Dimitar Chobanov, Economist
Institute for Market Economics
[ime.bg]

The National Statistical Institute (NSI) recently released data about employees and salaries in 2007.

At first glance, 2007 could be considered a very successful year for the Bulgarian economy. The nominal salary growth was about 19.4 per cent – according to IME’s calculations based on NSI data.

Salary growth accelerated relative to the rate of previous years and was one of the highest values in the whole of Europe. In fact, it was close to some of the fastest growing economies such as Slovakia, Lithuania and Latvia. This nominal growth fully offset the accumulated inflation during the year that averaged 8.4 per cent, based on the consumer price index. Hence, the real salary growth was 10.2 per cent, increasing the incomes of workers in the country.

High inflation and salary growth are determined by different factors but there is at least one common denominator. It is the growth in the supply of money that accounts for the rise in nominal values in the economy. The large capital inflows in Bulgaria, as a result of improvements in the business environment and rapid credit growth to the private sector, led to people having more money. This, in turn, increased the prices of goods, services and labour. This is the main determinant of possible overheating of the economy.

On the other hand, capital investments, both domestic and foreign, created new jobs and decreased the unemployment rate to a record low level of 6.9 per cent in 2007. This lead to a shortage in the supply of skilled workers in some sectors. The rate of employment for people aged between 15 and 64 rose to 49 per cent, higher than previous years. However, the potential for unemployed people to participate in the workforce has become limited to low-skilled jobs, because of a lack of qualification sand dexterity. This means that opportunities for extensive growth have decreased.

Another reason for higher salaries was the increase in productivity. If a proxy is taken – the GDP created divided by the number of employed – the productivity increased by 8.5 per cent in 2007, according to IME’s calculations based on NSI data. While in previous years the growth of the nominal salary was virtually a proxy for the growth in productivity, in 2007 the difference is obvious. This could indicate a worsening of cost competitiveness of Bulgarian companies. On the other hand, this was not supported by the data from the balance of payments statistics which implied positive export growth.

Another determinant of salaries is the Government’s income policies. Salaries in the public sector rose by 18.3 per cent in 2007, which, in turn, influenced those in the private sector. Reporting in the public sector is very close to actual values, so the growth could be considered as genuine. In the private sector the increase may have been mainly due to the formalisation, driven by the fiscal incentives of the reduction of corporate and social security taxes, of compensation payments that were previously considered part of the grey economy.

The logical question that follows is: What should be done in order to keep the economy on track?

The policies of maintaining a high budget surplus may be counterproductive if they limit savings in the private sector and, in turn, investment in physical and human capital. In the short term, the Government should promote investment by a further reduction of the tax burden and broadening opportunities for people to decide the way they want to allocate their incomes. This should be combined with a lower level of government spending compared to GDP. Salary growth in the public sector may create inflationary expectations, so the Government should be careful in its income policy not to allow such high growth as in 2007. Higher salaries should be a result of reforms in the sector and reduction in the number of jobs, so the total labour costs should rise more slowly than nominal GDP. The projected cut of 12 per cent of public sector employees would have a positive effect because those made redundant should be able to find a new career in the private sector in more productive activities relatively easily.

One of the main priorities should be to alleviate labour market regulations so the hiring and firing of workers is easier and human resources could be used more efficiently. The access of foreign workers to the Bulgarian labour market should also be revised.

On the other hand Bulgarian National Bank (BNB) should try to find more successful measures to curb inflation because the higher minimum reserve requirements, from eight per cent to 12 per cent, do not seem to have had a positive result in restraining credit growth and money creation. On the contrary, the growth rate of loans to the private sector has accelerated since the latest measures of BNB, in force since September 2007.

Long term measures are related to the improvement of the educational system, which should provide more prepared workers in the future. It should be designed in such a way as to enhance the flexibility of students to perceive new skills and knowledge so they could easily adapt to changing conditions and the varied requirements of employers. This should encompass studying foreign languages and information technology alongside traditional subjects.

The situation of the rapid growth in prices and wages often gives rise to doubts about the sustainability of economic development. It is hard to prove that it is induced only by increasing labour productivity. However, a relatively favourable business environment attracting investment from foreign and local sources leads to an accumulation of physical capital, new technology usage and an enhanced efficiency in resource allocation. Apart from this, the macro indices may not be indicative for the exact situation on a company level, which is really important for assessing competitiveness. The relevant factor is the marginal increase in product generated by every additional worker employed given the available capital stock. The creation of new jobs and higher employment imply that productivity will maintain its upward trend. Hence, the overall economic situation is good. However, government policies addressing the issues of the flexibility of the labour market and the prioritisation of the improvement of the education system are necessary because they are a precondition for future advancement.