costs in Bulgaria ........................................................................ 29 2.7. Dollar wages during the transition ........................................................................ 30 3.1. Aggregate transition probabilities ........................................................................ 38 3.2. Transition probabilities by gender ........................................................................ 39 3.3. Transition probabilities by age ........................................................................ 40 3.4. Transition probabilities by educational level . ........................................................................ 42 3.5. Transition probabilities by branches ........................................................................ 43 3.6. Long-term unemployment structure and transition probabilities .................................................... 45 4.1. Duration of unemployment benefits ........................................................................ 61 4.2. Basic features of social assistance programs . ........................................................................ 61 4.3. Basic features of the unemployment benefits system ....................................................................... 62 4.4. Features of the unemployment benefits and social assistance systems by family types .......... ..... 63 4.5. Gross replacement rates by family type in Czech Republic and Romania, 1995 ............................. 64 4.6. Unemployment benefits coverage rates ........................................................................ 64 4.7. Minimum wage-average gross wage ratio ........................................................................ 64 4.8. Breakdown of labor market policies expenditure in Bulgaria .......................................................... 65 4.9. Composition of labor policies expenditure in transition economies ................................................. 65 v EXECUTIVE SUMMARY This paper studies the Bulgarian labor market with a view to understand the interactions between the performance of the Bulgarian economy and the functioning of its labor market. The paper assesses also the position of Bulgaria vis-a-vis compliance with the acquis communautaire, and provides a set of key policy recommendations that may enhance the job creation potential in the years to come. In the aftermath of a steep adjustment process, the Bulgarian labor market resembles a sclerotic market, not dissimilar from the worst performing European markets. Nevertheless, the existing labor market policies and institutions, with the exception of excessively high payroll taxes and a somewhat strict employment protection legislation, are not necessarily synonymous of labor market rigidity: unemployment support schemes are modest, the minimum wage is not high, and industrial relations system do not appear to prevent an efficient wage dispersion across sectors. Thus, the poor performance of Bulgaria is likely to be the result of a chronic inability to restructure its old industrial sector, and to tackle fundamental structural problems. In terms of compliance with the acquis communautaire, Bulgaria's legislation appears aligned with most of the EU requirements in the labor area. However, the standardization of working conditions requires substantial investments and a strengthening of the administrative capacity to implement EU legislation. The key policy recommendations call for a reduction in the payroll taxes, some fine-tuning in the industrial relations system, an increase in labor market flexibility, and a gradual approach vis-a-vis compliance with the acquis communautaire, particularly in the process of standardizing working conditions. The Adjustment Process in the Labor Market Labor shedding in Bulgaria has been one of the steepest among transition economies in Central-Eastern Europe (CEE), and it has not been followed by a long run process of job reallocation from industry and agriculture towards the service sector. Indeed, out of 1.2 million jobs being destroyed over the last ten years, 1 million jobs have been lost in manufacturing, the other losses being concentrated in the service sector. This implies that, in relative terms, agricultural share in total employment has grown from 18 to more than 25 percent. Aggregate real wages in Bulgaria fell by some 40 percent over the 1990s. Political instability, erratic macroeconomic and fiscal policies during the early years of the transition, combined with the Government's failure to tackle fundamental structural problems have largely contributed to this outcome. Existing measures of employment reallocation suggest that restructuring in Bulgaria is taking place at a slower speed than in other countries candidates for EU accession. While separation rates are very high, the job finding probabilities are the lowest among the other countries in Central-Eastern Europe: this suggests that the poor performances of Bulgarian labor market have been linked not only to fast labor shedding, but also to a chronic inability to create jobs. Nevertheless, in every single year there is a positive value of gross job creation, suggesting that jobs were being created at all phase of the transition, but that such heterogeneity was more important in other countries. The stop-and-go nature of the structural reform programs, and the delays in macroeconomic stabilization have certainly put sands in the wheel of the overall transformation process in Bulgaria. vi The other side of the coin of the dramatic decline of employment rates experienced by Bulgaria has been the strong increase in the social security burden on the active population. Employment declines have been also compounded by widespread avoidance to paying social security contributions, which reduced the number of contributors well beyond the level implied by employment losses. Thus, the so-called "systemic dependency ratio" (the ratio of pensioners to the number of contributors) in Bulgaria is currently above 80 per cent, while the OECD average is below 40 per cent, and in the other CEE economies lies within the 50-60 per cent range. A Seemingly Sclerotic Labor Market While unemployrnent rose during the early stages of transition to more than 20 per cent of the labor force, it is still around 14 per cent, persisting significantly above the average of the other CEE economies. Bulgaria displays a dramatic incidence of youth unemployment, and up to one-fourth of the pool of those who have been unemployed for at least one year is made up of people aged 24 or less. Older workers, often attached to firms that still need to be restructured, remain a minor component of the unemployment pool. The high incidence of long term unemployment is likely to be linked to a reinforcing vicious circle between the size of the output loss and the delays in implementing structural reforms: as the time since the beginning of the transition elapsed, the loss of skills experienced during unemployment spells reduced the employment prospects of the unemployed workers, which, in any event, were the most seriously affected by delays in undertaking structural reforms. The labor market prospects of low educated workers, particularly negative at the early stage of the transition, do not show any sign of improvement. Unemployment in Bulgaria has also a regional dimension, with a dispersion in the unemployment rates across regions that is both increasing and persistent. Regional unemployment unbalances across regions are comparable to that observed in most European countries. More important, however, is the fact that regional unemployment is rising even when total unemployment is falling. Further, such disparities appear also to be persistent, with the standardized ranking of regions being very stable over time. Bulgaria features a dramatic level of "discouraged workers", that is unemployed workers who appear to quit the labor force. The evidence, based on the micro-data of the Labor Force Surveys, suggests that an unemployed people is as likely to become employed as he or she is likely of dropping from the labor force. This "discouragement" effect is potentially very important, since it may indicate either a huge social waste of potentially productive capacity, or, more likely, a large flows of workers towards the unofficial economy. Indeed, the flows of discouraged workers is estimated to be particularly large among the youth, a phenomenon that represents indirect evidence of substantial workers flows towards the unofficial economy. A high systemic dependency ratio means that social policy revenues have to be collected from a narrow tax base, and hence increasing statutory contribution rates. There is a rather evident negative association across CEE economies between the size of the contribution base and the statutory contribution rates to be paid for by employees as well as employers on the top of the wage bill. The issue is that higher contribution rates are often associated with lower levels of Executive Summary vii participation, and notably lower employment rates. Not surprisingly, the level of social security contributions in Bulgaria is by far the highest among that of the other CEE economies. By examining in further details the composition and the magnitude of payroll contributions on labor in Bulgaria, it appears that the sum of social security contributions, health care taxes, and contributions to the unemployment fund reach 60 percent of gross income for some categories of workers. The bulk of this burden is clearly linked to the social security contributions, which reached 54 percent of gross income in 1997 for primary workers, a set of workers that are entitled to early retirement benefits in light of their particular jobs (e.g. miners). The rest of the contributions, health care contributions and unemployment fund, are still sizeable, but in line with the rest of the OECD countries. Productivity differentials across sectors, albeit substantial throughout the transition, are now closely linked to differences in real wages, suggesting that labor market forces are serious!y at work, and are likely to ensure a more efficient allocation of labor in the years to come. The substantial increase in real wages observed in the last few years appears consistent with an estimated "productivity based dollar wage", suggesting that Bulgarian competitiveness is not at risk. Dollar wages in Bulgaria in 1998 were equal to $143, and represent some 70 percent of those in the Baltic countries, and only 50 percent of dollar wages in most CEE countries, including Poland and Hungary. However, a low value of dollar wages is not sufficient, by itself, to judge a country's competitiveness, since it does not take into account cross country differences in aggregate productivity. The paper estimates a productivity based dollar wage for Bulgaria, and finds that there is a sizeable difference between the actual and the productivity based wage, implying that Bulgaria competitiveness is not at risk. Labor Market Institutions and Compliance with the Acquis Communautaire The functioning of the tripartite industrial relations system seems acceptable, especially if compared to that of other Central European Countries. Overall, union membership is quite strong: existing estimates suggest that union members account for more than 70 percent of total employment, while this share appears to be only 20 percent in other CEE economies. While there seems to be a general tendency among CEE countries towards a more decentralized bargaining structure, this trend is not apparent in Bulgaria. The increasing incidence of long-terrn unemployment in CEE Countries and Bulgaria since the beginning of transition, and the subsequent fiscal pressure have lead to an overall tightening of the eligibility requirements for benefits entitlement. hn the area of passive policies, we have found out that the generosity of unemployment benefits is diminished, while that of social assistance has slightly grown, with a tendency to provide greater assistance to family types with no earners at all. There is a marked tendency to reallocate resources from passive to active labor policies, which appears to be in line with a general trend in place in other transition economies. In Bulgaria, Active Labor Market Policies (ALMP) envisage several policies, such as job search assistance, financial support to the unemployed to start their own business, programs for the unemployment in particularly depressed areas, training and re-training programs for the long term unemployed, etc. While ALMP are more costly, and require high administrative capacity in implementing each program, they should be able to provide better tailored instruments for the re- employability of the unemployed than simple unemployment compensation schemes. However, the scant existing evidence suggests that ALMP in Bulgaria have had extremely weak effects either on new job creation and on enhancing job finding probability for the unemployed. Despite several revisions over the years since the beginning of the transition, there is an urgent necessity to revise the most restrictive provisions in the Labor Code. The procedures for collective redundancies seem quite rigid and require a difficult coordination with the trade unions, representing an obstacle to firn-level restructuring. While employment termination for individual contracts is technically easy, there seems to be a practical difficulty in implementing dismissals, in light of the jurisdictional bias in favor of labor. In other dimensions, however, the labor codes suits the needs of a market economy, avoiding some of the most restrictive provisions, including the prohibition of fixed-term contracts, part-time and additional work, unduly onerous standards of firings and lay-offs, found in neighboring transition economies. Bulgaria is making considerable efforts to align its regulatory framework in the field of labor markets with the EU accession requirements. In the labor area, adoption of the acquis communautaire implies the recognition of a certain set of rights to workers in Bulgaria, as well as the standardization of working conditions to those in the EU. In principle, most of the worker's rights defined in EU regulations have long been part of Bulgarian labor legislation. However, effective membership in the EU requires not just a harmonized legal basis, but also an economy able to withstand the competitive pressures of the internal market and a flexible environment promoting labor mobility. The standardization of working conditions to those of the EU requires substantial investments which, although desirable, should not necessarily be undertaken immediately. Indeed, an immediate compliance with working conditions in the EU may be too risky, and ultimately delay accession. In the short run, the investments required to have the working conditions in the old Bulgarian industrial sector consistent with those prevalent in the EU may increase labor costs, and harm the developments of the small and medium enterprises. This in turn, may inflate the unofficial economy, and ultimately delay EU accession. Key Policy Recommendations The structure of labor cost is characterized by excessively high payroll taxes, whose rate reach 50 percent of gross labor income for a large size of the employment pool. This structure is a cause of concerns for the job generation prospect of Bulgaria, and substantial cuts in contributions are likely to be beneficial. However, the cuts in social security contributions should not be accompanied by further cuts in the already scarce level of social assistance. Thus, a determined effort on the part of the authorities to increase compliance in the are of social security contributions is vital. While there is evidence that the functioning of the industrial relations system is acceptable, if compared to that of other Central European Countries, some fine-tuning is needed. Executive Summary ix In particular, improvements are needed towards more de-centralized bargaining at local level to address high regional unemployment persistence and differentials. Even though the Labor Code is now a relatively modem document, some improvements are necessary. These include a simplification of the regulation in the area of collective dismissal, the reductions of requirements with respect to paid education leave and maternity and child leave; reform of sick pay regulations, and easier termination for misconduct or economic reasons. These problems areas should be addressed with the amendments of the code currently under discussion in the Parliament. In light of the large rates of unemployment among uneducated people with very low probabilities of reemployment, we believe that the shift from unemployment benefits toward social assistance is to be welcome, and we expect to see a further tendency in targeting specific unemployed groups in the years to come. However, in light of the current extent of the long term unemployment, the present coverage rate doesn't seem to ensure an adequate income source for the majority of the joblessness, whose risk to fall into poverty has thereby increased through the years. While the shift from passive support to the unemployed to a set of more active measures may enhance the job generation prospects of the unemployed, there are some risks involved, since Active Labor Market Policies may involve substantial deadweight losses and substitutions effects. Thus, the decision of the Bulgarian authorities to undergo a rigorous evaluation of the ALMP is important, and we recommend that future shifts in policies should take into account the results of the evaluation. This evaluation is now well advanced, and its comprehensive results should be available soon. In principle, most of the workers" rights defined in EU regulations have long been part of Bulgarian labor legislation. Because of an insufficient compliance, however, substantial gaps with EU requirements remain, even when the legal provisions appear to be in place. Thus, the process of legal approximation remains to be matched by a further strengthening of the administrative capacity to implement EL' legislation. Compliance with EU working conditions requires resources and administrative capacity to ensure compliance that are not yet available in Bulgaria. Since the costs of complying with EU working conditions may well exceed their short medium run benefits, it would be necessary to conduct survey-based studies for assessing the costs of compliance in this area. Thus, in order to avoid the risks that a too fast compliance inflate the informal economy and ultimately delay EU accession, a cautious sequencing is recommended in this area. CHAPTER 1: LABOR ADJUSTMENT DURING THE TRANSITION This chapter sheds some light on labor adjustment in Bulgaria over the transition, with particular emphasis on the dynamics in the structure of employment, unemployment, and labor force participation by age and gender. The key stylized facts, findings and policy implications of the chapter can be summarized as follows. First, labor shedding in Bulgaria was one of the steepest among transition economies of Central and Eastern Europe, and it was not associated with a long run process of job reallocation from industry and agriculture toward the service sector. Indeed, out of 1.2 million jobs being destroyed over the last ten years, 1 million jobs have been lost in manufacturing, with the other loss being concentrated in the service sector. This implies that, in relative terms, agricultural share in total employment grew from 18 to more than 25 percent. Second, existing measures of employment reallocation suggest that restructuring in Bulgaria is taking place at a slower speed than that of other countries considered for EU accession. The stop-and-go nature of the structural reforms programs in Bulgaria, and the delays in macroeconomic stabilization have certainly put sands in the wheel of the transformation process. Third, while unemployment rose at the early stages of transition to more than 20 per cent of the labor force, it is still significantly larger than that of the average of the other CEE economies. Furthermore, Bulgaria displays a high incidence of youth unemployment, and up to one-fourth of the pool of those who have been unemployed for at least one year is made up of people aged 24 or less. Older workers, often attached to firms that still need to be restructured, remain a minor component of the unemployment pool. Finally, unemployment in Bulgaria has a regional dimension, with a dispersion in the unemployment rates across regions that is both increasing and persistent. In this light, policy measures aimed at enhancing labor mobility across the country are strongly recommended. The chapter proceeds as follows. Section one analyses employment dynamics and the extent of structural changes which occurred since the start of the transformation process, while section two focuses on the structure and the dynamics of unemployment and labor force participation. Employment Dynamics and Structural Change Table 1.1 and Table 1.2 provide basic information on the size of employment losses and employment reallocation in Bulgaria relative to other transition countries of Central and Eastern European (CEE) that are currently being considered as official candidates for EU accession. In particular, data are provided on rates of change of total employment, and on the distribution of employment across the three main branches of the economy (agriculture, industry and services), as well as information on the ownership structure. Table 1.1 shows that the cumulative employment loss of Bulgaria over the past decade amounts to some 30 percent, or approximately 1 million jobs (Table 1.2). The size of such loss is much larger than the corresponding loss in other CEE countries, which were able to limit the shrink in their employment stock to 15 percent. In addition, the Bulgarian employment dynamics is not characterized by the traditional u-shape pattern observed in other transition economies. Indeed, after a marked and continuous fall 2 Chapter 1. Labor Adjustment during the Transition between 1989 and 1993, Bulgarian employment did rise in the mid nineties, just to return to negative growth toward the end of the decade (Figure 1.1). Figure 1.1: Employment dynamics in Bulgaria and other CEE economies 1989=100 First Round Candidates - -- Second Round Candidates - Bulgaria 100 - " 95_ 90\ 85 80 65 60 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Source There are several concomitant reasons that may rationalize the pace of labor shedding in Bulgarian state enterprises relative to other countries in transition'. First, output losses were more marked and protracted in Bulgaria than elsewhere. (Table 1.4) Whereas Poland and other CEE economies in the first group of EU candidates reached the trough of their output loss in 1991-1992, the Bulgarian GDP kept falling until 1993, and cumulative output falls reached 35 percent compared with an average of about 15 percent among the first group of EU applicants. Second, whereas other CEE countries successfully stabilize their inflation during the first three years of transition, inflation in Bulgaria accelerated throughout the second half of 1996, and reached hyperinflation levels in 1997. During the same period, a severe banking crisis halted the availability of credit to the emerging private sector. The ratio of employment to output variations (which can be used as a proxy for the employment-output elasticity) over the transitional recession in the 1990-1993 period was in Bulgaria of the order of 88 per cent, that is, a one per cent decline of GDP was associated with almost a 9 percent decline of employment, compared with 6 percent in other CEE countries. Such a strong responsiveness of employment to output State subsidies to state enterprises were cut at the beginning of the transformation. Although there are poor data on subsidies to firms in CEE countries and these offer a poor basis for cross-country cornparisons, there is some evidence (Cormnander and Tolstopiatenko, 1997) that the phasing out of state subsidies was more dramatic in Bulgaria than in the other CEE countries. This could also contribute to explain the larger employment losses occurred in Bulgaria relative to the other countries in transition. Chapter 1: Labor Adjustment during the Transition 3 changes can be partly attributed to the virtual absence of stabilizers that elsewhere contributed to reducing the volatility of employment over the cycle. Employment Reallocation over the Transition The massive labor shedding outlined above was only partly associated with reallocation of labor across industries, and with a fast privatization process. Table 1.2 provides information on the changes occurred since 1989 in the sectoral distribution of employment, as well as information on the distribution of employment between the public and the private sector. Summary measures are also reported for other CEE countries considered for EU enlargement. Overall, it appears that restructuring was not only delayed in Bulgaria, but it took place to a large extent out of industry and toward the agriculture sector, rather than toward the largely underdeveloped service sector. As shown in Table 1.3, until 1992 employment reductions were sizeable and uniform across sectors, with the sole exception of financial services, whose employment share was, in any event, well below 1 percent at the beginning of transition. In addition to industry -- the sector in which employment losses were concentrated in the other CEE economies -- heavy labor shedding took place in construction and in the agricultural sector (including forestry). Protracted employment declines in the construction sector are at odds with developments in other transitional economies, and can be attributed to the longer and more severe recession experienced by Bulgaria, as well as to the fiscal crisis which eroded state funds for maintaining and improving the public infrastructure. The initial large declines of agricultural employment are also in contrast with developments in neighboring Romania, where agricultural employment increased during the first four years of transition, contributing to absorb a large component of labor shed in industry. A possible explanation for the disappointing initial employment performance of the agricultural sector in Bulgaria is in the poor design and slow pace of privatization of collective farms, which maintained for several years significant uncertainty over ownership titles for a large part of arable land (Bobeva and Hristoskov, 1995). Employment dynamics by sector started getting more diversified in 1993. While employment declines in industry and construction continued throughout the decade, job gains were registered in most service sectors and in agriculture. The latter was due to some degree to the progress of the land reform in the country. Thus, the agriculture started playing a buffer role for employment reductions as some workers shed by industry returned to their place of origin to grow crops for their own consumption. The evidence, although scant, seems to support this hypothesis. Since agricultural exports decreased and real incomes fell dramatically between 1989 and 1995, additional output must have been consumed by the producers. With respect to industry, a massive restructuring program of loss making state enterprise took place in 1997 and 1998, in concomitance with the introduction of the currency board and the approval of a new economic program aimed at obtaining both macroeconomic stability and structural reforms. A first way to observe that widespread restructuring did not take place in Bulgaria is to look at employment dynamics in the main branches of the economy. Thus, labor shedding in Bulgaria was not associated with the long run process of reallocation of labor involving an increase in the importance of services and reduced employment shares for agriculture and 4 Chapter 1: Labor Adjustment during the Transition industry. Indeed, out of 1.2 million jobs being destroyed over the last ten years, 1 million jobs have been lost in manufacturing, with the other loss being concentrated in the service sector. Agriculture, despite its large initial fall, was able to recover entirely its employment stock, so as to significantly increase its share in total employment. Direct estimates of the extent of job reallocation suggest that the speed of structural change in Bulgaria was lower than in other transition economies, mainly as a result of the delay in undergoing substantial structural reforms. So, the new emerging enterprises could not compensate the loss of jobs in the economy2. The evidence is summarized in Table 1.5, where we report data on job reallocation for Bulgaria, Romania, as well as other three countries that belong to the first group of countries considered for accession. Gross job creation is measured as the sum of all employment gains in expanding firms in a given year, divided by total employment at the beginning of the year. Similarly, gross job destruction is defined as the sum of all employment losses in contracting firms in a given year divided by total employment. The sum of gross job creation and gross job destruction gives a measure of gross job reallocation, and the difference yields the net employment growth rate. Data from Table 1.5, which have been recently compiled by Faggio and Konings (1999), suggest that job reallocation in Bulgaria was the lowest among the countries considered.3 Nevertheless, in every single year there is a positive value of gross job creation, suggesting that jobs were being created at all phase of the transition, but that such heterogeneity was more important in other countries. Since the measure of job reallocation reflects, to a large extent, the dynamics of aggregate employment, Table 1.5 reports also information on excess job reallocation, which is defined as job reallocation rate minus the absolute value of net employment growth (Davis Haltiwanger, 1996). If we interpret this latter measure as an index of restructuring, as it is often done in the transition literature, Table 1.5 suggests that restructuring is taking place at a faster speed not only among the first group of countries considered for EU accession, but also in neighbor Romania. The reallocation of labor from the state to the private sector also proceeded more slowly than elsewhere. As shown by Table 1.2, at the end of 1995 only about 40 per cent of the workforce (slightly less than 50 per cent of value added) was employed in the private sector compared with well over 50 per cent in the other transition countries. Looking at the distribution of ownership across sectors, it appears that agriculture employment is entirely private, suggesting that the reallocation process is basically concluded, and further gains in agriculture employment can come only through expansion of agriculture output. Conversely, the privatization of the service sector is lagging behind, and it may receive further impetus if the proposed privatization of natural monopolies will proceed as planned in 1999. However, since the state has maintained minority stakes in many enterprises being privatized4, the actual size of the private sector in 2 According to Loukanova (1996) the slow pace of worker reallocation across sectors in Bulgaria has to be attributed to the presence of a very compressed wage structure, which offers little incentives to workers to move from one sector to another. The data from 1997, when the variation in the wages by branches was relatively high, did not support this statement. 3Data in Table 1.5 are based on a survey data on 1548 firms in Bulgaria over the period 1993-1997, and consist of company accounts of incorporated firns satisfying one of the following criteria: number of employees greater than 100, total assets and operated revenues exceed 16 million and 8 million USD, respectively. See Konings and Faggio ( 1999) for further details. 4 This is confirmed by the enterprise survey carried out by Konings et al. (1996). Chapter 1: Labor Adjustment during the Transition 5 Bulgaria may be slightly lower than what is displayed in Table 1.25. Even though more recent data on employment reallocation are not readily available, important measures aimed at speeding up restructuring where undertaken in 1999. As a result, a number of loss-making enterprises have been liquidated and a large-scale privatization program was launched. Table 1.6 looks at the measure of job reallocation and restructuring according to enterprise type. Foreign firrns in Bulgaria have higher job creation and excess job reallocation, and lower rates of job destruction. Within national firms, restructuring is taking place at faster rate in the private sector, which experiences rate of excess job reallocation comparable to those of foreign firms. Further, Table 1.6 suggests that even inside the emerging private sector, restructuring in Bulgaria took place at a lower rate than in Romania and a sub-sample of EU candidates. Dynamics of Unemployment and Labor Force Participation Fast labor shedding and slow job creation in the private sector involved dramatic declines in the employment rate (employment as a percentage of the working age population). The decline was much faster than in the other CEE countries (Table 1.7) and was to a large extent driven by the dis-employment of women, whose degree of participation was remarkably higher than that of the other countries at the beginning of transition. Unemployment rose at the early stages of transition to more than 20 per cent of the labor force and is still significantly larger than for the average of the other CEE economies (Table 1.8). The existence of early retirement schemes in Bulgaria also contributed to the fast decline of the employment rate. It was widely anticipated at the beginning of transition that the reduction of state subsidies to enterprises as well as voluntary decisions to leave the labor force (because work was no longer considered as a duty) would have led to significant declines in participation. Yet, the magnitude of employment losses experienced to date by Bulgaria was largely underestimated. From having at the beginning of the 1990s one of the highest ratio of employment to working age population in the world, Bulgaria currently displays a lower employment to working age population ratio not only when compared to OECD countries but also with respect to countries with similar outlook on EU accession. From virtual full employment at the beginning of the transition, registered unemployment rose steeply to 15.7 percent in 1993 - the highest incidence of unemployment attained among the transforming economies of Central and Eastern Europe at that time. Registered unemployment subsequently fell to 10 percent in 1995, as a result of the slowing down of labor shedding (as shown by lower inflows into unemployment) and some pickup of job creation (Figure 1.2). Labor Force Survey (LFS) data show a similar pattern of unemployment, but also suggest that unemployment measured according to internationally agreed definitions was in some years up to five percentage points higher than registered unemployment. However, the gap between LFS and registered unemployment is gradually closing. The vacancy rate, as described by the ratio of officially registered vacancies to the size of the labor force has remained constant s Dobrinsky (1996) and Beleva, Jackman and Nenova-Amar (1995) also provide mnicroecononmic evidence on the slower pace of restructuring in Bulgaria relative to the Visegrad countries. 6 Chapter]: Labor Adjustment during the Transition over the entire decade, with the exception of some increased activity in the mid nineties (Figure 1.3). Figure 1.2: Unemployment flows in Bulgaria 20 20 t Outflow rate from unemployment * Inflow rate into unernploymnent Inflow rate: inflows into unemployment in month t as a percentage of the unemployment stock in month t. Outflow rate: outflows from unemployment in month t as a percentage of the unemployment stock in month t-. Source: OECD-CEET Database. Figure 1.3: Unemployment and vacancies in Bulgaria % % 4 1,6 126- 1,4a 8v 6 4 S /*, < 0,4 2 r 1,lzl, 1:l,l,: , T 0,2 0 rr-mFrvx rt-C ' r-.---r-- 0 7/1990 3/1991 11/1991 7/1992 3/1993 11/1993 7/1994 3/1995 11/1995 7/1996 3/1997 11/1997 Unemployment rate 0 Vacancy rate Unemployment rate is percentage of the working age population. Vacancy rate is percentage of the labor force. Source: OECD - CEET Database. Chapter 1: Labor Adjustment during the Transition 7 Bulgaria has a higher incidence of long-term unemployment than the Czech Republic, Hungary, Poland, Romania, or the Slovak Republic (Table 1.8). Long-term unemployment rose from about one-half in 1993 to nearly two-thirds of total unemployment by 1995; hence, it continued to rise even in the years where overall unemployment was declining because rates of outflow from unemployment were persistently low. The high incidence of ]ong term unemployment is likely to be linked to a reinforcing vicious circle between the size of the output loss and the delays to implement structural reforms: as time since the beginning of the transition elapsed, the loss of skills during unemployment reduced employment prospects, which, in any event, were further affected by delays in undertaking structural reforms. Table 1.8 shows that unemployment hits disproportionally persons with lower levels of education and that almost 50 per cent of those having been unemployed for more than 12 months have educational attainments at the level of primary schools or lower. Like other countries in the second group of candidates for EU accession, Bulgaria displays a high incidence of youth unemployment and up to one-fourth of the pool of those who have been unemployed for at least one year is made up of people aged 24 or less. Older workers are still a minor component of the unemployment pool. Their importance is likely to increase as soon as the envisaged tightening of early retirement provisions and of access to disability pensions will succeed in rising the actual age of retirement. Bulgaria has also a very large number of discouraged workers, that is, people no longer searching jobs because they deem that there are no employment opportunities or they do not know how to get work. Discouraged workers accounted in 1996 for as much as 6 percent of the labor force compared with 3 percent in Hungary, 1.5 in Poland and about 1 percent in most OECD countries (OECD, 1995). Unemployment in Bulgaria has also an important regional dimension. Table 1.8 shows that regional unemployment across 9 regions is comparable to that observed in most European countries (Mauro, Spilimbergo and Prasad, 1999), with a coefficient of variation of the order of 0.3, which is the average value observed across European countries. More important, however, is the fact that regional unemployment is rising even when total unemployment is falling, as indicated by the dynamics of the coefficient of variation, which rose from 0.2 in 1993 to some 0.3 in 1997. Further, the regional unemployrnent is also persistent, with the standardized ranking of regions being very stable over time (Figure 1.4). The other side of the coin of the dramatic decline of employment rates experienced by Bulgaria was the strong increase in the social security burden on the active population. As we will discuss in next chapter, the so-called "systemic dependency ratio" (the ratio of pensioners to the number of contributors) of Bulgaria is currently about 80 per cent, while for the OECD average is below 40 percent (in spite of larger fractions of the population above the working age than in Bulgaria) and in the other CEEs is in the 50-60 percent range. (Table 1.7). In the next chapter, we will see how this phenomenon is linked to the widespread avoidance to pay social security contributions. 8 Chapter 1: Labor Adjustment during the Transition Figure 1.4: Standardized regional unemployment rates: 1993-97' 21 2 T ~~~~~~~~~~~MON< LOVETCH 0,5 BOURROUSSE * VARNA * SOFIA-AREA -0,5 *PLOVDIV l ~ ~~~~ /H ASKOVO -1 v -1,5 * A -2 -1,5 -J -0,5 0 0,5 1 1,5 2 1993 'Standardized regional unemployment rates are obtained by subtracting the average unemployrnent rate from each region's unemployment rate, and then dividing this value by the standard deviation of regional unemployment. Source: Chapter 1: Labor Adjustment during the Transition 9 Table 1.1: Yearly employment change of European Union candidates for enlargement: 1989-98 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 First Round Candidates Czech Republic .. -0.9 -5.5 -2.6 -1.6 0.8 2.6 0.6 -1.0 -2.4 Estonia .. -2.0 2.0 -6.0 - -2.2 -2.0 -1.6 -0.5 -1.5 Hungary .. -3.1 -9.6 -9.3 -5.7 -1.2 -1.3 -0.1 0.0 1.6 Poland .. -7.2 -4.3 -2.8 -1.7 1.1 2.9 3.5 1.3 1.4 Slovenia .. -3.9 -5.1 -4.1 -3.6 -1.3 -0.1 -0.4 0.2 -0.2 Second Round Candidates Bulgaria -2.3 -6.1 - -8.1 -1.6 0.6 1.3 0.1 -3.9 -1.6 Latvia .. -0.9 -0.8 -7.3 -6.9 - -3.5 -2.7 1.9 -2.9 Lithuania .. 2.4 -2.2 -4.2 -5.8 -1.9 0.9 0.6 -0.8 Romania -1.0 -0.5 -3.0 -3.8 -0.5 -5.2 -1.2 -3.1 Slovak Republic .. -1.8 - 0.3 -0.1 -4.2 2.1 3.3 -1.1 -1.2 Averages First Round Candidates . -3.4 -4.5 -5.0 -4.9 -0.6 0.4 0.4 0.0 -0.2 Second Round Candidates' .. -1.2 -3.3 -3.1 -3.8 -5.2 -2.1 0.1 -0.4 -1.6 Bulgaria -2.3 -6.1 - -8.1 -1.6 0.6 1.3 0.1 -3.9 -1.6 Employment Level2 First Round Candidates 100.0 96.6 92.2 87.7 83.3 82.9 83.2 83.6 83.6 83.4 Second Round Candidates' 100.0 98.8 95.5 92.6 89.1 84.5 82.7 82.8 82.4 81.1 Bulgaria 100.0 93.9 81.7 75.1 73.9 74.3 75.3 75.4 72.4 71.3 'Excluding Bulgaria. 2 Employment in 1989 equal to 100. Source: Bulgarian authorities and OECD-CCET Labor Market Database for data on EU applicants. 10 Chapter]: Labor Adjustment during the Transition Table 1.2: Labor shedding and employment restructuring in Bulgaria 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Total Employment (millions) 4.4 4.1 3.6 3.3 3.2 3.2 3.3 3.3 3.2 3.1 Agriculture 0.8 0.8 0.7 0.7 0.7 0.7 0.8 0.8 0.8 0.8 Industry 2.0 1.8 1.5 0.9 1.2 1.1 1.1 1.1 1.0 0.9 Services 1.5 1.5 1.4 1.3 1.3 1.3 1.4 1.4 1.3 1.3 Total Employment Changes .. -6.1 -13.0 -8.1 -1.6 0.6 1.3 0.1 -3.9 -1.6 Change in Employment By Sector 5 Agriculture .. -7.0 -8.1 -0.4 2.7 5.5 4.2 0.3 1.9 -0.4 Industrv .. -8.6 -19.2 -14.2 -6.6 -4.4 -2.2 -1.9 -7.1 -5.2 Services .. -2.4 -7.9 -5.6 1.0 2.5 2.6 1.6 -4.6 0.4 Distribution of Employment Agriculture 18.7 18.5 19.5 21.2 21.8 23.0 23.9 24.0 24.4 25.2 Industry 46.0 44.8 41.6 28.6 36.0 34.5 33.7 33.1 30.9 29.5 Services 35.3 36.7 38.9 40.2 40.6 41.6 42.6 43.3 41.1 41.6 Coefficient of Vaniation acrossninesectors . .. 1.1 4.0 3.2 2.6 1.9 across 16 sectors .. 1.1 0.9 1.7 8.7 19.7 10.4 Pace of privatisation Private Employment Share 5.5 5.9 10.1 17.7 28.3 36.0 40.6 42.3 55.3 58.6 by Sector Agriculture 20.6 21.2 24.6 45.7 65.2 77.1 82.2 83.1 94.1 94.4 Industry 1.4 1.7 3.7 5.5 12.4 17.3 21.4 24.5 47.2 53.5 Services 2.8 3.4 9.7 14.7 22.7 28.9 32.6 33.5 38.3 41.2 Memorandum Item Distribution of Enmployrnent: First Round Agriculture .. .. .. 9.70 13.39 12.80 11.94 11.69 11.50 Industry .. .. .. 40.35 38.42 37.73 37.64 37.18 35.83 Services .. .. .. 49.90 48.24 49.62 37.93 51.12 52.63 Distribution of Employment: Second Round 4 Agriculture .. .. .. .. .. 24.6 22.3 21.3 22.9 Industry .. .. .. .. . 36.2 32.7 32.8 31.9 Services .. .. .. 39.2 45.0 45.9 45.2 Private Emnployment Share First Round Candidates .. .. .. .. 56.9 59.4 61.9 64.1 Second RoundCandidates6 39.3 47.4 47.2 48.9 51.3 52.4 IIn percentage points. 2 The Classification of Employment by Sectors was changed in 1997 to the NACE. 3Includes Czech Republic, Hungary, Poland and Slovenia. 4Includes Latvia, Romania and Slovak Republic. Data refer to Poland. 6 Includes Latvia, Lithuania, Slovak Republic and Romania. Source: Bulgarian authorities and OECD-CCET Labor Market database for data on EU applicants. Chapter 1. Labor Adjustment during the Transitiot 1 Table 1.3: Distribution of employment growth by industry: 1989-96' 1990 1991 1992 1993 1994 1995 1996 Total -6.1 -13.0 -8.1 -1.6 0.6 1.3 0.1 Industry -9.0 -17.9 -13.2 -8.3 -3.7 -2.2 -1.2 Construction -6.8 -25.0 -19.1 2.3 -8.1 -2.4 -5.6 Agriculture -6.8 -7.6 -0.3 3.2 5.7 4.3 0.2 Forestry -11.1 -22.0 -0.9 -17.1 -7.0 -0.2 8.9 Transport -2.1 -7.8 -13.3 1.9 -4.3 9.3 -2.0 Communications 2.6 -0.7 -1.8 1.1 0.2 1.8 2.8 Trade -5.4 -8.0 -4.0 0.9 11.1 -3.3 -0.1 Others 2 14.8 -4.9 -1.6 13.4 5.5 6.5 35.3 Public utilities -5.1 -12.6 -15.0 -3.2 14.4 8.0 9.2 Science -6.6 -25.8 -22.0 -30.7 -16.9 -9.7 -8.4 Education -1.5 -1.7 -1.9 -0.1 -3.0 -0.6 1.1 Arts 3.6 -18.6 -10.6 20.8 -0.7 34.0 1.5 Health-care 3.0 -6.3 -1.5 -1.8 -2.6 0.5 2.2 Finance -3.7 10.0 29.8 5.1 19.4 16.0 1.1 Government -10.1 -7.4 2.6 29.7 12.1 1.1 1.5 Others 3 -11.0 -37.1 -31.4 7.4 -28.7 37.9 -26.C Standard Deviation 6.7 9.9 12.3 14.2 9.8 10.3 10.0 Coefficient of Variation 1.1 0.8 1.5 9.0 15.9 8.2 ' The Classification of Employment by Sectors was changed in 1997 to the NACE. 2 Refers to Restaurants and Hotel. 3 Refers to Local Cormmunity Services. Source: Bulgarian authorities. 12 Chapter ] Labor Adjustment during the Transition Table 1.4: Growth rates of GDP of European Union candidates for enlargements: 1989-98 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 First Round Czech Republic ... 1.4 -1.2 -11.5 -3.3 0.6 3.2 6.4 3.8 0.3 -2.3 Estonia ... -1.1 -8.1 -13.6 -14.2 -9 -2 4.3 3.9 10.6 4 Hungary ... 0.7 -3.5 -11.9 -3.1 -0.6 2.9 1.5 1.3 4.6 5.1 Poland ... 0.2 -11.6 -7 2.6 3.8 5.2 7 6.1 6.9 4.8 Slovenia ... -1.8 -4.7 -8.9 -5.5 2.8 5.3 4.1 3.5 4.6 3.9 Second Round Bulgaria ... 0.5 -9.1 -11.7 -7.3 -1.5 1.8 2.1 -10 -7 3.5 Latvia ... 6.8 2.9 -10.4 -34.9 -14.9 0.6 -0.8 3.3 8.6 3.6 Lithuania ... 1.5 -5 -6.2 -21.3 -16 -9.5 3.5 4.9 7.4 5.2 Romania ... -5.8 -5.6 -12.9 -8.8 1.5 3.9 7.1 4.1 -6.9 -7.3 Slovak Republic ... 1.4 -2.5 -14.6 -6.5 -3.7 4.9 6.9 6.6 6.5 4.4 GDP Level First Round Candidates 100 99.9 94.1 84.1 80.2 79.8 82.1 85.9 89.1 93.9 96.9 Second Round Candidates' 100 101 98.4 87.6 71.9 66 65.9 68.7 71.9 74.7 75.8 Bulgaria 100 100.5 91.4 80.7 74.8 73.7 75 76.6 68.8 64 66.2 ' Excludes Bulgaria. Source: Bulgarian authorities and OECD-CCET Labor Market database for data on EU applicants. Chapter 1: Labor Adjustment during the Transition 13 Table 1.5: Annual net and gross job flows JC I JD' JR' NET' EXC.' Bulgaria 1994 0.8 7.2 8.0 -6.3 1.7 1995 3.2 3.3 6.5 -0.1 6.4 1996 4.1 7.0 11.1 -2.9 8.2 1997 1.4 5.2 6.6 -3.7 2.9 Romania 1995 4.7 10.1 14.8 -5.4 9.4 1996 3.6 7.1 10.7 -3.5 7.2 1997 3.7 9.9 13.6 -6.2 7.4 CEE first group2 1994 3.8 6.7 10.6 -2.9 7.7 1995 4.9 6.4 11.3 -1.5 9.8 1996 6.6 8.2 14.7 -1.6 13.1 1997 5.2 6.0 11.2 -0.8 10.4 JC is the rate of Gross Job Creation; JD is the rate of Gross Job Destruction, JR is the rate Gross Job Reallocation, NET is Net Employment Change, EXC is Excess Job Reallocation. JC (JD) is the sum of all employment gains (contractions) in expanding (declining) firms in a given year, divided by total employment. JR is the sum of JC and JD. EXC is the difference between JR and the absolute value of NET. 2 Refers to Poland, Estonia and Slovenia. Source: Faggio and Konings (1999) and author's calculations. 14 Chapter 1: Labor Adjustment during the Transition Table 1.6: Annual average gross and net job flows rates according to ownership type JC1 JD' JR' NET' EXC' Bulgaria State Firms 1.9 5.6 7.5 -3.7 3.7 Foreign Firms 3.6 4.8 8.3 -1.2 5.6 Domestic Pnrvate Firms 2.8 6.0 8.8 -3.2 5.6 Poland State Firms 1.6 4.2 5.8 -2.5 3.3 Foreign Firms 9.4 2.9 12.3 6.5 5.8 Domestic Private Firms 5.0 4.3 9.3 0.7 7.9 Romania State Firms 2.3 9.5 11.8 -7.2 4.6 Foreign Firms 15.1 4.3 19.4 10.7 8.7 Domestic Private Firms 5.3 8.7 14.0 -3.4 10.6 'JC is the rate of Gross Job Creation; JD is the rate of Gross Job destruction, JR is the rate Gross Job Reallocation, NET is Net Employment Change, EXC is Excess Job Reallocation. JC (JD) is the sum of all employment gains (contractions) in expanding (declining) firms in a given year, divided by total employment. JR is the sum of JC and JD. EXC is the difference between JR and the absolute value of NET. Source: Faggio and Konings (1999) and author's calculations. Chapter 1: Labor Adjustment during the Transition 15 Table 1.7: Labor force participation rates 1990 1994 1995 1996 1997 1998 1999 Participation Rate' Total 0.70 0.65 0.63 0.64 0.63 0.63 0.62 Participation Rate by Gender male .. 0.69 0.67 0.68 0.68 0.68 0.66 female .. 0.60 0.59 0.60 0.59 0.59 0.60 Participation Rate by Age youth (15-24) .. 0.38 0.34 0.33 0.28 0.32 0.31 adult (2549) .. 0.89 0.88 0.88 0.87 0.87 0.84 old (50 - 64) .. 0.41 0.40 0.42 0.43 0.45 0.43 Employment - Population Rate 0.68 0.52 0.53 0.55 0.54 0.56 0.52 Dependency Ratio Pensioners/Insured workers 0.54 0.83 0.78 0.77 0.74 0.77 Pensioners/Total employment 0.55 0.75 0.74 0.73 0.76 0.75 Memorandum Items Employment - Population Rate First Round Candidates2 0.62 0.60 0.61 0.62 Second Round Candidates3 0.75 0.74 0.74 0.76 Labor Force Participation Rate First Round Candidates2 .. 0.73 0.70 0.72 0.72 Second Round Candidates3 .. 0.84 0.83 0.82 0.82 i Data refer to June for 1994, 1995, 1996, 1997, 1998, 1999. 2Includes Czech Republic, Estonia, Hungary, Poland, Slovenia. 3 Includes Latvia, Lithuania, Romania and Slovak Republic. Source: Bulgarian authorities and OECD-CCET Labor Market database for data on EU applicants. 16 Chapter 1: Labor Adjustment during the Transition Table 1.8: Unemployment structure by age, gender and skills 1991 1992 1993 1994 1995 1996 1997 1998 1999 Unemployment Ratet Official 8.91 14.09 15.7 13.3 10.7 9.9 14.2 11.4 12.8 ILO Definition .. .. 21.4 20.0 15.7 13.5 13.7 12.2 14.0 Official adjusted .. .. 15.7 13.8 13.4 12.1 15.1 12.1 14.0 Unemployment Rate by Age 15-24 .. .. 47.0 42.2 37.8 33.0 27.5 28.4 31.4 25-49 .. .. 17.7 17.2 13.2 11.5 12.1 10.7 12.5 50-64 .. .. 15.8 14.9 10.8 9.2 9.2 9.2 10.1 Unemployment Rate by Gender Male .. .. 21,0 20.1 15.7 13.6 14.0 12.7 14.1 Female .. .. 22.10 19.97 15.80 13.42 13.56 11.84 14.2 Share of Long Term Unemployment Total .. .. 53.8 59.9 67.0 59.9 61.3 63.7 57.8 Youth (15-24) .. .. 13.5 13.2 15.0 13.2 12.9 12.4 11.6 Oother .. .. 40.3 46.7 52.0 46.7 48.4 50.6 46.2 Unemployment Rate by Skills Higher education .. .. 9.7 7.9 5.6 4.6 5.1 5.4 5.2 Semihigher .. .. 8.6 7.2 4.3 5.6 5.5 5.8 5.4 Secondary vocational .. .. 16.5 15.6 11.6 10.7 12.0 10.4 11.5 Secondary general .. .. 22.2 20.0 15.6 13.1 14.6 12.4 14.3 Primary or lower .. .. 30.1 29.8 25.1 21.5 20.1 18.4 23.3 Memorandum Items Unemployment Rate First Round Candidates2 6.7 8.3 8.3 8.1 8.i 7.8 7.9 Second Round Candidates3 6.5 7.9 9.4 8.7 7.5 7.4 8.3 Unemployment Rate by Skills First Round Candidates2 Higher education .. .. 3.8 3.4 2.7 2.7 2.7 2.9 Secondary vocational .. .. 11.6 11.2 10.2 9.6 8.7 9.0 Secondary general .. .. 8.4 8.1 7.2 6.9 6.8 7.0 Primaryorlower .. .. 12.7 13.0 12.6 12.8 12.8 13.9 Second Round Candidates3 Higher education .. .. .. .. 4.8 5.2 4.5 Secondary vocational .. .. .. .. 10.2 11.9 10.2 Secondary general .. .. .. .. 14.2 15.4 14.4 Primary or lower .. .. .. .. 20.6 20.0 16.5 Share of Long Term Unemployment First Round Candidates4 .. 22.4 34.2 37.8 37.3 37.2 43.9 Second Round Candidates5 .. .. 31.6 40.2 47.9 56.3 50.4 Unemployment By Age [15-24] First Round Candidates6 .. .. 21.1 21.0 19.5 18.6 16.9 [1 5-24] Second Round Candidates7 .. .. .. .. 25.2 22.6 21.8 'Data refer to end of June, with the exception of 1993, which refer to end September. 2 Includes Czech Republic, Estonia, Hungary, Poland, Slovenia. 'Includes Latvia, Lithuania, Romania and Slovak Republic. 4 Includes Czech Republic, Estonia, Hungary, Poland and Slovenia. 5Includes Latvia, Romania and Slovak Republic. 6 Includes Czech Republic, Hungary, Poland and Slovenia. 7Includes Latvia, Romania and Slovak Republic. Source: Bulgarian authorities and OECD-CCET Labor Market Database for data on EU applicants. Chapter 1: Labor Adjustment during the Transition 17 Table 1.9: Evolution of regional unemployment 1993 1994 1995 1996 1997 Total 21.4 20.3 15.7 13.5 13.7 Sofia 15.0 14.0 8.5 7.4 7.9 Bourgas 22.9 21.5 18.0 16.5 17.0 Vama 19.6 20.9 17.3 15.6 15.8 Lovetch 20.4 19.3 16.8 15.8 17.5 Montana 27.3 29.9 24.1 22.1 24.1 Plovdiv 23.5 20.8 17.2 12.4 12.8 Rousse 25.8 24.7 18.8 18.4 17.4 Sofia-district 24.1 20.3 17.9 13.6 13.8 Haskovo 18.5 17.9 16.1 13.1 10.9 Standard Deviation 3.86 4.41 4.00 4.10 4.65 Mean 21.85 20.93 17.05 14.84 15.07 Coefficient of Variation 0.18 0.21 0.23 0.28 0.31 Source: Bulgarian authorities. CHAPTER 2: REAL WAGES, PRODUCTIVITY AND LABOR COSTS This chapter studies the dynamics of real wages, productivity and the structure of labor costs over the transition. It has four main findings. First, aggregate real wages in Bulgaria fell by some 40 percent over the 1990s. Thus, the combined steep decline in employment and real wages characterizes the labor market transition in Bulgaria as one of the steepest among EU applicants. Second, productivity differentials across sectors, albeit substantial throughout the transition, are now closely linked to differences in real wages, suggesting that labor market forces are seriously at work, and are likely to ensure a more efficient allocation of labor in the years to come. Third, the structure of labor cost is characterized by excessively high rates of payroll taxes, which reach 50 percent of gross labor income for a large size of the employment pool. This structure is obviously a cause of concerns for the job generation prospect of Bulgaria, and requires prompt policy action. Fourth, the substantial increase in real wages observed in the last few years appears consistent with an estimated "productivity based dollar wage", suggesting that Bulgarian competitiveness is not at risk. This chapter proceeds as follows. Section 1 looks at the dynamics of aggregate real wages and inequality in Bulgaria and in other EU applicants from Eastern Europe. Section 2 studies the dynamics of productivity and real wages across sectors, while section 3 looks at the structure of labor costs, and its breakdown in terms of the various payroll contributions. Finally, section 3 calculates the difference between actual and "equilibrium" dollar wages in manufacturing, and interpret the difference between them as a residual room for further real appreciation. Aggregate Wage Dynamics Bulgaria is one of the country that suffered the largest cumulative fall in real wages among all transition economies of Eastern Europe. Real wages in 1998 reached 40 percent of their level in 1989, with a cumulative fall of 60 percent, comparable only to the experience of Lithuania (Table 2.1) among EU applicants. Looking at the aggregate dynamic experience across the EU applicants of Eastern Europe, it appears that among the first group of countries real wages started to rise already in 1992, while the turnaround in the wage growth was delayed until 1994 for the second group of countries. Bulgaria's profile of real wage growth began in line with that of the second group of countries, but took a different path after 1995, when Bulgaria experienced negative real wage growth throughout 1997 (Figure 2.la and figure 2.lb). While one might expect that countries that experienced the largest fall in real wage had better employment performance, labor market dynamics in Bulgaria suggests that the relationship between employment loss and real wage losses may indeed be positive. Bulgaria combines one of the steepest employment loss with the largest cut in real wages, making the transition in the Bulgarian labor market as one of the most adverse among CEE countries. Political instability, erratic macroeconomic and fiscal policies during the early years of the transition, combined with the Government's failure to tackle fundamental structural problems led to very high inflation level, which further eroded the declined in real wages caused by the collapse in output. Chapter 2. Real Wages, Productivity and Labor Costs 19 Figure 2.1a: Real wage growth: "First Round" candidates (1989=100) 100 . . ..... Czech Republic 90 70 Pln 60 -..... Estonha ......... ..... 50 - 40 - 30; 20 1989 1990 1991 1992 1993 1994 1995 1996 1997 Source: Figure 2.1b: Real wage growth: "Second Round" candidates (1989=100) 120 - 110 9. Romania 80 \> ~~~~~-._ ~~Bulgaria 80 70 60 ............. 40 30 Lu 20- 1989 1990 1991 1992 1993 1994 1995 1996 1997 Source: Inequality increased throughout the decade. The ratio of the top to the bottom decile of the earning distributions increased from 2.5 in the early 90s to 3.5. (Table 2.2). Many authors, and Ferreira (1998) in particular, have argued that increasing inequality is bound to appear over the transition, since the command economy artificially compressed the wage distribution. Table 2.2 confinns this view, and shows that all EU countries considered for accession experienced 20 Chapter 2. Real Wages, Productivity and Labor Costs marked increases in wage inequality. Further, Table 2.2 suggests that the Bulgarian experience is not particularly different than that of the average CEE economies. Real Wages and Productivity Dynamics Across Sectors Real wage losses were sizeable across sectors, and were particularly significant in the retail trade sector, and in construction. With the exception of agriculture, wage losses started in 1992, and appear to have reached a trough in 1998. Preliminary data suggest a robust positive wage growth in 1999. The increase in wage dispersion, already observed in the earning distribution, is confirmed by Table 2.2, which reports that the coefficient of variation, close to 0.1 in 1991, rose to 0.2 in 1999. The distribution of real wages across sectors casts further lights on the dynamic behavior of the Bulgarian economy. Whereas workers employed in the communication sector have continued to enjoy the highest wage across sectors, the real wage in the emerging service sector has experienced a dramatic downward shift, so as to become the industry characterized by the lowest wage. This phenomenon, albeit consistent with the migration of labor back to agriculture observed in Chapter 1, suggests that the reallocation of labor experienced towards agriculture was the result of low employment opportunities in other sectors which features, in any event, low productivity jobs. The dynamics of the distribution of average productivity of labor across sectors is very heterogeneous (Table 2.2). Whereas some sectors, traditionally underrepresented under the command economy, such as telecommunications and transports, experienced marked increases in productivity, the performance of most service sectors was dismal, with cumulative fall in the average productivity of some 60 percent. The marked increased in the dispersion of the average productivity is also confirmed by the continuous and persistent increase in the coefficient of variation, which rose from a level of 0.2 in 1991 to a level of 0.9 in 1999. The temporal profile of the correlation between the level of real wages and labor productivity shows how market forces have been increasingly at work in Bulgaria. Whereas in 1989 there was almost no correlation between gross wages and the productivity of labor across sectors, such correlation has constantly increased over the decade, and has reached a remarkable level of 0.91 in 1999. This finding represents an important development for the Bulgarian labor market, since it implies that the determination of real wages is now more synchronized with the productivity of labor, and may sustain, in the long run, a more efficient allocation of labor across sectors. The Structure of Labor Costs The other side of the coin of the dramatic decline of employment rates experienced by Bulgaria, documented in the previous chapter, was the strong increase in the social security burden on the active population. Employment declines were also compounded by widespread avoidance to paying social security contributions, which reduced the number of contributors well beyond what was implied by employment losses. To give an example, while in 1994 employment declined by about 24,000 units, the Pension Fund lost about 90,000 contributors. Chapter 2: Real Wages, Productivity and Labor Costs 21 According to a study based on a survey of Bulgarian households (Hristoskov, Shopov and Beleva, 1996), in June 1996 employers did not pay (or under-paid) social security contributions for about 1,170,000 workers (almost 40 percent of total employment), implying a revenue loss of the order of 24,5 billion lev, that is, about 20 percent of the cumulative revenues of the various social security funds. Thus, the so-called "systemic dependency ratio" (the ratio of pensioners to the number of contributors) of Bulgaria is currently about 80 percent, while for the OECD average is below 40 percent (in spite of larger fractions of the population above the working age than in Bulgaria) and in the other CEE economies is in the 50-60 percent range. A high systemic dependency ratio means that social policy revenues have to be collected from a narrow tax base, and hence increasing statutory contribution rates. Figure 2.2b displays statutory payroll taxes and systemic dependency ratios for all countries in which data were available. There is a rather evident negative association across CEE economies between the size of the contribution base and the statutory contribution rates to be paid for by employees as well as employers on the top of the wage bill. The issue is that higher contribution rates are often associated to lower levels of participation, and notably lower employment rates (Figure 2.2a). Not surprisingly, Table 2.4 shows that the level of social security contributions in Bulgaria is by far the highest among that of CEE economies. Figure 2.2a: Employment rates and payroll taxes (1995) 85 - 80 i * Czech Republic -75- @ 70- FHungary > 65- Slova 60 - Poland Bulgaria 55 - 46 48 50 52 54 56 58 60 Payroll tax rate (%) Note: The employment rate is defined by the number of the employed as a percentage of the working age population (15-64). Source: 22 Chapter 2. Real Wages, Productivity and Labor Costs Figure 2.2b: Payroll taxes and "Pension dependency ratio" (1995) 88 83 1 Bulgaria 78 73 68 Hungary * 63 58 S lovakia 53. - Poland * Czech Republic 48 1 46 48 50 52 54 56 58 60 Payroll tax rate (%) Source: Boeri et al. (1998). OECD-CEET database. Table 2.5 examines in further details the composition and the magnitude of payroll contributions on labor in Bulgaria, and shows that the sum of social security contributions, health care taxes, and contributions to the unemployment fund reach 60 percent of gross income for some groups of workers. The bulk of this burden is clearly linked to the social security contributions, which reached 54 percent of gross income in 1997 for primary workers, a set of workers that are entitled to early retirement benefits in light of their particular jobs (e.g. miners).6 The rest of the contributions, health care contributions and unemployment fund, are still sizeable, but in line with the rest of the OECD countries. In 1999, the social security contributions appear to have been cut for some specific workers, but they have been increased for the self-employed worker. In light of the need to foster the job generation process, it is not clear whether the latter policy is the most appropriate. The high level of social security contributions suggests that a vicious circle is at work in which the erosion of the contribution base induces further increases in statutory contribution rates, which in turn inflates the informal sector. A halt to this perverse and self-fulfilling process can only be put by a protracted economic recovery and its capacity to generate jobs, and substantial cuts in contributions are likely to be beneficial. However, in order not to reduce further the already scarce level of benefits, a determined effort on the part of the authorities to increase compliance is crucial. 6Workers under the first category can retire 8 years earlier than "normal" pension age while workers in the second category" can retire 3 years earlier. As of 1999, a rough estimate of workers that are assigned the special category was about 600 000, but their number should be decreased with the new Social code. Chapter 2: Real Wages, Productivity and Labor Costs 23 Productivity = based Dollar Wages The large increase in the current account deficit of the last two years has increased concerns over the economy's competitiveness. Despite the large cumulative fall in real wages, there is some risk that wages in Bulgaria's manufacturing sectors are too high relatively to the low productivity of the economy. Table 2.7 looks at the dynamics of dollar wages in Bulgaria, the Baltic countries, and other CEE transition economies. Dollar wages in Bulgaria in 1998 were equal to $143, and appeared to be the lowest among the group of countries considered. While wages in Bulganra represent some 70 percent of those in the Baltic countries, they are only 50 percent of dollar wages in most CEE countries, including Poland and Hungary.7 However, a low value of dollar wages is not sufficient, by itself, to judge a country's competitiveness, and may potentially be misleading, since it does not take into account cross country differences in aggregate productivity. A methodology for assessing whether real wages in manufacturing in a transition economy should be considered "too high" has been recently proposed in the literature on transition by Krajmyak and Zettelmeyer (1998). The methodology implies using dollar wages in the manufacturing sector as a measure of real effective exchange rate, and then estimate equilibrium dollar wages as a fumction of productivity measures using a short panel of countries. Thus, the estimated equilibrium dollar wage represents an estimate of what the country could "afford" based on its stock of human and physical capital. Competitiveness can then be interpreted as the gap between actual dollar wages and estimated equilibrium wages. Figure 2.3 and Table 2.7 reports an update of the estimates performed by Krajmyak and Zettelmeyer (1998) for Bulgaria, and shows that the difference between actual dollar wage in manufacturing and the estimated equilibrium wage is positive, albeit significantly lower than in the early 1990s. More specifically, Figure 2.3 reports the results of a regression of dollar wage in manufacturing on proxies of productivity, the share of agriculture in GDP and a proxy of human capital.8 The results suggest two conclusions. First, the figure confirms the view that Bulgaria is undergoing an equilibrium appreciation, as indicated by the continuous increase in 7 Reported Dollar wages refer to public sector wages. Zettelmeyer and Krajnyak estimate the following equation in a short panel w$i, =ao+ a, PPPGDPit + a2 AGRi, + a3 SCHOOL1, where w$ are dollar wages measured as average monthly wages in manufacturing in U.S. dollars, PPPGDP is purchasing power parity adjusted to GDP ("PPP GDP"), AGR is the share of agriculture in GDP and SCHOOL is a measure of the average level of educational attainment of the labor force in the secondary school, by country and year. To construct Figure 2.2 we used the original estimates of the coefficients obtained by Zettelmeyer and Krajnyak (1998), and we updated the right hand side values of the equations for 1996, 1997, and 1998 and we obtained the equilibrium values reported in Figure 2.2. The original data set begins in 1990, with an end point set in 1995. Between these two dates, Zettelmeyer and Krajnyak include all market economies for which data were available for any number of consecutive years, and all transition economies for which a continuous sequence of annual data points was available from their first year of transition. This led to an unbalanced panel of 85 countries, including 15 transition economies: Bulgaria, the Czech Republic, Hungary, Poland, Romania, the Slovak Republic, the three Baltic States, Belarus, Kazakhstan, the Kyrgyz Republic, Moldova, Russia and Ukraine. The market economies in the original sample include all OECD countries, most Latin American countries, and some African and Asian economies. See Zettelmeyer and Krajnyak's original paper for the list of countries. 24 Chapter 2. Real Wages, Productivity and Labor Costs the ratio of actual to "productivity based wage". Second, the figure shows that there still exist a sizeable difference between the actual and the estimated wage, implying that Bulgaria's competitiveness is not at risk. Finally, Table 2.7 shows that the same exercise performed for different countries yields different results. Notably, Table 2.7 shows that the estimated equilibrium wage in Lithuania is the same as its actual wage, suggesting that further increase in dollar wage should be necessary accompanied by increase in productivity. Figure 2.3: Actual and estimated dollar wages in manufacturing - Actual Dollar Wage - Estimated Dollar Wage 400 350 _ -_ 300 _ _ 250 - 200 - 150 100- 50 - 1991 1992 1993 1994 1995 1996 1997 1998 Source: Chapter 2: Real Wages, Productivity and Labor Costs 25 Table 2.1: Yearly change of aggregate wage of countries candidates for EU enlargement: 1989-97 1989 1990 1991 1992 1993 1994 1995 1996 1997 First Round Candidates Czech Republic ,, -6.4 -26.4 10.3 3.7 6.6 9.8 8.9 1.9 Estonia .. 2.5 -33.5 -33.7 2.4 9.9 6.1 2.2 7.8 Hungary .. -5.7 -7.0 -1.4 -3.9 7.2 -12.2 -5.0 3.8 Poland -24.4 -0.3 -2.8 -2.9 0.6 2.9 5.7 5.8 Slovenia -26.2 -.16.3 -0.8 14.8 7.1 5.3 4.7 2.8 Second Round Candidates Bulgaria .. 11.5 -39.0 12.8 1.2 -17.9 -5.5 -17.6 -19.2 Latvia .. 5.0 -31.5 -31.8 5.7 11.8 -0.3 -6.2 12.2 Lithuania , 8.8 -30.8 -38.1 -39.1 14.4 1.5 5.5 14.1 Romania 5.2 -15.5 -13.0 -16.7 0.3 12.5 9.8 -21.9 Slovak Republic -5.8 -28.6 7.9 -4.7 3.2 5.5 8.8 6.7 Averazes First Round Candidates ,, -12.0 -16.7 -5.7 2.8 6.3 2.4 3.3 4.4 Second Round Candidates' ,. 3.3 -26.6 -18.8 -13.7 7.4 4.8 4.4 2.8 Bulgaria ,, 11.5 -39.0 12.8 1.2 -17.9 -5.5 -17.6 -19.2 Level of Real Wapes First Round Candidates 100 88.0 72.4 68.5 70.0 74.2 75.5 78.2 81.3 Second Round Candidates' 100 103.3 75.9 61.4 53.5 56.6 59.7 62.7 62.5 Bulearia 100 111.5 68.0 76.7 77.6 63.7 60.2 49.6 40.1 'Excludes Bulgaria. 2 Wages in 1989 equal to 100. Source: Bulgarian authorities and OECD-CCET Labor Market database for data on EU applicants. 26 Chapter 2: Real Wages, Productivity and Labor Costs Table 2.2: Top to bottom decile ratio of the earning distribution Country 1989' Early 90s2 Late 90s3 Czech Republic 2.43 3.03 3.19 Hungary 3.40 3.67 4.17 Poland 2.43 3.11 3.45 Slovenia 2.87 3.09 3.28 Bulgaria 2.56 3.13 3.57 Latvia 3.07 3.34 4.46 Lithuania 5.25 5.55 4.44 Romania 2.18 2.90 4.40 Average 3.03 3.48 3.87 ' Data refer to 1990 for Bulgaria and Hungary, to 1991 for Latvia and to 1992 for Lithuania. Slovenia's value is the average of 1989, 1990 and 1991. 2 Data refer to the average of 1992, 1993, 1994. 3 Data refer to the average of 1995, 1996, 1997, 1998. Source: UNICEF-Monnee database and authors' calculations. Table 2.3: Dynamics of real wages and productivity 1991 1992 1993 1994 1995 1996 1997 1998 1999 Indexes of Real Wages Agriculture and Forestry 100 87 74 57 54 44 40 51 58 Industry 100 122 109 86 84 72 61 69 73 Construction 100 110 95 76 67 56 37 48 52 Transport 100 118 112 89 83 69 58 65 69 Communications 100 112 105 85 76 63 58 72 86 Trade 100 122 111 88 87 53 39 48 60 Other Services 100 105 100 76 69 47 38 47 56 Labor Productivity at constant prices (1990=100) leva Agriculture and Forestry 100 113 97 66 68 75 68 93 92 Industry 100 96 100 102 113 106 104 83 92 Construction 100 105 146 133 144 151 135 112 136 Transport 100 101 121 129 139 178 178 185 187 Conimunications 100 94 98 105 106 138 145 150 172 Trade 100 101 85 85 82 87 76 51 53 Other Services 100 102 70 69 64 61 50 42 44 Total 100 102 102 103 104 105 96 90 96 Source: Bulgarian authorities. Chapter 2: Real Wages, Productivity and Labor Costs 27 Table 2.4: Real wages and productivity by sector in Bulgaria 1991 1992 1993 1994 1995 1996 1997 1998 1999 Avg. Monthly Wage (in constant prices) Agriculture and Forestry 177 176 158 122 116 84 80 103 129 Industry 220 263 240 189 184 161 134 142 152 Construction 234 264 242 195 170 123 98 108 120 Transport 235 279 418 312 198 161 137 146 153 Communications 223 256 172 194 174 126 131 157 193 Trade 189 229 219 172 170 131 99 92 101 Otherservices 208 219 209 158 144 99 79 98 116 Annual Average CPI (1990=1) 4 8 14 28 46 103 1,212 1,482 1,456 Avg. Monthly Wage (constant prices) 212 241 237 192 165 126 108 121 138 Standard Deviation 22 36 86 59 27 29 25 26 31 Coefficient of Variation 0.1 0.15 0.36 0.31 0.16 0.23 0.23 0.22 0.22 Labor Productivity at constant prices (1990=100) leva Agriculture and Forestry 10,978 12,454 10,648 7,239 7,516 8,260 7,483 10,246 10,128 Industry 13,088 12,558 13,097 13,306 14,741 13,907 13,586 10,812 12,006 Construction 9,383 9,879 13,732 12,440 13,500 14,138 12,647 10,490 12,741 Transport 10,707 10,826 12,970 13,804 14,870 19,012 19,027 19,804 20,007 Communications 15,217 14,282 14,972 15,989 16,095 20,957 22,044 22,769 26,123 Trade 9,534 9,655 8,124 8,083 7,825 8,261 7,198 4,825 5,053 Other services 8,824 8,982 6,161 6,085 5,651 5,359 4,426 3,708 3,847 Total 11,079 11,245 11,349 11,359 11,493 11,680 10,610 10,018 10,679 Avg. Monthly Wage (constant prices) 11,104 11,234 11,386 10,992 11,457 12,842 12,344 11,808 12,844 Standard Deviation 2,297 1,919 3,222 3,807 4,292 5,841 6,496 7,113 7,931 Coefficient of Variation 0.21 0.17 0.28 0.35 0.37 0.45 0.53 0.6 0.62 Correlation Wage-Productivity 0.21 0.04 0.2 0.62 0.75 0.62 0.87 0.89 0.91 ' Preliminary Data. Source: Bulgarian authorities. 28 Chapter 2: Real Wages, Productivity and Labor Costs Table 2.5: Nonwage components of labor costs in selected countries' Social security contributions Health care contributions Contributions to unemployment fund Total Employer's Employee's Total Employer's Employee's Total Employer's Employee's Total Bulgaria2 0.37 0.02 0.39 0.00 0.00 0.00 0.04 0.01 0.05 0.44 Slovak Renublic 0.22 0.06 0.28 0.10 0.04 0.14 0.03 0.01 0.04 0.45 Czech Republic 0.20 0.07 0.26 0.09 0.05 0.14 0.03 0.00 0.04 0.43 Hungary 0.22 0.05 0.27 0.11 0.03 0.14 0.00 0.00 0.00 0.41 Poland 0.10 0.10 0.20 0.07 0.09 0.16 0.04 0.00 0.04 0.39 Slovenia 0.09 0.16 0.24 0.06 0.06 0.13 0.00 0.01 0.01 0.38 European Union .. 0.24 . . 0.13 0.37 'Contributions are based on the gross salary received by the worker. Data refer to 1998. 2Data refer to the third category of labor. Source: International Monetary Fund, Country Reports (various issues). Chapter 2. Real Wages, Productivity and Labor Costs 29 Table 2.6: Nonwage components of labor costs in Bulgaria Social security contributions Health care contributions Contributions to unemployment fund Total Employer's Employee's Total Employer's Employee's Total Employer's Employee's Total First Category of Labor 1997 0.52 0.02 0.54 0.00 0.00 0.00 0.05 0.00 0.05 0.59 1998 0.52 0.02 0.54 0.00 0.00 0.00 0.04 0.01 0.05 0.59 1999 0.51 0.02 0.52 0.00 0.02 0.02 0.04 0.01 0.04 0.58 2000 0.44 0.07 0.51 0.03 0.03 0.06 0.03 0.01 0.04 0.61 Second Category of Labor 1997 0.47 0.02 0.49 0.00 0.00 0.00 0.05 0.00 0.05 0.54 1998 0.47 0.02 0.49 0.00 0.00 0.00 0.04 0.01 0.05 0.54 1999 0.46 0.02 0.47 0.00 0.02 0.02 0.04 0.01 0.04 0.53 2000 0.39 0.07 0.46 0.03 0.03 0.06 0.03 0.01 0.04 0.56 Third Category of Labor 1997 0.37 0.02 0.39 0.00 0.00 0.00 0.05 0.00 0.05 0.44 1998 0.37 0.02 0.39 0.00 0.00 0.00 0.04 0.01 0.05 0.44 1999 0.36 0.02 0.37 0.02 0.02 0.03 0.04 0.01 0.04 0.444 2000 0.29 0.07 0.36 0.03 0.03 0.06 0.03 0.01 0.04 0.457 Self Employed 1997 0.00 0.32 0.32 0.00 0.00 0.00 0.00 0.00 0.00 0.32 1998 0.00 0.32 0.32 0.00 0.00 0.00 0.00 0.00 0.00 0.32 1999 0.00 0.32 0.32 0.00 0.03 0.03 0.00 0.00 0.00 0.35 2000 0.00 0.35 0.35 0.00 0.06 0.06 0.00 0.00 0.00 0.41 Contributions are based on the gross salary received by the worker/received income by the self-employed. Data for the year 2000 refer to the new legislation. Source: Bulgarian authorities. Chapter 2: Real Wages, Productivity and Labor Costs 30 Table 2.7: Dollar wages during the transition Country Indicator 1993 1994 1995 1996 1997 1998 Bulgaria $ Wages 122.18 96.17 122.67 106.48 106.58 143.83 Estimated Equilibrium Wage' 336.75 345.93 354.61 330.48 300.09 322.28 Ratio 0.36 0.28 0.35 0.32 0.36 0.45 Estonia $ Wages 133.57 207.15 247.89 257.98 291.02 Estimated Equilibrium Wage' 363.22 387.72 402.31 419.91 472.25 496.21 Ratio 0.00 0.34 0.51 0.59 0.55 0.59 Latvia $ Wages 76.89 138.26 179.28 191.62 214.14 241.06 Estimated Equilibrium Wage' 289.01 309.73 321.14 344.13 375.49 373.68 Ratio 0.27 0.45 0.56 0.56 0.57 0.65 Lithuania S Wages 42.85 91.52 129.00 172.21 212.98 264.85 update 221.22 217.15 224.68 237.46 255.06 270.10 Ratio 0.19 0.42 0.57 0.73 0.84 0.98 Memorandum Items Polish Average $ Wages 207.12 228.63 288.33 328.70 328.68 359.20 Czech Average $ Wages 196.10 230.99 303.13 347.57 326.80 n.a. Slovak Average $Wages 174.59 196.13 242.15 270.15 263.64 n.a. Hungarian Average$ Wages 287.13 304.14 308.69 309.23 308.07 313.22 'Uses IMF estimates of PPP-GDP per employee. Source: Krajnyak and Zettelmeyer (1998). CHAPTER 3: MOBILITY AND LABOR MARKET FLOWS IN BULGARIA This chapter uses micro-data from the Bulgarian Labor Force Survey to estimate the dynamics, the magnitude, and the composition of labor market flows over the transition. It has three main findings. First, while separation rates are very high, the job finding probabilities in Bulgaria are the lowest among countries of Central and Eastern Europe, suggesting that the adverse labor market experience of Bulgaria was not only linked to fast labor shedding, but also to a chronic inability to create jobs. Second, Bulgaria features a dramatic level of "discouraged workers", that is unemployed workers who appear to quit the labor force. Further, the flow of discouraged workers is estimated to be particularly large for young workers, a phenomenon that is likely to represent indirect evidence of substantial flows toward the unofficial economy. Third, the labor market prospects of low educated workers, particularly negative at the early stage of the transition, do not show any sign of improvements. These results call for policy intervention targeted to the young and less educated people, with a view to try to bring back the former group into the official economy, and to assist the latter group with training programs. In t'his light, the emphasis in the new Act on Unemploymnent on Active Labor Market Policies that are aimed at the youth and the long- term unemployed is to be welcome. The rest of the chapter proceeds as follows. Section 1 presents the data set and introduces concepts and definitions used throughout the chapter. Section 2 compares labor market flows in Bulgaria with those oi^ several CEE economies, while Section 3 looks at the structure of labor market flows by gender, age, and education. Data Source, Concepts and Definitions This chapter uses data from the Bulgarian Labor Force Survey administered by the National Statistical Institute (NSI). The first Bulgarian LFS was perfonned in September 1993, while the most recent one was completed in June 1999. Each survey covers approximately 24,000 households, which correspond to some 55,000 individuals.9 This chapter focus on labor market flows and analyze the following waves of labor market surveys: September 1993-October 1994, June 1995-June 1996, and June 1998- June 1999. The estimates of the flows are always on an annul basis, and the average number of persons that we can follow at one year distant is approximately 8,000. 9 Since fifty percent of the participants in one survey are included in the subsequent survey, it is possible to track individual histories over time, and to study the changes in their labor market state. Typically, the surveys are performed in March, June and November of each year. However, due to a variety or reasons, including lack of funds from the part of NSI, these dates were changecl in different years, and the surveys were sometimes not performed at all. This irregular behavior represents one of the major problems with the analysis of this chapter: since the seasonality in the labor market is typically quite high, the comparison of different waves of LFS requires some caution. Thus, in order to insure maximum comparability over time, this chapter focuses on the surveys performed in September 1993, October 1994, June 1995, June 1996, June 1998 and June 1999. Chapter 3. Mobility and Labor Market Flows in Bulgaria 32 The purpose of our analysis is to study the mobility patterns of individuals across three different labor market states: employment, unemployment, and out of the labor force.,0 Specifically, labor market flows refer to the number of people that change labor market status over a given period, which corresponds to one year in our analysis. If we indicate with the E, U, and N the number of employed, unemployed and out of the labor force, respectively, in what follows we shall indicate with EU the flow corresponding to the number of people that were employed at time t and became unemployed at time t+l. In the rest of the chapter, whenever we will indicate two subsequent capital letters E, N, U, (e.g. NU), the first of such letters shall indicate the originating population (e.g. N), while the second letter shall refer to the destination population (e.g. U). Since different labor market states have different sizes, the companrson of flows is typically done as a share of the originating population. Figure 3.1 plots all the possible flows in a single chart, and reports also the relevant definition. While these flows let us follow people between employment, unemployment and inactivity, it is clear that labor force surveys can not be used to infer the magnitude and composition of job to job movements, which appear to be important in the context of transition (Boeri, 1998). Figure 3.1: Labor market flows / Emaployme (E -- U)E nemploymen (U X E)/U \E \( OLF)/E (OLF -* U)/OLF (U -* OLF)/U (OLF -* E)OL\/ Out of labor force Source: 10 The Bulgarian Labor Force Surveys (LFS) classifies individuals on the basis of their economic activity following the International Labor Office (ILO) recommendations. During the survey period, a person of age 15 and more can be in three different labor market states: employed, unemployed and out of the labor force. An employed person is classified as somebody who a) performed some work for at least one hour for pay or other income; b) did not work during the reference period but had a job or enterprise from which they were temporarily absent; and c) is a woman on maternity leave that is absent from work but is still fully paid. Conversely, an unemployed person is classified as somebody who a) did not work at all during the survey week; b) were actively looking for work within the preceding four week period; and c) were available to start work within two weeks following the reference period. Finally, those persons who are neither employed nor unemployed are considered as out of the labor force. Chapter 3: Mobility and Labor Market Flows in Bulgaria 33 Aggregate Labor Flows in Bulgaria and Other CEE Economies Figure 3.2 reports the magnitude of labor market flows for Bulgaria, Czech Republic, Poland, Slovak Republic and Slovenia in the mid nineties. From the comparison of labor market flows of Bulgaria with other transition economies, important characteristics of the Bulgarian transition immediately emerge. First of all, the modest labor market performance of Bulgaria documented in the previous chapter is the result of both higher separation rates and lower job finding probabilities, in a way that is consistent with the low rates of job reallocation documented in Chapter 1. Indeed, Figure 3.2 shows that the Bulgarian separation rate (i.e. the probability of becoming unemployed, or the EU flow) is the highest among the five countries reported, while the job finding probability is the lowest (UE flow). The stop-and-go nature of the structural reforms programs in Bulgaria, and the delays in macroeconomic stabilization have certainly played a role in such a poor performance. Further, existing evidence on other micro survey suggests also that reservation wages are much higher than the average wage available in the market for a given level of human capital. However, Figure 3.2 shows that the most dramatic difference between Bulgaria and other countries is linked to the inflows towards and outflows from the labor force. Not only is the proportion of people who leave employment the largest among the group of countries considered, but it appears also that the number of people that exit from unemployment for leaving altogether the labor force is twice as large as that of other transition economies. The aggregate numbers of Figure 3.2 suggests that an unemployed person is as likely to become employed as he (or she) is likely of dropping out of the labor force. This "discouragement" effect is potentially very important, since it may indicates either a huge social waste of potentially productive capacity, or a large flows of workers toward the unofficial economy. The rest of this chapter will look closely to this large exit from the labor force, and will draw the necessary implications. Table 3.1 reports transition matrices for the aggregate labor market flows in Bulgaria in 1992-93, 1995-96 and 1998-99. These three periods refer to labor market flows at the early stage of the transition, in the mid nineties, when employment was still declining, and in the late nineties, when aggregate employment started to rise.11 Looking at Table 3.1, it is clear that the largest probability is attached to the elements in the main diagonal of each matrix, an indication of persistence in each labor market state. 11 Matrices in Table 3.1 and subsequent Tables should be read and interpreted as follows. In the first column we report the labor market state of an individual during the first wave of the labor force survey (say in year t), while in the first row we report the labor market status of the same individual in year t+l. Thus, in the row libeled "employment" we can read the conditional probability that an employed individual ends up "out of the labor force", "unemployed" or remains "emnployed". Further, by reading the table across rows, the numbers in the cells sum up to one (unless small differences due to rounding), since a given worker must necessarily end up in one of the three labor mnarket states reported in the colurmn. 34 Chapter 2: Real Wages, Productivity and Labor Costs Figure 3.2: Labor market flows for selected countries Bulgaria: 1995-1996 -43% Employment Unemployment 32.6% 0 \ \ ~8% 3.8%/ 7.7% 1628% Source: LFS, June 1995-June 1996, Boeri (1998) NVote: In this and subsequent figurs p ec orgin population. Czech Republic 1995-1996 2.9 Employment Unemloyment 47.1% 6>.70 %\< °/f.27 Out of labor force Source:LFS,Q2 1995-Q2 1996, Boeri (1998) Slovak Republic: 1995-1996 34.8% \:7% ~~~~1.6 %/% 2% \/ 4.2% Source:LFS,Q2 1995-Q2 1996, Boerii(1998) Chapter 3. Mobility and Labor Market Flows in Bulgaria 35 Poland: 1994-1995 3.5% EmploymentUnemplomn 38% 5.5% 3.2% 6% 15.6% Ouit of laboar fre Source: LFS,Q2 1994-Q2 1995, Boeri (1998) Slovenia 1994-1995 2.4% Employment Uemployment 38.7% 5.8% 2.1% / / 6.3% 19.4% Out of labor force Source: LFS,Q2 1994Q2 1995, Boeri (1998) Surprisingly, Table 3.1 shows that the job finding probability has not increased over the decade of transition but it has, if anything, marginally declined. This result is certainly worrying, since reveals a failure of the transition process to increase the employment prospects of the unemployment pool. Conversely, while job losses were very high in the early nineties, they declined in the second part of the decade. Further, these Tables show also the dramatic drop in labor force participation observed early in the transition. Table 3.1 shows that in the early nineties, 11 percent of the employed people moved from employment to out of the labor force, with a discouragement rate of some 30 percent. These numbers fell, respectively, to 8 percent and 28 percent in the last part of the decade. 36 Chapter 3: Mobility and Labor Market Flows in Bulgaria The Structure of Labor Market Flows by Age, Gender and Education While women experienced a huge exit from the labor force early in the transition process, over time, the composition of labor flows by gender has become fairly similar, indicating that the one time adjustment of the early nineties is now completed (Table 3.2). In 1994, 14 percent of employed women left their job and went directly out of the labor force, while the discouragement rate was 34 percent, compared with values of 9 percent and 28 percent for men. This gender difference suggests an interesting pattern, and partly reflects the very high employment of women under the command economy. However, the large exit from the labor force of women compared to that of men came mainly from employment, rather than from unemployment. This suggests that women were willing to keep working, but were not attached to the labor force as men were, and they left the labor force once their job was destroyed. The composition of labor market flows by different age groups reveals interesting, and possibly surprising, phenomena. First, both the separation and the hiring rate falls monotonically with age. This phenomenon partly reflects the temporary nature of most job held by young people, which result in large rates of hiring and firings, but it is also linked to the dramatic increase in youth unemployment experienced by Bulgaria. Second, prime-aged people out of the labor force are as likely to become employed as they are of becoming unemployed; this suggests that such class of workers may not perceive the difference between the two non-employment states as particularly relevant. Third, the discouragement rate by young workers is higher than that of workers in the prime age group. Table 3.3 shows that 40 percent of the unemployed in the age group between the age 15 and 24 drops from the labor force, while this proportion falls to 20 percent for prime age workers. There are two possible explanations for this phenomenon. The first one would be linked to the decision of young people to go back to education, and by the low attachment to the labor force of young female women. The alternative possible explanation is that these large flows of young people out of the labor force simply reflect labor market movements towards the unofficial economy. To check that the latter interpretation is the most plausible, we estimate the transition probability for both men and women, and we find that the difference in terms of gender is negligible, thus suggesting that these large outflows are probably not linked to matemity leave of young women. Further, for the period June 1998 - June 1999 we tested the flow from unemployed to out of labor force excluding the regular students. The transition probability still stays high - 0.24. As a result, we tend to interpret these large flows as indirect evidence of labor market flows from the regular economy towards the underground economy. Data on labor flows by educational attainment show that labor shedding early in the transition took place mainly among the low educated people. However, Table 3.3 shows also that these flows continued to be very low among people with higher and semi-higher education throughout the decade. Employed people without education have only 75 percent probability of retaining their job, compared with an average retention probability of 85-90 percent for people with higher education. This finding is certainly consistent with the large rise in unemployment experienced by low educated people. Table 3.4 suggests also that for low educated people it is very difficult to enter the labor force, since the probability of leaving inactivity is less than 10 percent. Thus, means-tested social policy schemes should be probably addressed mainly to this category of workers. Chapter 3: Mobility and Labor Market Flows in Bulgaria 37 Table 3.5 looks at worker mobility across different sectors, and estimates a transition probability matrix in which employed workers are divided among three sectors: agriculture, industry and services. Among the three sectors identified, we note that employment in agriculture is the less persistent state in the economy (i.e., the probability of being employed in the same sector of the economy one year after the reference period is the lowest for agriculture if compared to industry and services, even if it has doubled across transition, especially for the youth) with a probability of retaining one's job of 63 percent, against a probability of some 80 percent in the remaining two sectors. Further, there is a substantial reshuffling of workers between service and industry, as suggested by the large probability of transiting from agriculture to industry, and vice versa. While these results may seem to be at odd with the increase in agriculture employment observed in Chapter 1, they should be interpreted with caution. Indeed, it is possible that the inherent difficulty of labor force surveys of successfully following people who changed residences between two subsequent surveys, may imply that our estimates fail to capture the large migration back into villages that appears in the aggregate number discussed in Chapter 1. Table 3.5 shows also that there is a large proportion of young people who tend to leave the services sector and enter into industry, probably linked to the end of a temporary jobs in the service sector for a more stable job in industry. We next look in some details at the composition and the structure of long term unemployment, one of the main problems afflicting the Bulgarian economy, as we discussed in Chapter 1. Table 3.6 reports the skill composition of the long-term unemployment, i.e. the unemployed workers who have been out of work for more than 12 months, and shows that this labor market status refers mainly to people with very low educational attainment. While it is not surprising to see that poorly educated people represent a high percentage of the long term unemployed, it is somewhat more disturbing to observe that the proportion is just marginally higher than that of workers with secondary and vocational education. Table 3.6 estimates also the transition probabilities of long term unemployed, and it finds that their employment probability falls only marginally in the second year in the sample. This suggests that their employment prospect are not completely reduced by their unemployment status, and that they could probably be improved with some policy intervention, in the spirit of the recently approved Act on Unemployment and Labor Market Policies. 38 Chapter 3: Moiotiliy and Labor Market Flows in Bulgaria Table 3.1: Aggregate transition probabilities Septemberl993-October 1994' TOTAL Out Of Labor Force Employment Unemployment Out Of Labor Force 0.87 0.08 0.05 Employment 0.11 0.82 0.07 Unemployment 0.31 0.29 0.40 June 1995-June 1996' TOTAL Out Of Labor Force Employment Unemployment Out Of Labor Force 0.89 0.08 0.04 Employment 0.08 0.88 0.04 Unemployment 0.28 0.33 0.39 June 1998-June 1999' TOTAL Out Of Labor Force Employment Unemployment Out Of Labor Force 0.90 0.06 0.03 Employment 0.09 0.85 0.05 Unemployment 0.28 0.34 0.37 'The labor rnarket state in the first column refers to the position of the person at time t and the state in the first row refers to the position at time (t+1). The numbers in each cell refer to the probability of moving from the original to the final position. Source: Bulgarian Labor Force Survey and Authors' calculations. Chapter 3: Mobility and Labor Market Flows in Bulgaria 39 Table 3.2: Transition probabilities by gender September 1993-October 1994' MALE Out Of Labor Force Employment Unemployment Out Of Labor Force 0.85 0.09 0.06 Employment 0.09 0.84 0.07 Unemployment 0.28 0.27 0.45 Septemberl993-October 19941 FEMALE Out Of Labor Force Employment Unemployment Out Of Labor Force 0.89 0.07 0.05 Employment 0.14 0.80 0.06 Unemployment 0.34 0.30 0.36 June 1998-June 1999' MALE Out Of Labor Force Employment Unemployment Out Of Labor Force 0.88 0.08 0.04 Employment 0.09 0.86 0.05 Unemployment 0.26 0.39 0.35 June 1998-June 19991 FEMALE Out Of Labor Force Employment Unemployment Out Of Labor Force 0.92 0.05 0.03 Employment 0.10 0.84 0.06 Unemployment 0.32 0.28 0.40 The labor market state in the first column refers to the position of the person at time t, and the state in the first row refers to the position at time (t+ 1). The numbers in each cell refer to the probability of moving from the original to the final position. Source: Bulgarian Labor Force Survey and authors' calculations. 40 Chapter 3: Mobility and Labor Market Flows in Bulgaria Table 3.3: Transition probabilities by age Septemberl993-October 1994' Age 15-24 Out Of Labor Force Employment Unemployment Out Of Labor Force 0.81 0.08 0.11 Employment 0.26 0.63 0.11 Unemployment 0.40 0.22 0.39 June 1995-June 1996' Age 15-24 Out Of Labor Force Employment Unemploymnent Out Of Labor Force 0.80 0.11 0.09 Employment 0.15 0,76 0.09 Unemployment 0.40 0.27 0.33 June 1998-June 1999' Age 15-24 Out Of Labor Force Employment Unemnployment Out Of Labor Force 0.84 0.09 0.08 Employment 0.14 0.77 0.09 Unemployment 0.32 0.35 0.32 June 1998-June 1999' Age 15-24,male Out Of Labor Force Employment Unemployment Out Of Labor Force 0.80 0.11 0.09 Employment 0.10 0.82 0.07 Unemployment 0.31 0.43 0.26 June 1998-June 19991 Age 15-24,female Out Of Labor Force Employment Unemployment Out Of Labor Force 0.88 0.06 0.06 Employment 0.20 0.69 0.11 Unemployment 0.35 0.24 0.41 The labor market state in the first column refers to the position of the person at time t, and the state in the first row refers to the position at time (t-l ). The numbers in each cell refer to the probability of moving from the original to the final position Source: Bulgarian Labor Force survey and authors' calculations. Chiapter 3: Mobility and Labor Market Flows Itm Bulgaria 41 Table 3.3 (continued): Transition probabilities by age. Septemberl993-October 19941 Age 25-50 Out of Labor Employment Unemployment Age 51-64 Out of Labor Employment Unernployment Force Force Out Of Labor Out Of Labor Force 0.47 0.37 0.16 Force 0.91 0.06 0.02 Employment 0.05 0.88 0.07 Employment 0.22 0.73 0.06 Unemployment 0.20 0.35 0.45 Unemployment 0.63 0.18 0.20 June 1995-June 19961 Age 25-50 Out of Labor Employment Unemployment Age 51-64 Out Of Labor Emnployment Unemployment Force Force Out Of Labor Out Of Labor Force 0.55 0.32 0.13 Force 0.94 0.05 0.01 Employment 0.04 0.92 0.04 Employment 0.21 0.76 0.03 Unemployment 0.19 0.37 0.44 Unemployment 0.44 0.22 0.33 June 1998-June 1999' Age 25-50 Out of Labor Employment Unemployment Age 51-64 Out Of Labor Employment Unemployment Force Force Out of Labor Out Of Labor Force 0.63 0.27 0.10 Force 0.94 0.05 0.01 Employment 0.05 0.90 0.06 Employment 0.21 0.76 0.03 Unemployment 0.22 0.37 0.41 Unemployment 0.54 0.19 0.27 'The labor market state in the first coluni refers to the position of the person at time t, and the state in the first row refers to the position at time (t+l). The numbers in each cell refer to the probability of moving from the original to the final position. Source: Bulgarian Labor Force Survey and Authors' calculations. 42 Chapter 3. Mobility and Labor Market Flows in Bulgaria Table 3.4: Transition probabilities by educational level Septemberl993-October 1994' Higher and Semi-Higher Education Primary and Without Education Out of Employment Unemployment Out of Labor Employment Unemployment Labor Force Force Out of Labor Out of Labor Force 0.68 0.24 0.08 Force 0.91 0.06 0.04 Employment 0.06 0.91 0.03 Employment 0.21 0.69 0.09 Unemployment 0.17 0.48 0.35 Unemployment 0.36 0.24 0.40 June 1995-June 1996' Higher and Semi-Higher Education Primary and Without Education Out of Labor Employment Unemployment Out of Labor Employment Unemployment Force Force Out of Labor Out of Labor Force 0.86 0.13 0.01 Force 0.92 0.05 0.03 Employment 0.04 0.94 0.02 Employment 0.15 0.79 0.06 Unemployment 0.30 0.41 0.30 Unemployment 0.32 0.28 0.41 June 1998-June 19991 Higher and Semi-Higher Education Primary and Without Education Out of Labor Employment Unemployment Age 51-64 Out Of Labor Employment Unemployment Force Force _ Out of Labor Out Of Labor Force 0.89 0.08 0.03 Force 0.94 0.04 0.02 Employment 0.04 0.93 0.02 Employment 0.17 0.75 0.08 Unemployment 0.34 0.41 0.24 Unemployment 0.35 0.24 0.41 The labor market state in the first column refers to the position of the person at time t, and the state in the first row refers to the position at time (t+l). The numbers in each cell refer to the probability of moving from the original to the final position Source: Bulgarian Labor Force Survey and Authors' calculations. Chapter 3. Mobility and Labor Market Flows in Bulgaria 43 Table 3.5: Transition probabilities by branches (1993-94) Septemberl993-October 19941 Total Out of Labor Force Unemployment Agriculture Industry Services Out of Labor Force 87.0 5.0 2.3 3.1 2.6 Unemployment 31.3 40.1 6.0 12.6 9.9 Agriculture 28.5 11.2 44.1 8.9 7.3 Industry 8.9 7.9 1.8 72.6 8.9 Services 7.3 4.5 1.1 9.3 77.8 September 1993-October 19941 Age 15-24 Out of Labor Force Unemployment Agriculture Industry Services Out Of Labor Force 80.8 11.4 2.3 2.3 3.2 Employment 39.7 38.8 6.0 6.9 8.6 Agriculture 42.9 7.1 28.6 7.1 14.3 Industry 26.0 14.0 2.0 46.0 12.0 Services 18.9 8.1 2.7 13.5 56.8 September 1993-October 1994' Age 25-50 Out Of Labor Force Unemployment Agriculture Industry Services Out Of Labor Force 47.0 16.4 8.2 16.4 11.9 Unemployment 19.6 45.1 5.9 17.2 12.3 Agriculture 17.4 12.8 51.4 12.8 5.5 Industry 3.5 7.5 1.3 78.8 8.8 Services 3.8 4.7 0.9 9.4 81.1 September 1993-October 1994' Age 51-64 Out Of Labor Force Unemployment Agriculture Industry Services Out Of Labor Force 91.3 2.5 2.5 1.9 1.9 Unemployment 62.5 20.0 7.5 7.5 2.5 Agriculture 33.3 11.9 42.9 2.4 9.5 Industry 20.9 6.0 3.0 64.2 6.0 Services 16.7 2.4 1.2 7.1 72.6 44 Chapter 3.: Mobility and Labor Market Flows in Bulgaria Table 3.5 (continued): Transition probabilities by branches (1998-99) Junel998-June 19991 Total Out of Labor Force Unemployment Agriculture Industry Services OutofLaborForce 90.5 3.1 1.5 1L9 3.1 Unemployment 28.5 37.3 5.9 11.6 16.7 Agriculture 19.6 4.9 62.7 7.1 5.6 Industry 8.8 7.1 1.8 74.5 7.8 Services 6.8 4.1 1.0 4.7 83.3 June 1998-June 19991 Age 15-24 Out of Labor Force Unemployment Ag!riculture Industry Services OutOfLaborForce 83.6 7.8 1.4 2.9 4.4 Employment 32.5 32.5 2.6 15.8 16.7 Agriculture 30.4 4.3 54.3 6.5 4.3 Industry 13.8 8.3 0.9 66.1 11.0 Services 10.4 9.8 0.6 6.1 73.2 June 1998-June 1999' Age 25-50 Out Of Labor Force Unemployment Agriculture Industry Services Out Of Labor Force 63.2 10.0 5.4 8.2 13.2 Unemployment 22.0 41.3 7.0 11.3 18.3 Agriculture 10.4 6.3 67.3 9.5 6.5 Industry 5.3 7.5 2.2 77.3 7.7 Services 3.3 4.0 1.1 4.8 86.9 June 1998-June 1999' Age 51-64 Out Of Labor Force Unemployment Agriculture Industry Services Out Of Labor Force 94.1 0.9 1.8 1.3 1.9 Unemployment 53.7 26.9 6.0 4.5 9.0 Agriculture 34.2 2.5 56.3 2.5 4.4 Industry 19.4 4.9 0.8 68.0 6.9 Services 16.3 2.0 1.1 3.9 76.7 The labor market state in the first column refers to the position of the person at time t, and the state in the first row refers to the position at time (t+l). The numbers in each cell refer to the probability of moving from the original to the final position. Source: Bulgarian Labor Force Survey and Authors' calculations. Chapter 3: Mobilitv and Labor Market Flows in Bulgaria 45 Table 3.6: Long-term unemployment structure and transition probabilities Flows Out Of Labor Force Employed Unemployed Sept.1993-Oct.1994 33.3% 26.9% 39.8% Junel995-Junel996 28.6% 31.7% 39.7% June1998-June1999 28.4% 27.7% 43.9% Age 15 - 24 25-50 51-64 65 and over Sept.1993 25.2% 61.7% 11.9% 1.2% June1995 22.7% 66.3% 10.6% 0.4% June1998 20.6% 66.0% 13.3% 0.1% June1999 20.5% 66.3% 12.9% 0.3% Gender Male Female Sept.1993 52.0% 48.0% June1995 50.7% 49.3% June1998 53.8% 46.2% June1999 51.9% 48.1% Education Higher & Senmi-Higher Secondary Primary and Without Education Sept.1993 6.6% 39.0% 54.4% June1995 5.3% 42.3% 52.4% June1998 6.4% 48.6% 45.1% June1999 6.7% 47.1% 46.2% Source: Bulgarian Labor Force survey and authors' calculations. CHAPTER 4: LABOR MARKET INSTITUTIONS, POLICIES, AND COMPLIANCE WITH THE ACQUIS COMMUNAUTAIRE This chapter surveys the functioning of labor market institutions and policies in Bulgaria, with particular emphasis on the trade unions and industrial relations, the active labor market policies, and the unemployment benefits system. Further, it discusses Bulgarian compliance with the acquis communautaire in the field of labor. This section outlines the key insights of the analysis. While there is evidence that the functioning of the industrial relations system seems acceptable, if compared to that of other Central European Countries, some fine-tuning is needed. In particular, improvements are needed towards more de-centralized bargaining at local level to reduce high regional unemployment differentials. In the area of passive policies, we find that the generosity of unemployment benefits is diminished, while that of social assistance has slightly grown, with a tendency to provide greater assistance to family types with no eamers at all. In light of the large rates of unemployment among uneducated people with very low probabilities of re-employment, we believe that this measure is to be welcome, and we expect to see a further tendency in targeting specific unemployed groups in the years to come. However, in light of the current extent of the long terrn unemployment, the present coverage rate doesn't seem to ensure an adequate income source for the majority of the joblessness, whose risk to fall into poverty has thereby increased through the years. There is a marked tendency to reallocate resources from passive to active labor market policies (ALMP), which appears to be in line, though less pronounced, to that shown by other transition economies. While this shift in policy may in pnrnciple enhance the job generation prospects of the unemployed, some shortcomings associated with the implementation of such measures, narnely deadweight losses and substitutions effects, should be taken into account. Even though we lack a rigorous evaluation of the ALMP, there is no evidence suggesting that ALMP had significant impact on job creation and were able to improve the job finding probability of the unemployed. Thus, the decision of the Bulgarian authorities to undertake a rigorous evaluation of the ALMP is to be welcome, and future shifts in policies should be based on the results of the evaluation. The evaluation is now at an advanced stage, and comprehensive results will be available soon. Bulgaria is making considerable efforts to align its regulatory framework in the field of labor markets with the EU accession requirements. In the labor area, adoption of the acquis communautaire implies the recognition of a certain set of rights to workers in Bulgaria, as well as the standardization of working conditions to those in the EU. In principle, most of the worker's rights defined in EU regulations have long been part of Bulgarian labor legislation. Because of an insufficient compliance, however, substantial gaps with EU requirements remain, even when the legal provisions appear to be in place. Thus, the process of legal approximation remains to be matched by a further strengthening of the administrative capacity to implement EU legislation. Chapter 4: Labor Market Institutions, Policies and Compliance with the Acquis Communautaire 47 An area in which Bulgaria needs to invest resources or acquire administrative capacity to ensure compliance with EU labour legislation is the standardisation of working conditions. This process will demand substantial investments in infrastructure and an increased capacity of employers to provide training, with inevitable impact on the labour cost. Since there is some risks that such standardisation may harm in the short run the development of the small and medium enterprises, inflate the unofficial economy, and ultimately delay accession, we recommend a gradual approach in this area. We do not see any clear benefits from an immediate harmonisation, and before proceeding, we recommend performing survey-based studies to assess the impact of such standardisation on total labour costs. Effective membership in the EU requires not just a harmonized legal basis, but also an economy able to withstand the competitive pressures of the internal market and a flexible environment promoting labor mobility. As Bulgaria moves closer to accession its economic competitiveness and flexible labor market will be key to its participation in the Union and to benefiting from membership. Trade Unions and Labor Relations Trade Unions are one of the key player of the Bulgarian Industrial Relations system. which is regulated by a tripartite system whose other members are government representatives (representatives of the cabinet, ministers, municipals authorities depending on the level of partnership) and the employers' organizations. The foundations of the tripartite system are established by the Constitution of Bulgaria, and detailed by several pieces of legislation, including the Law for Collective Labor Disputes and the Law for Unemployment Protection and Employment Incentives. The functioning of the tripartite system requires coordination and consultation among the three social parties on a variety of issues, including changes to the minimum wages and social security legislation. Negotiations are carried out at four levels: national, branch, regional and enterprise. The most important issues subject to negotiation, such as the minimum wage, the average wage in the public sector and the mechanisms of wage setting and determination, must be discussed at the national level, and can consequently be finalized at the branch or at the regional level (for example minimum wage can be set at different levels from the national one, but never lower); more specific issues concerning wages, additional payments and employment (overtime work regulation and holiday leave) can be instead negotiated at the enterprise level. Wages are completely centrally set in the activities of the public sector and are entirely subsidized by the state budget; however, in the areas of the public sector that are not covered by the state budget, the wage is determined by decentralized bargaining; in the private sector, no form of collective bargaining is envisaged, and wages tend to be set at the firm level (ETF Background Study, 2000). The set-up and functioning of the Trade Unions in Bulgaria are regulated by the Labor Code. To be recognized as a legal representative of workers, a union must count on a membership of at least 50.000 employees, have organizations in more than half of the sectors of activity, and have both national and territorial bodies. Employees are free to join and leave unions without any restriction. In Bulgaria, the most important Unions are the Confederation of Independent Trade Unions (KNSB) and the Confederation of Labor ("Podkrepa"). According to information from the Ministry of Labor and Social Policy KNSB, founded in 1990 inherited the 48 Chapter 3. Mobility and Labor Market Flows in Bulgaria former state organized labor union, claims about 600 thousand members in 64 branch organizations and covers almost all sectors of economic activity; Podkrepa, founded in 1989, reports about 150 000 members in 17 branch organizations. The results of a recent survey carried out by the ILO on a sample of firms and employees in selected transition economies provides insightful information on Unions behavior (ILO, 1998), and on the functioning of the tripartite system. Union membership in Bulgaria is prominent in the sectors of primary production and manufacturing and in private-owned rather than public enterprises, and does not seem to change considerably according to the firm size. Overall, union membership appears to be quite strong if compared with other countries: as shown by Figure 4. 1, in almost 60 percent of the units surveyed the percentage of union-member employees was between 76 percent and 100 percent, while this share appears to be only 20 percent in Hungary and 5 percent in Poland. Looking at the quality of the relation between the Unions and the Employers, the prevailing relationship seems that of "cooperation and partnership" while in the other countries "partnership and opposition" seems predominant. While there is a general tendency among CEE countries toward a more decentralized bargaining structure, this trend is not apparent in Bulgaria. In all the countries analyzed by the ILO surveys, nearly 90 percent of the establishments surveyed had concluded collective agreements at the local level, while the same percentage in Bulgaria is only 70 percent. Further, in almost 60 percent of the units surveyed in Bulgaria, the negotiating team had to accept claims defined in advance, against a 20 percent in the Czech Republic, and was allowed to take decisions within a mandate according to own's judgments only in 25 percent of the units, against a figure of 70 percent for the Czech Republic. However, compromises on the part of the unions appear to be less common in Bulgaria than in other countries. The main issues on which compromises are made more frequently are remuneration and social security, the same on which employers more often refuse to negotiate. In general, compromises are more frequent in privatized and foreign-owned enterprises; while no remarkable difference is observable between public and Bulgarian-owned firms, the budget and service sectors are those in which collective bargaining seems to be better at work. Finally, Bulgaria outperforms other countries in how the overall atmosphere in the bargaining process is perceived by trade unionists: in all the countries, the bargaining process is perceived at most as "acceptable", whereas in Bulgaria, in more than 50 percent of the units, the atmosphere has been described as "good", against, for example, Poland's 20 percent (Figure 4.2). Chapter 4. Labor Market Institutions, Policies and Compliance with the Acquis Communautaire 49 Figure 4.1: Union membership in Central Eastern Europe (mid '90s). Poland Percentages of total employees members H ungary _of unions: H1076 to 100% Czech Republic 051 to 75% i *26 to 50 % Bulgaria Ml to 25 % Slovakia 0 10 20 30 40 50 60 70 80 90 % of units surveyd Source: ILO (1998). Figure 4.2: Relationship between employers and the unions Czech Republic Slovakia 0 Open confrontation Poland 0 Both partnership and d ~~~~~~~~~~~~~~~~OppOsition ____________________________________________ U Constructive opposition Hungary UCooperation and partnership Bulgaria _ 0 10 20 30 40 50 60 % of units surveyed Source: ILO (1998). 50 Chapter 3: Mobility and Labor Market Flows in Bulgaria Some further insights on the Unions' influence can be caught by considering the extent by which local and national-level bargaining interact in the provisions of collective agreements concerning employment, working conditions and remuneration. In all countries, the majority of units surveyed by the ILO reported a "supplementary" relationship between local and national (or regional) agreements, which implies that labor agreements deal with similar issues at different level of negotiation. Local bargaining plays an important role in some aspects of wage- setting (salary-related issues such as premiums related to productivity, overtime and holiday payments etc.) and agreements on working time. While local bargaining agreements are typical for Poland and Hungary, covering, on average, about 90 percent and 80 percent of the units surveyed, they are less common in Bulgaria. At the same time, Bulgaria exhibits lower working time flexibility in the normal weekly working hours than the other countries. Figure 4.3: Bargaining level determining the basic wage Poland 11 Czech Republic_______________________________ Hungary Slovakia ___m 1Local * National Bulgaria 0 10 20 30 40 50 60 70 80 90 100 % of units surveyed Source: ILO (1998). The picture that emerges suggests the following conclusions. Although the overall performance of the Unions seems acceptable if compared to that of other Central European Countries, the Industrial Relations system requires some fine-tuning. The lack of substantial negotiation at either branch or regional level, the high centralization of the bargaining system and the poor coordination of employers representatives represent potential problems areas; in particular, improvements are needed towards more de-centralized bargaining at local level to better address high and persistent regional unemployment unbalances. Chapter 4. Labor Market Institutions, Policies and Compliance with the Acquis Communautaire 51 BOX 4.1: Bulgarian Labor Market and Euroscierosis Most of the features of the Bulgarian labor market resemble those of the worst performing European markets, such as France, Germany and Italy. First, unemployment appears stubbomly stable at double digit level. Second, long term unemployment, measured as the fraction of workers who have been unemployed for more than a year is approximately equal to 50 percent. Third, Bulgaria displays a high incidence of youth unemployment, and up to one-fourth of the pool of those who have been unemployed for at least one year is made up of people aged 24 or less. Fourth, Bulgaria features a dramatic level of "discouraged workers", that is unemployed workers who appear to quit the labor force. An unemployed people is as likely to become employed as ho or she is likely to drop from the labor force. Fifth, unemployment has a regional dimension, with a dispersion in the unemployment rates across regions that is both increasing and persistent. In the jargon of the unemployment literature, Eurosclerosis refers to an ailing labor market (in the sense that it displays the five features outlined above) that is regulated by a set of very "rigid" labor market policies and institutions. The set of such "rigid" policies typically include very high payroll taxes, high unemployment benefits, high minimum wages, restrictive protection legislation, and strong unions that do not coordinate their bargaining activities. While Bulgaria's payroll contribution are obviously too high, even when compared to the worst performing European countries, the remaining set of labor market policies and institutions do not appear be "rigid", at least not when compared to the European experience. The picture that emerges for Bulgaria suggests that the poor performance in the labor market can only partly be attributed to its labor market institutions, and is likely to be the result of Bulgaria's past inability to restructure its ailing industrial sector, and to tackle fundamental structural problems. Payroll Contributions. The level of payroll contributions in Bulgaria is by far the highest among that observed in CEE and Western European countries. By looking in further details at the composition and at the magnitude of payroll contributions in Bulgaria, it appears that the sum of social security contributions, health care taxes, and contributions to the unemployment fund reach 60 percent of gross income for a large set of workers. The bulk of this burden is clearly linked to the social security contributions, which reached 54 percent of gross income in 1997 for primary workers, a set of workers that are entitled to early retirement benefits in light of their particular jobs (e.g. miners and teachers). The rest of the contributions, health care contributions and unemployment fund, are still sizeable, but in line with those found in the rest of the OECD countries. Employment Protection Legislation. Despite several revisions since the beginning of the transition, there is still a need to revise the most restrictive provisions in the Labor Code. The procedures for collective redundancies are quite rigid, they require a difficult coordination with the trade unions, and represent an obstacle to firm level restructuring. While employment termination for individual contracts is technically easy, there seems to be a practical difficulty in implementing dismissal, in light of the jurisdictional bias in favor of labor. In other dimensions, however, the labor codes suits the needs of a market economy, avoiding some of the most restrictive provisions, including the prohibition of fixed- term contracts, part-time and additional work, unduly onerous standards of firings and lay-offs, found in neighboring transition economies. Minimum Wage. One way to describe the level of the minimum wage is to compare it with the average wage, as we did in Table 4.7. While this ratio in Bulgaria was very high at the beginning of the transition, its level has been cut throughout the decade, and is now around 33 percent. In countries such as France and Germany, the fraction of the minimum wage to the average wage is much higher, in the order of 50 percent. Unemployment Benefits. There are at three ways to describe the generosity of the unemployment benefit level. The first one is the gross replacement rate, which represents the percentage of the unemployment benefit with respect to the average wage. The second measure is the coverage rate: the percentage of unemployment benefits recipients over the total number of unemployed. A further measure is the duration of benefit, the length of the unemployment spell in which workers can get unemployment benefits. Along each of these dimensions, as we discussed in Section 4.3, Bulgaria's generosity is lower than what observed in most other CEE economies, and also lower than what is observed in France. Union Behavior. Unions in Bulgaria are fairly strong, at least when union membership is measured by union density, that is the proportion of employees who choose to join a union. However, industrial relations in Bulgaria are characterized by a high degree of cooperation between unions, and between unions and employer representatives, and there does not seem to be much evidence that wages pressure in Bulgaria is "too high". However, some fine tuning is needed. In particular, improvements are needed towards more de-centralized bargaining at local level to better foster high regional unemployment persistence and differentials. 52 Chapter 3: Mobility and Labor Market Flows in Bulgaria Passive measures for the Unemployed: the Unemployment Benefits and Social Assistance System. Unemployment Benefits schemes usually refer to non means-tested income support schemes addressed to unemployed individuals registered at the local labor office. They differ from Social Assistance support schemes in that these latter usually offer means-tested income support schemes targeted to households; moreover unemployment benefits are normally linked to the individual previous wage, while social assistance allowances are determined according to a flat rate of some living standard basic indicator (i.e. minimum wage) or measures of the family income. Furthermore, Social Assistance support schemes can be split into schemes provided to the unemployed only (former recipients of unemployment benefits whose entitlement period has expired), such as "Long term unemployed social assistance", and assistance offered to all households living in poverty, which may or may not include unemployed individuals (Table 4.2). This section describes the unemployment benefits system in Bulgaria in some details, and provides some international comparison. We find that generosity of unemployment benefits is diminished, while that of social assistance has slightly grown, with a tendency to insure greater assistance to family types with no eamers at all. In light of the large rates of unemployment among specific group, we believe that this measure is to be welcome, and we expect to see a further tendency in targeting specific unemployed groups in the years to come. The increasing incidence of long-term unemployment in CEE Countries and Bulgaria since the beginning of transition, and the consequent fiscal pressure have led to an overall tightening of the eligibility requirements for benefits entitlement. Following this change in policy, transition economies witnessed a shift from the provision of unemployment benefits to social assistance programs (Boeri and Edwards, 1998). In Bulgaria, the Unemployment Benefits system is ruled by the "Unemployment Protection and Employment Incentives Act", approved in the end of 1997. Eligibility criteria for unemployment benefits require the following conditions: registration at the local labor office, a minimum employment spell of 9 months during the last 15 months and willingness to accept job or training if offered. For the unemployed previously employed with full time contracts, the amount of the benefit before tax (gross replacement rate) equals 60 percent of the average earnings (before tax) received during the last six months, and is bounded between 85 percent and 140 percent of the minimum wage level. For the unemployed formerly under part time contracts the amount of the benefit is proportionally reduced. In the case of voluntary termination of the permanent employment contract, the unemployed individual will receive an unemployment benefit amounting to 80 percent of the minimum wage for a period of four months. The entitlement period varies between 4 and 12 months according to tenure (increasing with the years spent in employment) and age and the gross replacement rate shifts according to duration and family types. Table 4.1 shows the length of the entitlement periods to unemployment benefits according to different records of service. Unemployment benefit recipients must meet monthly with the local labor office staff to certificate that they are actively searching for ajob and to be ready to accept suitable job or training offers. The payment Chapter 4: Labor Market Institutions, Policies and Compliance with the Acquis Communautaire 53 of the unemployment benefits should terminate when the benefit recipient obtains a permanent job for more than nine months or in other specific circumstances.'2 If an individual is still unemployed six months after the expiration of the benefit, he (or she) becomes eligible for the next three months of a non means-tested unemployment allowance amounting to 60 percent of the minimum wage. The allowance has substituted the "Unemployment assistance for long term unemployed", in place until the end of 1997, which implied similar overall protection but was means-tested and lasted six months; other programs in place until the end of 1997 have thereafter been dropped, such as the unemployment assistance for school leavers and the "child supplement" for the first two children targeted to families with both parents unemployed. Other benefits assigned independently from the fulfillment of the conditions necessary to the eligibility for unemployment compensations are now gathered under the category "General Social Assistance" (Table 4.2), whose duration is indefinite and whose amount depends only on the individual's relative income to the basic minimum income. The tightening of tenure requirements and the amount of the minimum benefit guaranteed to the unemployed occurring since the start of reforms is noticeable in Table 4.3, while Table 4.4 describes the features of the income support schemes envisaged for different categories of income support schemes by family types in 1995 and 1998. Looking at the aggregate replacement rates, the overall generosity of the system has not changed considerably, while the benefit composition among each support schemes has undergone substantial changes. The generosity of unemployment benefits is diminished, while that of social assistance has slightly grown, with a tendency to provide greater assistance to family types with no earners at all. The shift from unemployment benefits to social assistance is automatic for the majority of family types considered in Tables 4.4, while in the other cases it is conditional on the decision of the local assistance center. All the unemployment programs are financed by the National Unemployment Fund; as we saw in Chapter 2 of the report the contribution rate for the unemployment benefits is 4 percent of the gross wage, split between 0.8 percent paid by the employee and 3.2 percent paid by the employer. Comparing Bulgarian gross replacement rates with those observed in the Czech Republic and Romania in 1995, we find that benefits generosity in Bulgaria is lower than in both countries in terms of social assistance, while the generosity of the unemployment measures in Bulgaria is at the same level than Romania. Another index of the overall generosity of the system is given by the coverage rate: the percentage of unemployment benefits recipients over the total number of unemployed. Table 4.6 shows that while the unemployment benefits coverage occurred in all the countries considered, its reduction in Bulgaria has been the most dramatic; given the current extent of the long term unemployment, the present coverage rate doesn't seem 12 The circumstances include operating under a contract for management or supervision of a commercial company, working under no written contract with the employer, perforning commercial activities, working as co-operative member, receiving income in cash or in kind from some labor activity; payments must also be terminated if the unemployed refuses to accept a suitable job or training without justification, if she enrolls at school or university or if she becomes eligible for old age pension. Finally, the payment of the unemployment benefit may be temnporary suspended if the unemployed person carries out personal service contract or works under an employment contract for a limited period of time, if he attends training courses held by the National Employment service or if is paid allowances for temnporary disability to work. 54 Chapter 3: Mobility and Labor Market Flows in Bulgaria to ensure an adequate income source for the majority of the joblessness, whose risk to fall into poverty has thereby increased through the years. In any event, the risk of poverty is also relevant for the (low-paid) employed workers. Table 4.7 shows the evolution of the minimum wage replacement rates for different transition countries: in Bulgaria, the remarkable decline registered since 1990, reveals that the progressive erosion of real wages has prevented the minimum average from playing its role of basic income support scheme. Active Labor Market Policies Active Labor Market Policies (ALMP) comprise a number of measures ranging from training and retraining schemes, subsidized employment, programs for the youths, jobs for the disabled, public works etc. The various programs are usually classified into three main groups: Socially Purposed Jobs (SPJ, including mainly various kinds of subsidized employment) Publicly Useful Jobs (PUJ, mainly seasonal jobs for low-skilled) and Training Programs. The empirical evidence on the effectiveness of ALMP in both Western and Eastern Europe is not straightforward, as such kind of programs is likely to give rise, if not carefully designed, to undesired displacement effects or deadweight-loss effects. In Bulgaria, ALMP envisage several policies, including job search assistance, financial support to the unemployed to start their own business, programs for the unemployment in particularly depressed areas (Smoylan, Madan, and Rudozem municipalities), job creation schemes for vulnerable groups of unemployed, training and re-training programs for the long term unemployed and peopled fired in mass layoffs. Looking at the evolution of the composition of total expenditure on labor market policies over the transition, we find that Bulgaria experienced a marked shift from passive (namely unemployment benefits schemes or early retirement programs) to active labor market policies. The increasing share of active labor policies expenditure in Bulgaria has been mainly due to the growth of the weight on the overall expenditure of measures aimed to promote employment creation and, at the same time, to the steady decline of the relative importance of passive measures. The tendency exhibited by Bulgaria in the reallocation of resources from passive to active labor policies seems in line, though less pronounced, than that shown by other transition economies, such as Hungary and Slovakia (see the table below), where at present the funds addressed to the financing of labor policies are almost equally distributed. There are at least two implications stemming from this shift in policy. On the one hand, ALMP are more costly, and require high administrative capacity in implementing and evaluating each policy program; on the other hand such policies should be able to provide better tailored instruments for the re-employability of the unemployed than simple unemployment compensation schemes. Even though we lack a rigorous evaluation of the ALMP, the scant existing evidence suggest that ALMP in Bulgaria have had extremely weak effects either on new job creation and on enhancing job finding probability for the unemployed. Rather, ALMP seem to have worked only as temporary sources of income for the long-term unemployed and the discouraged workers undertaking the program. The most serious lack in the implementation of such measures however, seems the absence of any methodology aimed to a specific evaluation of the program, and at the same time the insufficient coordination between active and passive measures. Thus, the recent decision of the Bulgarian authorities to undergo a rigorous evaluation Chapter 4: Labor Market Institutions, Policies and Conmpliance with the Acquis Comnrnunautaire 55 of the ALMP is important, and future shifts in policies should be take into account the results of the evaluation. Compliance with the Acquis Communautaire Bulgaria Accession to the EU is an overarching priority that enjoys broad support of all political forces in the country. In recent years, Bulgaria has accelerated its efforts to prepare for EU membership. The results of such efforts are witnessed by the decision of the European Council, at its meeting held in Helsinki in December 1999, to start membership negotiations with Bulgaria. In its Regular Report from 1999 the European Commission concluded that the pace of transposition of the acquis communautaire in Bulgaria has been speeded up. Bulgaria is making considerable efforts to align its regulatory framework in the field of labor markets with the EU accession requirements. Substantial progress has been achieved, and important pieces of legislation are now in place, including the Labor Code, the Unemployment Protection and Employment Promotion Act, hereafter referred to as the Unemployment Act. In September 1998, Bulgaria signed the revised European Social Charter and initiated preparatory actions for its ratification, involving the social partners and a large number of government institutions and NGOs. Nevertheless, this process of legal approximation remains to be matched by a further strengthening of the administrative capacity to implement EU legislation. These shortcomings have been clearly identified by the Government and the European Commission, and several Phare institution-building projects have been initiated. In the labor area, adoption of the acquis communautaire implies the recognition of a certain set of rights to workers in Bulgaria, as well as the standardisation of working conditions to those in the EU. In principle, most of the worker's rights defined in EU regulations have long been part of Bulgarian labor legislation. Because of an insufficient compliance, however, substantial gaps with EU requirements remain, even when the legal provisions appear to be in place. The process of legal harmonisation of labor market related legislation includes the following four areas: (1) Equal opportunities for Men and Women; (2) Health and Safety at Work; (3) Co-ordination of Social Security Schemes; and (4) Labor Law and Working Conditions. While in the rest of this section we look in some details at the Bulgarian regulatory framework in each of the areas crucial to EU assessment, we first provide an overall assessment. The principle of equality and prohibition of all kinds of discrimination is stipulated in the Constitution of Bulgaria (Art. 6, Para. 2) and all legislative acts related to working activities are based on this provision. The process of transposition of Health and Safety at Work provisions needs to be speeded and matched with a process of further strengthening the institutional capacity of the General Labor Inspectorate. In the field of co-ordination of social security schemes no insurmountable difficulties can be envisaged upon accession. It appears that the transition has negatively affected the observance of working conditions principles by most economic agents, mainly as a result of the scarce capacity of regulatory and monitoring bodies to conduct effective control. Thus, the process of harmonisation of working conditions with those of the EU will demand substantial investments in infrastructure, and 56 Chapter 3: Mobility and Labor Market Flows in Bulgaria increased training for the employers, with inevitable impact on the labor costs. Since there is some risk that such standardisation will harm the developments of the small and medium enterprises, inflate the unofficial economy, and ultimately delay accession, we recommend a gradual approach in this area. We do not see any clear benefits from an immediate harmonisation, and before proceeding, we recommend performing survey-based studies to assess the impact of standardisation of working conditions on total labor costs. Equal Opportunities for Men and Women Apart from Article 119 of the Treaty of Rome, European equality legislation now comprises at least five directives, as well as numerous interpretations by the Court of Justice, and one directive, based on Article 118a, on the protection of pregnant and breastfeeding women at the workplace. The principle of equality and prohibition of all kinds of discrimination is stipulated in the Constitution of Bulgaria (Art. 6, Para. 2), and all legislative acts related to working activities are based on this principle. At the same time, developments over the last ten years have proven that there is a need to implement active measures to promote equality. To this aim certain changes are being implemented in the Labor Code (transposition of EU regulations and provisions for strengthened legal protection of employees), Social Security Code and the Act on Additional and Voluntary Social Insurance. Current Bulgarian legislation covers all provisions of the Equal Pay Directive (75/11 7/EEC). In addition Bulgaria has signed and subsequently ratified ILO Convention 100 on equal pay. Amendments are envisaged to the Labor Code to ensure the presumption of guilt on the side of the employer in case of a dispute stemming form the provisions of Equal Pay Directive. The principle of equal treatment for men and women as regards access to employment, vocational training, etc. (Equal Treatment Directive 76/207/EEC) is also a part of Bulgarian legislation. It is reflected in the Constitutional provision against discrimination, and is also a part of the provisions of the Labor Code, the Unemployment Act (Art. 2) and the Act on Health and Safety at Work. These provisions need to be incorporated into a single body of equal treatment legislation and the enforcement capacity needs to be strengthened. The equal treatment of men and women in matters of social security (Social Security Directive 79/7/EEC) is reflected in all social security legislation in Bulgaria, including the newly adopted Social Security Code, Pensions Act and Act on Additional and Voluntary Social Insurance. With the changes in social security legislation in Bulgaria, namely the adoption of the Social Security Code, the Pensions Act and the Act on Additional and Voluntary Social Insurance, the requirements of the occupational social security directive (86/378/EEC) and the directive on equal treatment for self-employed men and women (86/613/EEC) are introduced in national legislation. Special programs and measures for women's employment promotion are also in place in regions with high unemployment. Chapter 4: Labor Market Institutions, Policies and Compliance with the Acquis Communautaire 57 Health and Safety at Work There are two distinct legislative phases of EU regulations in the field of health and safety at work. The first series is based on Article 100 of the EEC Treaty. Following the adoption of the Single European Act, the second series of EU Health and Safety at Work legislation took on its present structure with the new legal base of Article 11 8A of the EC Treaty. This body of legislation is based on a framework Directive 89/391/EEC and includes some 14 individual directives covering, inter alia, medical services, cancer-organic, biological, chemical and other agents in the working environment, etc. The Health and Safety at Work EU legislation demands to a high extent not just an adequate level of transposition, but an effective enforcement and monitoring mechanism, coordinated through the General Labor Inspectorate. The White Paper on the Internal Market lists the Health and Safety at Work Framework Directive (89/391/EEC) as a Stage I measure and its transposition in Bulgaria is based on the Act on Health and Safety at Work (1997) and some parts of the Labor Code. These provide for the structure and activities of the General Labor Inspectorate (GLI). Its provisions also cover important areas like health and safety training requirements, formalized risk assessment, regimes of work and rest, etc. Most of the provisions of the Minimum Safety and Health Requirements for the Workplace Directive (89/654/1EEC) and the Minimum Health and Safety Requirements for the Use of Work Equipment by Workers Directive (89/655/EEC) have been transposed into Bulgarian legislation through the Act on Health and Safety at Work, various provisions of the Labor Code and a number of regulations by the Ministry of Labor and Social Policy and the Ministry of Health. Further alignrment of legislation is needed to cover the whole range of specific Health and Safety at Work Directives, especially in relation to the use and protection from hazardous agents, including chemical, biological or cancer-organic materials. The process of transposing legislation needs to be matched with a process of strengthening the administrative capacity of the GLI to monitor the adherence to health and safety legislation. Admittedly, further efforts will be needed in this direction, especially vis-a-vis small and medium enterprises in the country. The functions of monitoring adherence and implementation can be matched with active programs promoting awareness of health and safety at work standards among employers in the country, and encourage workers to play an active role in this process. To this effect, a Phare project has been in place since 1998 to assist the institutional strengthening of the General Labor Inspectorate. There is a risky vicious circle in the implementation of these requirements. While in principle safety at work and working conditions are desirable characteristics, they will obviously require substantial investments in infrastructure, and further training on the parts of the employers, with inevitable impact on the labor costs. Since there is some risks that such standardisation will harm the developments of the small and medium enterprise, inflate the unofficial economy, and ultimately delay accession, we recommend a gradual approach in this area. The economic literature on the size, causes, and consequences of the shadow economies find that, other things equal, there is a robust correlation between the regulation of the official economy and the size of shadow economy. Thus, an immediate compliance with working 58 Chapter 3: Mobility and Labor Market Flows in Bulgaria conditions in the EU may be too risky. Since the costs of complying with EU working conditions may exceed their short medium run benefits, it would be necessary to conduct survey-based studies for assessing the costs of compliance in this area. In particular, substantial change should wait for the results of the properly designed micro studies. Co-ordination of Social Security Schemes There is no EU regulation uniformly governing social security systems in Member States, thus no harmonization is envisaged in this field. There are however rules that apply to certain categories of persons who move between member states. The aims of these regulations is to prevent such persons from losing social security rights acquired previously in a different EU state member. EU provisions on social security co-ordination are contained in Regulations 1408/71 and 574/72. These provisions are based on four principles (1) only one legislation can be applicable; (2) equality of treatment; (3) retention of rights acquired; and (4) aggregation of periods of insurance or residence. The analysis of current Bulgarian legislation suggests that there are no contradictions between national social security legislation and the relevant EU regulations. Bulgarian law does not discriminate between foreigners and nationals vis-A-vis social security. There are adequate provisions governing, inter alia, the retention of accrued rights of Bulgarian nationals working abroad. Bilateral agreements regulate international co-ordination between Bulgaria and other countries. Currently such agreements exist with Germany and all CEE countries. Labor Law and Working Conditions Since 1972 the European Community moved more decisively towards strengthening the social dimension in the construction of Europe. The internal market, based on the three freedoms, needed to be enhanced by everything that contributed to the well being of European citizens. The Amsterdam Treaty enshrined the social 'foundation' of Europe in the basic treaty of the European Union. Since 1975 the European Council has adopted eight labor law directives and some have been accordingly amended. In the area of labor law the main legal instrument in Bulgaria is the Labor Code, adopted in 1986 and amended substantially in 1992 and 1995. In addition labor relations and working conditions are regulated by other piece of legislation, including the Unemployment Protection Act (in relation to collective redundancies) and the Trade Act (in relation to protection of employees in cases of employers' insolvency). In September 1998 Bulgaria signed the European Social Charter (revised) and initiated preparatory actions for its ratification including social partners and a large number of government institutions and NGOs. In addition, Framework Directive 89/391/EEC, as well as a set of specific directives on workplace regulation, have been fully transposed in the Bulgarian legislation. The procedures for collective redundancies are quite rigid, they require a difficult coordination with the trade unions, and represent an obstacle to firm level restructuring. While employment terrnination for individual contracts is technically easy, there seems to be a practical difficulty in implementing dismissal, in light of the jurisdictional bias in favor of labor. Other Chapter 4: Labor Market Institutions, Policies and Compliance with the Acquis Communautaire 59 areas where further simplification is required include the reductions of requirements with respect to paid education leave and maternity and child leave; reform of sick pay regulations, and easier termination for misconduct or economic reasons. These problems areas should be addressed with the amendments of the code currently under revision in the Parliament, even if they are not specifically linked to the transposition of E'U requirements in the labor area. In other dimensions, however, the labor codes suits the needs of a market economy, avoiding some of the most restrictive provisions, including the prohibition of fixed-term contracts, part-time and additional work, unduly onerous standards of firings and lay-offs, found in neighboring transition economies. In terms of EU requirements, current Bulgarian legislation includes most of the provisions of the Labor Law Directives. It is believed that full transposition will be achieved with future Amendments to the Labor Code, and some other legislative changes. The provisions of the Collective Redundancies Directive (75/129/EEC), including amendments, are incorporated into Bulgarian legislation through the Unemployment Protection Act (Art. 64-66). The current provisions as regard to employer-employee commissions in enterprises undergoing a process of mass layoffs are structured so as to reflect the state of the structural reforms in the Bulgarian economy. The Transfers of Undertakings Directive (77/187/EEC) and the Insolvency of Employers Directive (80/987/EEC), including amendments, are partially governed by provisions of the Labor Code and the Trade Act. It is expected that with the upcoming amendments of the Labor Code full harmonization will be achieved. Similarly EU requirements for the employer to inform each individual, in writing, of the main terms and working conditions (91/533/EEC) and requirements as to the minimum daily, weekly and annual rest periods (91/104/EC) transposed into Bulgarian legislation. Some adjustments remain to be done, but it will be covered by draft amendments to the Labor Code. 60 Chapter 3. Mobility and Labor Market Flows in Bulgaria BOX 4.2: Bulgarian Labor Market and the Acquis Communautaire Bulgaria is making considerable efforts to align its regulatory framework in the field of labor markets with the EU accession requirements. In the labor area, adoption of the acquis communautaire implies the recognition of a certain set of rights to workers in Bulgaria, as well as the standardisation of working conditions to those in the EU. In principle, most of the worker's rights defined in EU regulations have long been part of Bulgarian labor legislation. Because of an insufficient compliance, however, substantial gaps remain, even when the legal provisions appear to be in place. Overall, the process of legal approximation remains to be matched by a further strengthening of the administrative capacity to implement EU legislation. The process of legal harmonisation of labor market related legislation includes the following four areas: (1) Equal opportunities for Men and Women; (2) Health and Safety at Work; (3) Co-ordination of Social Security Schemes; and (4) Labor Law and Working Conditions. Equal Opportunities for Men and Women. Stage I measures require the country to comply with directives 75/117/EEC and 76/202/EEC, which contain provisions regarding: (I) equal pay; and (ii) equal treatment form men and women in access to jobs, promotion, training and working conditions. Stage 1I measures require the country to comply with directives 79/7/EEC and 86/378/EEC, which apply the principle of equal treatment for men and women to statutory and occupational social security schemes. The principle of equality and prohibition of all kinds of discrimination is stipulated in the Constitution of Bulgaria (Art. 6, Para. 2), and all legislative acts related to working activities are based on this principle. Current Bulgarian legislation covers all provisions of the Equal Pay Directive (75/117/EEC), equal treatment for men and women as regards access to employment, vocational training, etc. (Equal Treatment Directive 76/207/EEC). The equal treatment of men and women in matters of social security (Social Security Directive 79/7/EEC) is reflected in all social security legislation in Bulgaria, including the newly adopted Social Security Code, Pensions Act and Act on Additional and Voluntary Social Insurance. The requirements of the occupational social security directive (86/378/EEC) and the directive on equal treatment for self- employed men and women (86/613/EEC) are introduced in national legislation. Coordination of Social Security Schemes. The EU's provisions regarding social security legislation are based on four principles: (1) the legislation of only one country can be applicable; (ii) workers from other states receive equal treatment; (iii) workers retain the rights they have acquired; and (iv) periods of insurance or residence are aggregated. There are no contradictions between Bulgarian social security legislation and the relevant EU regulations. Bulgarian law does not discriminate between foreigners and nationals vis-a-vis social security. There are adequate provisions governing, inter alia, the retention of accrued rights of Bulgarian nationals working abroad. Health and Safety at Work. Measures at Stage I require compliance with Directive 89/391/EEC which stipulates that employers must assess the risks to safety and health at work, ensure that workers receive appropriate safety and health information, and provide workers with adequate safety and health training. Legislation must also include provisions regarding protective and preventive services, health surveillance, and the participation of workers in health and safety issues at work. At Stage II, countries are required to comply with a set of 13 directives that include regulations on maintaining the health and safety of workers in the most critical areas (workplace equipment, safety signs, chemical exposure). The Health and Safety at Work EU legislation demands to a high extent not just an adequate level of transposition, but an effective enforcement and monitoring mechanism, coordinated through the General Labor Inspectorate. Bulgaria legislation in this area is based on the Act on Health and Safety at Work (1997) and some parts of the Labor Code, which determine the structure and activities of the General Labor Inspectorate (GLI). These legislation also covers important areas like health and safety training requirements, formalized risk assessment, regimes of work and rest, etc. Further alignment of legislation is needed to cover the whole range of specific Health and Safety at Work Directives, especially in relation to the use and protection from hazardous agents, including chemical, biological or cancer-organic materials. Admittedly, further efforts will be needed in this direction, especially vis-a-vis small and medium enterprises in the country. Labor Law and Working Conditions. At Stage I countries are required to comply with the contents of four directive that protect workers' rights in the areas of: (i) collective redundancies; (ii) undertakings, business, or part of business; (iii) insolvency of employers; and (iv) young people at work. At Stage 11, they are required to comply with three additional directives that regulate working conditions, working time and information and consultation with workers. In the area of labor law the main legal instrument in Bulgaria is the Labor Code, adopted in 1986 and amended substantially in 1992 and 1995. Current Bulgarian legislation includes most of the provisions of the Labor Law Directives. It is believed that full transposition will be achieved with Amendments to the Labor Code that are to be made in the first half of 2000. Chapter 4: Labor Market Institutions, Policies and Compliance with the Acquis Communautaire 61 Table 4.1: Duration of unemployment benefits Record of service Period of entitlement to unemployment benefit (Years) (Months) up to_3 4 3to5 6 5 to 10 8 10 to 15 9 15 to 20 10 20to25 11 Over 25 12 Source: ETF (2000). Table 4.2: Basic features of social assistance programs Maximum duration Minimum benefits Benefits Type of benefits Benefit amount as % of the average wage Social Assistance for the 3 months 60% of the minimum 19.8% long term unemployed wage General Social hidefiite Co-efficient of basic 19.6% Assistance minimum income Entitlementfor Social Assistance income support schemes requires registration as unemployed at the local labor office. Source: ETF (2000). 62 Chapter 3: Mobility and Labor Market Flows in Bulgaria Table 4.3: Basic features of the unemployment benefits system 1989 1991 1992 1998 Reference period 12 months 12 12 15 months months months Minimum employment spell 6 months 6 months 6 months 9 months required for eligibility Maximum duration of benefits 6 months 12 12 12 months months months 100 percent of the last monthly wage for the first month, then 10 percent less for the next 5 months; the Relation to individual's amount of the unemployment 60% 60% gross earnings insurance equals the minimum wage plus 20 percent of the difference between the average and the minimum wage. Unemployment Maximum 140% 140% benefits level (% of the Minimum 100% 90% 85% minimum wage) Source: OECD (1998) Chapter 4. Labor Market Institutions, Policies and Comnpliance with the Acquis Comnmunautaire 63 Table 4.4: Features of the unemployment benefits and social assistance systems by family types Unemployment Benefits Social Assistance Entitlement Average gross Entitlement Average gross Total Family Type Period replacement period replacement Average (months) rate (%) (months) rate (%) 1995 1998 1995 1998 1995 1998 1995 1998 1995 1998 Single earner 0-12 0-6 60 53 13-60 7-60 27 25 34 30 Couple, one earner, no 0-12 0-6 66 53 13-60 7-60 5 3 17 13 children Couple, no earner, no 0-12 0-6 60 53 13-60 7-60 49 47 49 48 children Couple. no earner, one 0-12 0-6 66 64 13-60 7-60 59 64 61 64 child Couple, no earner, two 0-12 0-6 72 81 13-60 7-60 66 81 67 81 children Couple, one earner, one 0-12 0-6 66 53 13-60 7-60 1 1 3 22 13 child Note: Benefit entitlement before tax as a percentage of previous earnings before tax. Data are averages of replacement rates at two levels: average earnings and two thirds of average earnings. Source. OECD (1998). 64 Chapter 3: Mobility and Labor Market FloWu.s sin Bulkgutriai Table 4.5: Gross replacement rates by family type in Czech Republic and Romania. 1995 Unemployment Benefits Social Assistance Family Type Czech Republic Romania Czech Republic Romania Single earner 55 59 36 (9 Couple, one earner, no children 55 59 14 8 Couple, no earner, no children 66 59 64 4S Couple, no earner, one child 94 59 94 (o Couple, no earner, two children 113 59 113 89 Couple, one earner, one child 59 59 44 19 Averages 73.7 59.0 60.8 41 5 Average Bulgaria 59.5 37.17 Source: Boeri and Edwards (1998). Table 4.6: Unemployment benefits coverage rates 1990 1991 1992 1993 1994 1995 1996 1997 1998 Bulgaria 79 55 39 35 27 23 30 26 29 Estonia - - - 56 46 40 45 54 55 Czech Republic - 64 47 51 47 44 50 51 49 Hungary - 77 74 60 40 36 34 30 Poland - 79 69 48 47 53 54 -- Slovakia 71 39 35 24 22 26 - Source: ETF (2000), various issues for: Bulgaria, Estonia, Czech Republic, Hungary; OECD(1996) for Sloakta anLd OECD for Poland. Table 4.7: Minimum wage-average gross wage ratio 1990 1991 1992 1993 1994 1995 1996 1997 1998 Bulgaria 43.1 54.2 35.9 38.3 35.7 32.6 29.3 27.1 Czech Republic ... 52.4 47.1 37.4 31.6 26.9 27.4 23 . Slovakia ... 52.4 48.4 40.9 38.9 34 35.9 Hungary 37.3 37.4 35.9 32.8 31.2 31 32.9 Poland 21 34 43 41 43 38.6 43.3 ... .Source: ETF (2000) for Bulgaria and Czech Republic and Vaughan-Whitehead ed., Paying thJe price, ILO, 1998. Chapter 4. Labor Market Institutions, Policies and Compliance with the Acquis Communautaire 65 Table 4.8: Breakdown of labor market policies expenditure in Bulgaria 1993 1994 1995 1996 1997 1998 Active Labor Market Policies 17.3 19.9 27.3 30.8 27.5 31.2 (of which:) Administration services 11.5 12.9 15.3 15.0 11.6 14.7 Training and Retraining Courses 1.4 1.3 1.6 1.7 0.6 0.2 Programs for the Youths 0.2 0.2 0.0 0.1 0.1 0.6 Subsidized Employment 4.1 5.4 10.2 13.9 15.0 16.2 Passive Labor Market Policies 82.7 80.0 72.6 69.1 60.1 57.4 Other Expenditure ... ... ... ... 12.1 11.4 Total Expenditure 100 100 100 100 100 100 Source: ETF (2000). Table 4.9: Composition of labor policies expenditure in transition economies 1991 1992 1993 1994 1995 1996 1997 1998 Czech Republic Active Measures 43.4 62.3 54.3 49.7 51.9 47.9 36.1 35.7 Passive Measures 56.6 37.7 45.7 50.3 48.1 52.1 63.9 64.3 Hungary Active Measures ... ... ... 37.1 36.7 37.3 45.8 48.9 Passive Measures ... ... ... 62.9 63.3 62.7 54.2 51.1 Romania Active Measures 2.9 1.5 1.2 1.5 15.7 11.7 ... ... Passive Measures 97.1 98.5 98.8 98.5 84.3 88.3 ... ... Slovakia Active Measures 21.7 61.7 36.5 48.8 55.4 49.5 ... ... Passive Measures 78.3 38.3 63.5 51.2 44.6 50.5 Source: ETF(2000) for Czech Republic and Hungary and data provided by National Authorities. 66 REFERENCES BELEVA, I., BOBEVA, D., DILOVA, S., and MITCHOVSKI, A. (1993). "Labor market trends and policies": Bulgaria, in: OECD-ILO, Structural Change in Central and Eastern Europe: Labor Market and Social Policy Implications, Paris. BOERI, T., and EDWARDS, S. (1998). "Long Terrn Unemployment and Short Termn Unemployment Benefits: The Changing Nature of Non Employment Subsidies in Central Eastern Europe". Empirical Economics, 23, pp. 31-54. BOERI, T., BURDA, M., KOLLO, J. (1998). Mediating the Transition. Labor Markets in Central and Eastern Europe. CEPR, London. HRISTOSKOV, I, SHOPOV, G. and BELEVA, D. (1997). Infornal Employment and self-employment, Sofia, mimeo (in Bulgarian). BELEVA, I., JACKMAN, R., and NENOVA-AMAR, M., "The Labor Market in Bulgaria", London School of Economics, Center for Economic Performance Discussion Paper No. 268, December 1995. BOBEVA, D., and HRISTOSKOV, Y. (1995). "Unemployment in Agricultural Areas: An Overview of Central and Eastern Europe and a Case Study of a Bulgarian Region, in: OECD, The-Regional Dimension of Unemployment in Transition Economies, Paris. COMMANDER, S., and TOLSTOPIATENKO, A. (1997). Unemployment, restructuring and the pace of transition, in ZECCHINI, S. (ed.) Lessons from the Economic Transition, Kluwer. DAVIS, S., J. HALTTWANGER (1996). "Job Creation and Destruction", MIT PRESS, Cambridge: MA. DOBRINSKY, R., DOCHEV, N. and NIKOLOV, B. (1996). "Debt Work-out and Enterprise Performance in Bulgaria", Sofia, mimeo. ETF (European Training Foundation) (2000a). Employment and Labor Market in Bulgaria. Working Paper. (2000b). European Training Foundation: Employment and Labor Market in Czech Republic. Working Paper. (2000c). European Training Foundation: Employment and Labor Market in Estonia. Working Paper. (2000c) European Training Foundation: Employment and Labor Market in Hungary. Working Paper FAGGIO, G., and KONINGS, J. (1999). "Gross Job Flows and Firmn Growth in Transition Countries: Evidence Using Firm Level Data on Five Countries". CEPR Working Paper 2261. FERREIRA, F. (1998). "Inequality and Transition", mimeo, World Bank, Washington D.C. 67 JONES, D. C., AND KATO, T. "The Nature and Determinants of Labor Market Transitions in Fonner Socialist Economies: Evidence from Bulgaria", Working Paper 93/5, Department of Economics, Hamilton College, New York, 1993. ILO (1998), Trade Unions Experiences in Collective Bargaining in Central Europe. Geneva, ILO. KRARAJNYAK, K., and ZETTELMEYER J. (1998). Competitiveness in Transition Economies: What Scope for Real Appreciation? IMF STAFF PAPER, Vol. 45, 2. KOTZEVA, M., MIRCHEVA, D., and WORGOTTER, A. (1996). "Evaluation of Active and Passive Labor Market Policy in Bulgaria, in: OECD, Labor Market Policies in the Transition Countries: Lessons from their Experience, Paris. LOUKANOVA, P. (1996). "Labor Market Policies Under the Structural reform", Economic Thought. MAURO, P., SPILIMBERGO, A., PRASAD, E (1999). "Perspectives on Regional Unemployment in Europe" International Monetary Fund, Occasional Paper num. 177. OECD (Organization for Economic Co-operation and Development) (1994). Unemployment in Transition Countries: Transient or Persistent?, Paris. (1995). Employment Outlook, Paris. (1 996a). Labor Market and Social Policies in the Slovak Republic, Paris. (1996b). Employment Outlook, Paris (1 996c). Labor Market Policies in the Transition Countries: Lessons from Their Experience, Paris. (1 996d). Country Survey of Slovakia. (1997). Country Survey of Poland. (1998). Labor Market and Social Policy in Bulgaria. Vaughan-Whitehead, ed. (1998). Paying the price. ILO, Geneva. UNDP (United Nations Development Programme), (1995). Bulgaria. Human Development Report, Sofia. Distributors of World Bank Group Publications Prices and credit terms vary from CUECH REPUBLIC INDIA Eulyoo Publishng Co., Ltd. PERU SWEDEN country to country. Coosult your USIS, HIS Prodejna Allied Publishers Ltd. 46-1, Susong-Duig Editorial Desarrollo SA Wennergren-Williams AB local dist-rbutor before placig on Havelkova 22 751 Mount Road Jongro-Gu Aparado 3824, Ica 242 OF. 106 P. 0. 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