Why we don't have a flexible labor market or how the poor get poorer

With the planned average increase of 4.1% in the minimum social security thresholds in 2014, the government will deal another blow to the Bulgarian labor market. This measure, aimed at filling the budget gap, hides many risks and negative consequences, most notably in declining employment, especially in the poorer regions of Bulgaria.

And despite numerous rebukes and warnings from organizations such as the International Monetary Fund [1], the European Commission [2], the Ministry of Finance [3], and the Institute for Market Economics [4], the rulers once again prove that they lack not only knowledge in the field of economics, but also conventional logical thought.

Social security

Social insurance in Bulgaria is more like a tax than a social security, because there are no funds where the proceeds from this burden can be accumulated and invested. The collected funds are spent immediately. Moreover, the revenues from social insurance are insufficient to cover current expenses (which they should cover), and every year it is necessary to make transfers from the republican budget in order to cover the deficit in the system. In 2012, it was over 5 billion leva, with a little over 4 billion leva of it due to the pension system (see Table 1). So in practice it turns out that we pay much more for the social system than the administratively determined social insurance.

Table 1: Data on the social system in million BGN for 2008 - 2012

Source: Ministry of Finance, Investor.bg

Social security contributions are part of the wage that the employer is obliged to pay if he wants his business to be "in the light". Accordingly, the higher these contributions are, the more expensive the labor force is and the less incentive an employer has to hire, other things being equal. And while we can boast one of the lowest income taxes in the world, the situation with our social security is different.

The social security contributions that each worker pays on his salary (except for some groups such as civil servants) vary according to the category of work in which the worker falls, and in general vary by about 20% (see Table 2). Social security contributions (quasi-taxes) fell for the period 2008-2013, which is a positive development in the field of social security, supporting employment by lowering the cost of labor. However, considering that the expenditure in the social system is almost twice as much as the revenue collected from social security contributions, it turns out that the real rate paid for social security varies by about 40%.

According to Bulgarian legislation, the social security burden is shared between the employer and the employee, but in practice such a distinction does not exist. Any administratively imposed burden on the cost of labor is borne entirely by the employee, with the part that the employer "pays" being deducted from the proposed labor remuneration. It is worth noting here that about 80% of all socially insured persons belong to the third labor category, where social security contributions have decreased by 4.2 percentage points over the last 5 years - indeed commendable, but as we will see below, insufficient given the presence of other administratively imposed restrictions such as the presence of minimum insurance thresholds.

Table 2: Amount of social security contributions 2008 - 2013

Source: CSR

For the period 2008-2013, the amount of the minimum social security income (MSI) increased on average from 240 BGN/month to 310 BGN/month for the employed and from 240 BGN/month to 420 BGN/month for the self-employed. The importance of the MSI lies in the fact that it sets minimum thresholds on which social security contributions are calculated. This in turn increases labor costs and if this increase is not accompanied by at least an equivalent increase in labor productivity, it is very likely to lead to a decrease in employment. The latter applies even more strongly to low-skilled labor and those employed in regions characterized by low employment and wages lower than the national average.

The relationship between the increasing MDI and the decreasing employment in Bulgaria is difficult to prove empirically, especially in the context of the global economic crisis and stagnant domestic consumption in the country. However, the conclusions of a number of institutions on the issue are unambiguous – there is a relationship between the growth of MDI and the decreasing employment in the country, especially in individual regions and sectors of the economy. As the Ministry of Finance wrote in its report published in July 2013:

“The basis for such assumptions is also confirmed by the presence of a more significant negative correlation, which is observed in a regional aspect, between the change in the share of minimum incomes to the average wage and the dynamics of employed persons, as in the areas where the increase in the share of the minimum threshold to the average wage is greater than the national average, the decrease in employed persons also tends to be greater than the average for the economy, with some exceptions.”

The European Commission and the IMF reached the same conclusions in their studies, published in reports in 2012. As for the self-insured, the insurance thresholds were shockingly increased in 2010 (from 260 BGN to 420 BGN), and in the same year the number of self-insured people fell by 93,000 people. For comparison, in 2009, 2011 and 2012, when the threshold remained unchanged, no decline was observed.

The MOE introduced in 2003 was intended to reduce the size of the shadow economy and increase treasury revenues. While in years of economic growth this administratively determined threshold had no negative effect on the labor market due to the high growth of wages and labor productivity, especially among low-skilled workers, in times of economic crisis strongly negative effects are observed. When a company operates in conditions of stagnant revenues, increasing costs, low levels of investment and negative prospects for the next few years, the only solution is to cut jobs.

Moreover, very different dynamics are observed at the regional level. In 2008-2012, the average wage in Sofia and Varna increased by 45%, while the increase in Vidin was only 16%. There are significant differences between the regions in Bulgaria, but the increase in the average wage is the same throughout the country. Therefore, a change in the average wage has a different effect on the labor market in each region in Bulgaria, with the negative effects being borne mainly by the poorer parts of the country.

There are several approaches to solving the problems created in the labor market by the high growth of the MOE in the last few years, and these solutions and their consequences are described in detail in the report “MacroWatch: Economic Policy Options, Advantages and Disadvantages” [5], published in 2013. According to the report’s authors, in the short term the minimum thresholds should be reduced, while in the long term their size and change should be linked to the state of the labor market at the national and regional levels.

Although such changes would improve the situation at the moment, the possibility of completely eliminating the minimum insurance thresholds should not be ruled out. According to the MacroWatch report, such a step risks losing revenue to the treasury, which is a negative development only if our goal is for the state to take more and more income from the population. If the tax administration does not collect certain funds as revenue, they will not disappear irretrievably - they will remain at the disposal of individuals, who certainly know best how to spend them according to their individual needs.

The complete abolition of the minimum insurance thresholds will reduce the cost of labor, which will lead to an increase in employment in the country (especially in the poorest regions) and will make Bulgarian exports more competitive. Of course, this reform should not be considered in isolation, but combined with others, especially in sectors where the state exercises a monopoly: the provision of public services, the size of the state administration, the pension system, healthcare, education, etc.

Sources:

[1] http://ime.bg/bg/articles/polovinata-osigureni-izvyn-stolicata-sa-na-minimalniya-prag/

[2] “Assessment of the National Reform Programme and the Convergence Programme of Bulgaria for 2012”. European Commission. May 2012.

[3] IMF Executive Board Concludes 2012 Article IV Consultation with Bulgaria. International Monetary Fund. Декември 2012.

[4] “Labor Market, Competitiveness and the Impact of Minimum Insurance Thresholds”. Ministry of Finance. July 2013.

[5] Macro Watch: Варианти за икономическа политика, предимства и недостатъци. 2013.

Institute for Market Economics. www.ime.bg

The Economics Blog. www.ikonomika.org

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