Why is Unemployment so High in Bulgaria?

The objective of this paper is to determine the main factors behind poor labor market outcomes in Bulgaria. Unemployment in Bulgaria is high and of long duration. The accumulation of the unemployment stock has been caused by relatively high inflows into unemployment coupled with limited outflows. These features of the Bulgarian labor market are quite typical of other transition economies of Central Europe and thus exploring their sources is broader interest. In looking for an explanation the paper focuses on determinants of and constraints to job creation. It uses data on job creation and job destruction coming from a survey of employment in all registered firms. The paper finds that the source of large inflows into unemployment is intensive enterprise restructuring associated with a high pace of job reallocation. However, job creation falls short of job destruction. Three main factors account for the limited job creation and hiring, and thus for low outflows from unemployment First, the unfriendly business environment, reflected in a low rate of new firm formation, and a relatively small SME sector. Second, labor market rigidities, including excessive hiring and firing costs. Third, skill and spatial mismatches brought about by enterprise restructuring, as well as lowskills and marginalization of the long-term unemployed, who cannot successfully compete for new jobs. The paper recommends a three pronged strategy to improve labor market performance. It comprises (i) removing bureaucratic constraints to entry and expansion of firms; (ii) enhancing labor market flexibility through lowering hiring and firing costs, and (iii) improving the educational system so as to equip workers with broad and portable skills.