02.06.2023

IS THE JOB MARKET OVERHEATING?

Since the beginning of the Covid-19 crisis, the labor market in Bulgaria has gone through many different phases - from an explosion of unemployment during the lockdowns, followed by a revival and a very high demand for labor after them, to a record employment and labor shortage since the end of last year. However, the expected slowdown in economic growth raises the question of whether the expansion is over and the labor market has returned to a more normal course or, on the contrary, will continue to heat up, says an analysis by the Institute for Market Economics.

To answer the question, economists use the Beveridge curve, which compares the unemployment rate to the number of job vacancies relative to the total labor force. The resulting indicator serves to determine the moment of the business cycle through the dynamics of the labor market, with recessions characterized by high unemployment and lower demand for labor, and periods of economic growth - by low unemployment, many vacancies and, accordingly, high competition for workers.

A special case is when there is an increase in unemployment combined with an increase in the number of vacancies relative to the size of the labor force. In such a case, there is likely to be a significant mismatch between employers' needs for new labor and the skills and qualifications of the unemployed, which speaks to deeper structural problems in the labor market beyond the influence of the economic cycle.

The Beveridge curve for the last three years clearly demonstrates that from the point of view of the labor market, the crisis can be divided into several stages. With the introduction of the initial restrictions on social and economic life in March 2020, unemployment increased by almost 3 pp. up to 9% of the labor force, but the level of vacancies remains almost unchanged at the level of 20 thousand - or 6-6.5 per thousand working people. In other words, even during a period of sharply increased economic uncertainty, employers generally do not reduce their demand for labor. There is a slight drop in the demand for labor only in the winter months with the introduction of the second wave of restrictive measures, with its lowest level recorded in December 2020 - with 4.82 vacancies per thousand able-bodied, according to the Institute for Market Economics.

The break-even point at which the vacancy rate exceeds the unemployment rate comes in February 2021, with the usual seasonal dynamics observed over the course of the year. The demand for labor rises in the summer months with the activation of tourism and agriculture, and accordingly shrinks in the autumn and winter months, while at the same time the unemployment rate falls below its pre-crisis levels to 4.7 - 4.9% in the fall of 2021. Namely in the second quarter of 2021 comes the peak of labor demand, at least according to the data of the Employment Agency.

2022 brings with it a subsequent normalization and recovery of seasonal dynamics, especially from a demand perspective. The winter and spring months here are also characterized by a visible revival (up to 9.9 vacancies per 1000 able-bodied), mostly related to the dynamics of tourism and agriculture, followed by a more visible decline compared to the previous year during the summer and the autumn months. Towards the end of the year, a slight increase in unemployment was also observed, which is also an indicator that the Bulgarian labor market has already passed the recovery phase after the covid-shock and has returned to its usual dynamics. The beginning of 2023 also brings a rapid recovery in demand, but more moderate than in previous years, most likely as a result of the narrowed expectations of employers for expansion in the coming quarters and the mismatch between labor supply and demand.

In regional terms, while Burgas and Blagoevgrad are among the districts most seriously affected by the initial impact on the labor market and continue to recover from it, Vidin is the district with the weakest indicators in the whole country, and the capital - the strongest and a flexible labor market throughout the national economy.

Apparently, selected regional labor markets continue to behave differently. Blagoevgrad - the district whose local labor market took the hardest hit during the crisis, not only shows no signs of recovery in terms of unemployment, but also from mid-2022 the unemployment rate rises again, to over 10 % of the able-bodied. However, labor demand in the area remains very high (except for the last month for which we have data, April 2023), which points to structural problems limiting the growth of the local economy.

Burgas, for its part, returns to its usual seasonal dynamics driven by tourism from 2021. Here again, unemployment starts to rise slightly after mid-2022, but remains well below its 2020 levels. Meanwhile, demand in the first months of 2023 is higher than in previous years, most likely driven by optimism for a stronger summer.

In Vidin, the relationship between unemployment and the vacancy rate remains negative even three years after 2020. Unemployment remains significantly high at over 9% even in the best months, and the demand for labor is weak. This, in turn, means that the major problems in the regional labor market are structural and far predate the pandemic, mostly along the lines of weak entrepreneurial activity and investment, which also determines the low demand for labor in the workforce.

The capital is expected to be the most positive example, with job vacancies falling below the unemployment rate very briefly in the worst months of 2020, and since the end of 2021 unemployment has remained below the very low level of 1.6%. From mid-2022, however, there is a gradual decline in labor demand, most likely under the influence of reduced expectations for growth in the coming year, especially from the perspective of the IT sector.

At this stage, the main indicators of the labor market point not so much to overheating as to a gradual calming down. On the one hand, the demand for workers is slowing down as a result of indications of more moderate growth in the coming quarters, on the other hand, unemployment is rising slightly, following the usual annual cycle. However, this does not mean that access to a skilled workforce will not be a growth constraint in the medium term, especially in regions with deeper structural problems, the analysis concludes.