World Bank Policy Note

Bulgaria: Raising employment and human capital for growth and convergence

November 2008

Abstract

Bulgaria’s living standards convergence with the leading economies in the European Union requires strong economic growth over the next two decades which, in turn, will rely on high employment levels and strong productivity growth. Bulgaria has seen impressive improvements in the labor market in recent years, and unemployment has fallen to record low levels. However, increased tensions on the global financial markets, sharp adjustments to global commodity prices, and expected recession in most advanced economies in the world, are likely to slow Bulgaria’s economic growth which would lead to rise in unemployment in the short- and medium-term. While labor force participation remains low relative to many other EU Member States, in particular for youth, this note finds that further labor market activation of the working age population will not be sufficient to generate the high economic growth necessary for Bulgaria’s longer-term convergence. Rather, convergence will require substantial increases in skills and productivity of the current and future labor force and delays in addressing the skills issue would have negative long-term implications on growth. As education outcomes and labor productivity in Bulgaria remain low in a European comparison, sustained interventions from early childhood to adult education are necessary over the coming years to raise human capital, in particular given the added challenge of a demographic decline. This policy note was prepared at the request of and in close cooperation with the Bulgarian Ministry of Labor and Social Policy (MLSP) and the Confederation of Employers and Industrialists of Bulgaria (CEIBG).

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World Bank Policy Note Bulgaria: Raising employment and human capital for growth and

convergence

Executive Summary The Bulgarian labor market has seen remarkable improvements in recent years, with record low unemployment and big gains in employment, edging closer towards the Lisbon target of an employment rate of 70 percent. More than 400,000 new jobs have been created between 2003 and 2007, and businesses have been reporting shortages of skilled workers. This benign environment for job creation is likely to change as ongoing global financial turmoil with ensuing negative effects on the real economy will impact on labor market demand in Bulgaria. Growth in sectors that have been the engine of job creation until now—construction, industry, real estate, and trade—is likely to slow and even decline. This would result in an increase unemployment, although the demand for highly skilled workers is likely to remain largely unchanged. Compared to the EU27 averages, activity and employment rates remain low, and Bulgaria has significant untapped domestic labor reserves. This note finds substantial untapped labor supply reserves that could be activated to boost Bulgaria’s employment rate and contribute to sustaining the high rates of economic growth required for convergence. Bulgaria performs poorly in youth labor market participation compared to its European partners, with a substantial share of the youth who are neither in education nor in employment. Moreover, there are groups such as adult women who are out of the labor force for family reasons, and Bulgaria’s older workers participate less in the labor force than their European peers. Many of the unemployed and inactive have low skills, including young people, but there is also a large share of secondary education graduates. In satisfying the growing demand for skilled labor and boosting employment, Bulgaria needs to urgently look at promoting the transition of young people from education to the labor market, including through keeping them longer in school and ensuring they earn the skills that are in demand in the labor market as well as promoting part-time employment and internship programs for young people. In light of Bulgaria’s demographic decline over the coming years long-term growth and convergence require sustained increases in labor productivity and investments in human capital.. While employment was an important contributor to economic growth in recent years, further labor market activation of the working age population will not be sufficient in the future to generate the high economic growth necessary for Bulgaria’s convergence with the leading economies in Europe and around the world. Indeed, if GDP growth continues at around 5 percent per year, Bulgaria is likely to meet the Lisbon employment target in the next few years but growth prospects have worsened lately with the global financial crisis. Bulgaria’s level of GDP per capita will remain well below EU averages for many years to come, and its convergence will require sustained increases in skills and productivity. As Bulgaria’s labor productivity remains low in a European comparison, sustained interventions from early childhood to adult education are necessary over the coming years to raise human capital and ensure the increases in labor productivity that Bulgaria needs to accelerate growth and convergence. These interventions should not be put on hold because of other emerging priorities like dealing

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with the impacts of the global crisis. The importance of enhanced labor skills for future productivity growth and the time it takes to raise skills of the labor force and use them in the labor market requires constant attention to this issue despite shifts in short- and medium-term demand for labor. This notes reviews the latest labor market trends in Bulgaria and examines untapped domestic labor supply reserves. It also reviews the interaction of the labor force and skills in the context of demographic decline and provides policy recommendations on employment activation and measures to address skills shortages in the short term and raise human capital in the medium term. Overview of Policy Recommendations Employment Activation Challenge 1: Many youth are inactive in the labor market - Promote flexible and part-time work arrangements

Introduce legislation on temporary work agencies Introduce simpler contracting for part-time and temporary employment Reduce barriers to part-time contracting in the social security system

- Pilot and test apprenticeship, internship and wage subsidy programs - Develop youth-centered employment activation Challenge 2: Certain adult groups are inactive in the labor market - Enhance provision of child care - Promote second chance education programs Challenge 3: Older workers leave labor market too early - Strengthen incentives in the pension system to work longer Skills and human capital Challenge 4: Too many youth drop out of school early and become individuals neither in employment, education nor training (NEET) - Promote early childhood development programs to promote school readiness - Intensify efforts to prevent early school leaving and boost retention in education and training

Introduce incentive measures to prevent early school leaving Promote early outreach through school counseling and professional orientation Introduce more varied, alternative and flexible pathways to education and training

Challenge 5: Youth leave education insufficiently prepared for the knowledge economy - Complete ongoing school education reform to improve quality and relevance

Place a greater focus on developing good monitoring systems Adopt active measures to attract, train, retain and reward effective teachers Move to a competency-based approach in curriculum and learning

- Promote tertiary participation Introduce student loans and scholarship programs Develop curricula for VET secondary schools balancing vocational and general skills Delay early selection into profile and non-profile secondary schools Expand occupationally oriented short-cycle colleges

- Enhance labor market relevance of university degree programs Reform financing of higher education to enhance competition among tertiary institutions Reform governance of higher education institutions

Challenge 6: Few adults participate in life-long learning - Pilot-test adult learning approaches - Ease alternative entry routes into higher education for adults

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World Bank Policy Note1 Bulgaria: Raising employment and human capital for growth and convergence

1. Bulgaria’s agenda of accelerating convergence in living standards with the most advanced economies in the European Union and worldwide requires continued high rates of economic growth, driven by employment creation and strong productivity growth. As argued in a recent World Bank study “Accelerating Bulgaria's Convergence – The Challenge of Raising Productivity”, Bulgaria will need to continue efforts to activate its working age population, and, more importantly, adopt measures to ensure high rates of productivity growth, in order to sustain high rates of economic growth and converge within the EU over the coming decades.2 Despite strong recent employment growth, Bulgaria’s employment and activity rates remain low in a European comparison, suggesting there is further room for employment creation. It is becoming increasingly important, therefore, to better understand where Bulgaria’s untapped labor reserves are and what are ways to address skills shortages and raise human capital for productivity increases in the short and long-term.

A. RECENT LABOR MARKET PERFORMANCE: LOW UNEMPLOYMENT BUT LOW

LABOR UTILIZATION 2. Bulgaria has seen remarkable improvements in the labor market over the last five years, with falling unemployment and rising employment but recent worsening of external environment may put on hold further improvements or even reverse them. Unemployment rates have fallen from above 15 percent in 2000 to below 7 percent in 2007. As Figure 1 shows, Bulgaria’s employment growth has been substantial between 2000 and 2006. Over the last five years, Bulgarian businesses have created more than 400,000 jobs. Marking an end to the period of “jobless growth”3 in the late 1990s and early 2000, the improvements in the labor market in recent years have been driven by strong economic growth: Bulgaria’s employment elasticity of growth – capturing the extent to which economic growth has been accompanied by increases in employment – has been positive since 2000, with coefficients of 0.2 between 2001 and 2003 and 0.5 between 2004 and 20064. That means that one percent growth in output was associated with half a percent growth in employment. However, an expected economic slowdown in Bulgaria in response to global financial turmoil and expected recession in 1. 1 This policy note was prepared by a World Bank team comprising Christian Bodewig (main author), George Clarke and Lire Ersado. It was prepared at the request of and in close cooperation with the Bulgarian Ministry of Labor and Social Policy (MLSP) and the Confederation of Employers and Industrialists of Bulgaria (CEIBG). The World Bank team would like to thank Todor Krastev (MLSP) and Lena Roussenova, Evgeni Ivanov and Ivan Zahariev (CEIBG) for the close cooperation. The note also draws on prior research for World Bank (2007), Labor Markets in EU8+2: From the Shortage of Jobs to the Shortage of Skills, World Bank: Washington DC. 2 World Bank (2007). "Accelerating Bulgaria's Convergence: The Challenge of Raising Productivity", World Bank: Washington DC. 3 The period of jobless growth was marked by substantial job losses in State-owned enterprises largely offset by job creation in newly established companies. 4 World Bank (2007), Labor Markets in EU8+2: From the Shortage of Jobs to the Shortage of Skills, World Bank: Washington DC.

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most advanced economies is likely to change labor demand patterns in Bulgaria and increase unemployment.

Figure 1: Bulgaria’s recent labor market trends have been remarkable

Average annual employment growth

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CZ EE HU LV LT PL SK SI BG RO HR EU15

Change in unemployment rates 2000-2006 (15-64)

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2000 2006

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2000 2006 Lisbon Goal

Source: Eurostat; Bank staff calculations. Notes: Croatia data from 2002 3. A significant share of employment creation has been in relatively low-skilled sectors, yet this trend is unlikely to continue in light of the worsening external environment and expected adjustments to growth. Between 2003 and 2007, total employment increased by about 418,000 jobs (see Table 1). The largest increases were in the construction sector (141,000), wholesale and retail trade and repairs of motor vehicles and household goods (96,000) and manufacturing (90,000). Financial intermediation and real estate, renting, and business activities grew very quickly in relative terms (35 percent and 34 percent over this period) but started from much smaller bases. Most job creation has been in sectors where relatively few workers have higher degrees (e.g., doctorate, masters, bachelors or specialist) and where wages are low (see Table 1). However, low-skill sectors are likely to become much less of an engine of job creation in the years to come. In particular, the construction boom in Bulgaria is largely over, while employment in retail trade will likely taper off with the emergence of larger establishments and closure of smaller shops and expected slowdown in economy as a consequence of ongoing global financial turmoil. This implies that Bulgaria cannot expect low skilled sectors in the labor market to absorb low skilled workers as in recent years, and policy

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should center on raising their skills – more important now, in a period of economic slow-down, than ever.

4. At the same time, the labor market has become very tight for highly skilled workers: Labor market opportunities for tertiary graduates are excellent, and unemployment among this group is virtually non-existent. The unemployment rate for tertiary education graduates in 2007 was below 3 percent, suggesting that university graduates are increasingly in short supply. The picture is almost as good for upper secondary graduates, at around 5 percent (see Figure 3 below).

Table 1: A lot of employment creation has taken place in low skill sectors Changes in employment by sector 2003-2007

Employ. in 2003 (000s)

Employ. in 2007 (000s)

Change in

Employ. 2003-2007

Growth in

employ 2003-2007

% of workers

with higher degree

Average Wage in

sector (as % of average)

Total (in thousands) 2835 3253 418 14% 25 100 Agriculture 286 245 -40 -15% 5 71 Mining and quarrying 41 36 -6 -15% 12 171 Manufacturing 677 767 89 12% 13 90 Electricity, gas and water 60 60 0 1% 20 171 Construction 152 292 141 66% 10 84 Wholesale and retail trade 423 519 96 20% 20 81 Hotels and restaurants 129 163 34 23% 11 68 Transp., storage and comm. 215 220 5 2% 23 128 Financial intermediation 31 44 13 35% 67 232 Real estate and business activities

116 163 48 34% 52 99

Public administration 230 239 9 4% 43 148 Education 210 218 7 3% 70 100 Health and social work 156 162 6 4% 60 106 Other services 107 125 18 15% 28 80 Source: National Statistical Institute (NSI). Household labor force survey (HLFS). 5. Yet despite the surge in employment, labor remains underutilized in Bulgaria, driven primarily by low participation among youth and older workers. While unemployment rates have fallen and job creation has been strong, employment rates remain low in Bulgaria – relative to the EU 15 and to the Lisbon target of 70 percent by 2010 (see Figure 1, lower right panel). The same is true for activity rates. While the employment and activity rates for the adult population in Bulgaria are on par with EU averages – a remarkable achievement for Bulgaria – there are big deficits for young people and to a lesser extent for older workers (Figure 2). This suggests that Bulgaria has large underutilized pools of labor among the youth as well as, to some extent, among older workers, and the challenge is to find ways to activate them. In particular, Bulgaria’s ability to meet the Lisbon targets over the coming years will depend on the extent to which it can activate its youth population.

6. An expected slow-down in economic growth in the wake of the global financial crisis may lead to an increase in unemployment, though likely concentrated among less skilled workers. Relative demand will shift ever more towards skilled workers and highly educated professionals. As shown, the labor

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market improvements have been driven to a significant extent by the boom in construction and strong growth in industry and some services. An expected slow down in construction and industry will drive up unemployment among workers in these sectors; lower external and domestic demand would affect also employment in services which has been very strong over the last several years..

Figure 2: Bulgaria’s labor market outcomes are on par with the EU 15 for workers aged 25-54, but there are major lags for young workers

Employment Rates, 2007

0

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80

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15-64 15-24 25-54 55-64

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ent

EU27 EU15 BG

Lisbon target

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15-64 15-24 25-54 55-64

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Source: Eurostat

7. Bulgaria’s convergence agenda critically depends on consistently mobilizing the inactive to become employed and on addressing skills shortages and mismatches, particularly in light of its worsening demographic profile. The improvement in the skills of available workforce is a prerequisite to enhanced productivity and to the increase in the labor force participation rate. Addressing the emerging labor market challenges requires increasing the effective labor supply, i.e. the supply of workers that have incentives to actively seek employment, and skills that enable them to take the newly created jobs. As noted, Bulgaria has substantial untapped labor supply reserves that need to be activated to boost Bulgaria’s employment rate. However, more importantly, Bulgaria’s economy is increasingly hitting skills shortages and mismatches, suggesting that efforts to raise human capital – crucial for Bulgaria’s long-term convergence agenda – have become a short term challenge. This policy note is organized as follows. Section B provides a snapshot of the profile of the inactive as well as reasons for inactivity5, while section C examines inactivity among the youth and older workers in more detail. Section D discusses the drivers and elements of the emerging skills shortages in the context of Bulgaria’s declining demographics, and section E sets out the policy reform agenda focusing on employment activation and measures to raise human capital.

B. WHO ARE THE INACTIVE? UNDERSTANDING BARRIERS TO LABOR MARKET

PARTICIPATION 8. Despite the recent high labor demand in low-skill sectors, workers with low levels of education have particular difficulties to find jobs and are often economically inactive. Figure 3 presents data from the two recent Multi-Topic Household Surveys (MTHS) conducted in 2003 and 2007 which allow for an analysis of dynamics between the two years. The data reveal that the recent buoyancy in the labor

1. 5 Inactivity in this policy note is defined as being outside the labor force.

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market has largely bypassed the very low skilled. Unemployment rates among workers with initial education (4th grade) and below remain highest. And, as Figure 3 shows, the least skilled faced a much higher unemployment risk in 2007 than in 2003, while unemployment rates for workers with basic education and above have fallen substantially. At the same time, inactivity is highest among the least skilled, with almost half of those with 4th grade and less and 40 percent of those with basic education (7th grade) not economically active. This suggests that the workers with initial education (4th grade) and below may be considered insufficiently qualified even by employers in predominantly low skill sectors. However, overall they make up only a small share of the inactive population in Bulgaria, while those with basic education and secondary education accounting each for about 40 percent for both 15-64 and 25-54 year olds.

Figure 3 Unemployment and inactivity have a strong skill dimension, in particular for youth, and unemployment is largely long-term

Unemployment and mean inactivity rates by level of completed education

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Source: Top panel: Staff calculations, based on Multi-Topic Household Surveys 2003 and 2007; lower panel: Eurostat; Long-term unemployment = unemployment of 12 months’ duration or more. “Low education” means lower secondary education and less. 9. At the same time, unemployment is largely of a long-term nature, suggesting that the unemployed are unable to find employment even in times of strong labor demand. Long-term unemployment, i.e. unemployment lasting for 12 months or more, is a sign of specific barriers to employment that remain binding even when there is a shortage of labor. Lacking skills are typically the most important explanation for long-term unemployment, but they can also include health reasons, family and child care obligations and other reasons that prevent individuals from actively seeking work. Bulgaria’s share of long-term unemployed, at close to 60 percent, is now the second largest in the European Union (see Figure 3, lower right panel).

10. Low-skilled youth in particular face a hard time to find employment - much more than elsewhere in the EU. Bulgarian youth do worse than adults in Bulgaria (see

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Figure 2) which is a typical feature in most labor markets and true for the EU 27 as a whole. However, Bulgarian youth have significantly more trouble finding jobs than youth in the EU 27 on average. This is particularly true for youth with lower secondary education and less who are dramatically marginalized in the labor market (lower left panel in Figure 3). Only about 10 percent of low education youth in Bulgaria participate in the labor market and those that do, face an unemployment rate of almost 40 percent.

Figure 4: Roma face much higher unemployment than other ethnic groups Unemployment rates by ethnicity

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Source: Staff calculations, based on Multi-Topic Household Surveys 2003 and 2007 11. Unemployment and inactivity also have a strong ethnic dimension, with Roma facing major barriers to employment. This finding is consistent with the data on the skill-related barriers to employment, since in Bulgaria Roma on average have substantially lower education attainment than other ethnic groups. As Figure 4 shows, Roma did not benefit from the fall in unemployment overall in Bulgaria between 2003 and 2004 – their unemployment rate in 2007 remained at 20 percent, compared to a rate of about 6 percent for Bulgaria as a whole. Roma are also more likely to not participate in the labor market than ethnic Bulgarians and ethnic Turks.

Figure 5: The poor and ethnic minority groups have substantially lower educational attainment: Years of education completed (20-28 year olds)

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Source: 2007 Bulgaria MTHS Data 12. Poor education outcomes are a key link in the intergenerational reproduction of poverty and exclusion. They are driven by poverty and, by limiting access to employment, drive poverty. Figure 5 presents educational attainment rates by poor/non-poor status and ethnic groups for those individuals older than 20 years of age. It shows that drop-out after 8th grade has been a serious problem, particularly for the poor and

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minority ethnic groups, resulting substantially lower educational attainment levels. The implications are that poor children and youth in Bulgaria have been achieving lower education levels, reducing their chances in the labor market and locking them into continued poverty.

13. Employment varies heavily by regions, with some regions closing in on the Lisbon target. There is little variation overall in unemployment and activity rates between rural and urban areas. However, there are vast differences in employment rates across different parts of the country (Figure 6).

Figure 6: Bulgaria’s labor market conditions vary by regions Employment Rates by Regions, 2007

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Source: Staff calculations, based on Labor Force Survey 2007 data 14. Reasons for labor market inactivity vary – depending on the sub group. Figure 7 presents data from the MTHS 2007 on the stated reason for inactivity given by interviewed individuals. Not surprisingly, the main reason for youth inactivity is enrollment in education, while for older workers it is retirement or illness. Childcare dominates the reasons for inactivity among the 25-45 year olds. For example, according to MTHS data, more than half of Bulgarian women aged 25-45 with secondary education, and hence with good labor market opportunities, are inactive for reasons of childcare. Individuals with completed basic and secondary education include many youth continuing in education and citing this as a reason for inactivity. Interestingly, the main reason for workers with initial education and below is retirement – hardly any are inactive for reasons of participation in training or education. Among the two richest quintile groups, the main reason for inactivity is participation in education, while childcare is an equally relevant reason for inactivity across all quintile groups – whether rich or poor. Child care is also a major explanation for members of the Roma minority, implying that there are major barriers to their employment activation that lie outside the labor market. This limits the scope of the recent tightening of eligibility for social assistance (two thirds of social assistance beneficiaries are Roma) to provide incentives for labor market participation in the absence of kindergarten and child care places close

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to Roma settlements6. Among the poorer and the low educated an important set of reasons revolve around what was labeled “I do not want to work” in the MTHS questionnaire which typically covers a lack of motivation or confidence to seek work, often driven by uncertainty about individual skills and related opportunities in the labor market.

Figure 7: Reasons for labor market inactivity, 15-64 year olds Reasons for inactivity by level of completed education,

2007

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Source: Staff calculations, based on Multi-Topic Household Surveys 2003 and 2007

C. YOUTH AND OLDER WORKERS – BULGARIA’S UNTAPPED LABOR SUPPLY

RESERVE Youth and school to work transition 15. Most Bulgarian youth are inactive in the labor market because they are in education, and very few are working part-time. Figure 8 (left panel) shows that enrollment in education is the main reason for inactivity. Bulgarian youth who are enrolled do not work at the same time. This finding is mirrored by comparative data on the extent of part-time employment among youth (right panel). Bulgarian youth are far less likely to work part-time and combine education with some form of employment than their peers elsewhere in the EU. The difference is stark: less than 5 percent do so in Bulgaria, compared to almost 70 percent in the Netherlands or, to take another new EU 1. 6 As of January 2008, eligibility for Guaranteed Minimum Income (GMI) is limited to a maximum duration of 18 months for able-bodied working age individuals so as to provide work incentives. Recently, the Government has decided to shorten this to 12 months.

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Member State, 30 percent in Slovenia. The picture for youth is in line with that of the population as a whole: part-time employment is very rare in the Bulgarian labor market. This is all the more surprising since much of the labor shortages often reported by Bulgarian employers are in sectors where work is seasonal and part-time, for example the tourism and construction industries. While Bulgaria has recently made part-time and temporary work arrangements more flexible, employers remain concerned that part-time contracting requires the same procedures as full-time contracting, hence making it not sufficiently attractive to companies.

Figure 8: Enrollment in education is the main reason for inactivity among Bulgarian youth, while part-time employment is very scarce in Bulgaria for youth and adults

Inactive youth (15-24) by whether or not in education, 2007

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Source: Staff calculations based on MTHS 2007 (left panel), Eurostat (right and bottom panels) 16. More worryingly, too many Bulgarian youth leave school prematurely – but not to enter the labor market. In 2005, close to 25 percent of Bulgarian 15-24 year olds were neither in employment, education nor training (the so called “NEETs” – Neither in Employment Education nor Training) (see Figure 9). Contrast that with the Netherlands where 35 percent of the youth population was both in the labor market and education at the same time. Not surprisingly, the Netherlands also have the highest share of youth in part-time employment (see Figure 8, top right panel). As Figure 9 shows, Bulgaria is not the only new EU Member State with a NEETs problem – it appears to be widespread across the region. However, there are also exceptions: Slovenia in particular is a case which merits examination. The message is that lacking part-time employment opportunities and low youth participation in the labor market in Bulgaria appears to go hand in hand.

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Figure 9: Too many Bulgarian youth leave education early, but not to join the work force

education and employment status of 15-24 year olds, 2005

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perc

ent

Source: Eurostat 17. Who are the youth that are neither in education nor employment? Answer: the majority have basic education and less, but there are also many with secondary education. Figure 10 presents the education profile of inactive youth aged 15-24. There are a number of observations: First, while more than 60 percent of the NEETs have completed only basic education and less, there are also many with completed secondary or tertiary education who are not active. Indeed, the NEETs with basic education and less are primarily an education challenge – they should go back to education and training to obtain the skills necessary to compete in the knowledge economy. The NEETs with secondary education and above are primarily a challenge of the labor market. The large share of youth who are inactive but in education and who have only completed basic education is entirely logical, since they remain in education, studying towards the next degree. Second, none of the inactive youth with initial education and less (4th grade) remain in any form of education, for example second chance education or vocational training. Third, as indicated in Figure 8, inactive female youth are less likely to be in education than their male peers – for example because they are looking after children.

Figure 10: The majority of inactive youth have only basic education, although many youth not in education nor employment have secondary education

Education profile of inactive youth (15-24), 2007

0%20%40%60%80%

100%

all male female all

not in education in education

perc

ent

initial and below basic secondary higher

Source: Staff calculations, based on Multitopic Household Survey 2007

14

18. Possibly partly in response to perceived poor job opportunities in the country, many younger people consider emigrating from Bulgaria either to work or to further their education. In a recent survey, people in Bulgaria were asked about possible plans and attitudes towards emigration7. People under 30 had strong positive attitudes towards emigration and were the most likely to say that they had plans to emigrate. About 50 percent of all potential long-term emigrants and about 60 percent of labor emigrants were between 15 and 29 years old in 2006.

1. 7 The source of that data is a Survey on Emigration (nationally representative) organized by Gallup Int., in the summer of 2006. www.mlsp.government.bg/bg/docs/BBSS_Main%20Report_Emigration%20 attitudes_Sept%202006_bg.ppt

15

Box 1: Why are Bulgarian enterprises not hiring more young workers? Bulgarian employers are expressing concerns about lacking skilled workers, and the labor market is tight. At the same time, this report shows that many young people, including secondary education graduates, are unemployed or inactive. How does this go together? Bulgarian enterprises – members of the Confederation of Bulgarian Employers and Industrialists (CEIBG) – which were surveyed for the purposes of this report, stated that they are not hiring young workers primarily because they need experienced workers (see Figure 11). They also cited unreasonable wage demands and quality of education as moderate to major obstacles. At the same time, in comparison, they did not rate regulation on part-time or temporary hiring as much more than minor obstacles. Figure 11: Firms are most concerned about the lack of experienced workers, which is an obstacle to hiring youth

Obstacles to hiring young people

0

1

2

3

4

5

Nee

d ex

perie

nced

wor

kers

Unr

easo

nabl

ew

age

dem

ands

Poor

qua

lity

ofun

iver

sity

educ

atio

n

Poor

qua

lity

ofvo

catio

nal

educ

atio

n

Poor

qua

lity

ofpr

imar

y/se

cond

ary

educ

atio

n

Res

trict

ions

on

tem

pora

ry h

iring

Res

trict

ions

on

part-

time

hirin

g

high

val

ues

= m

ore

prob

lem

a t

Source: Staff calculations based on a survey of 100 enterprises that are members of the Confederation of Bulgarian Employers and Industrialists (CEIBG). Note: 1= no obstacle, 2 = minor obstacle, 3 = moderate obstacle, 4 = major obstacle, 5 = very severe obstacle. How to interpret these findings? Bulgaria’s labor market is very tight, and firms, in particular expanding firms, are looking for additional skilled and experienced workers. Young people just out of school do not bring the experience that employers seek. At the same time hiring young workers may be (perceived to be) too costly, given their lack of experience. Moreover, the skills they obtain in formal education (which are more recent than those of more experienced workers) may not be sufficient to make up for what they lack in terms of experience. What are the implications of these findings? The simple answer: There is not one solution in the short-term, but several measures which would need to be adopted at the same time. First, skilled experienced workers appear to be in increasingly short supply. This situation will not change in the short-term. Employers may therefore consider hiring young workers and investing in their training to make up for the gap in experience. Second, the education system and employers need to interact more to ensure that young people get exposure to the labor market (and labor market needs) even while in education, for example through internships. This is something where employers will need to become more active. Third, the government may wish to experiment with wage subsidies to reduce the cost of hiring untested and inexperienced young workers. Fourth, while not one of the biggest obstacles, ensuring easy hiring through temporary and part-time employment may be one way of reducing the “risk” for companies of hiring young untested workers.

19. The key message from this analysis is that Bulgarian youth are underutilized in the labor market, although they could be a tremendous asset to the Bulgarian economy. Many Bulgarian youth are neither in education nor employment – as opposed

16

to combining work and study like many of their peers elsewhere in Europe. Moreover, many drop out early from education without being employable and enter a vicious circle of labor market exclusion: It is not only that many youth leave too early but also that they leave without any marketable, if basic, qualification, without any written "password" which would leave some door open in terms of returning to schooling, going to training or having a chance of being hired in the labor market. Once out of the formal education system, a lack of second chance alternatives which actively attract these drop-outs and the lack of flexibility in the qualifications framework to recognize qualifications earned outside the formal education system in effect leave the doors firmly closed. At the same time, there is little support available in terms of counseling and professional orientation services which could prevent early drop out.

Figure 12: Bulgaria’s 15 year olds are behind in reading literacy Percentage of students with reading literacy proficiency level 1 and below on the PISA reading literacy scale

0

10

20

30

40

50

60

EU

Finl

and

Irel

and

Esto

nia

Net

herla

nds

Swed

en

Den

mar

k

Pola

nd

Slov

enia

Uni

ted

Kin

gdom

Bel

gium

Ger

man

y

Hun

gary

Latv

ia

Aus

tria

Fran

ce

Luxe

mbo

urg

Cze

ch R

epub

lic

Portu

gal

Spai

n

Lith

uani

a

Italy

Gre

ece

Slov

akia

Bul

garia

Rom

ania

Cro

atia

Turk

ey

Nor

way

perc

ent

2000 2006

Source: OECD PISA database, presented in European Commission (2008), Progress towards the Lisbon objectives in education and training, Indicators and Benchmarks, Commission Staff Working Document. Note: Reading literacy is defined as “understanding, using and reflecting on written texts, in order to achieve one’s goal, to develop one’s goal, to develop one’s knowledge and potential to participate in society”. The scale is level 1 and below (worst) to level 5 (best). Netherlands, Luxemburg and UK are not representative in 2000. The EU figure is a weighted average based on the number of students enrolled and data for 18 countries.

20. At the same time, Bulgarian youth are not exploiting their educational potential to contribute to advancing Bulgaria’s future competitiveness. While too few are staying on in education, especially at higher levels, many who do stay in education do not acquire the necessary skills and competencies to compete in a high innovation economy and meet skill needs from employers – marketable, often vocational, qualifications which would guarantee a job in Bulgaria’s tight labor market (see Box 1). But this also holds for generic, transferable skills increasingly needed in an era of fast technological change: For example, as shown in Figure 12, more than 50 percent of Bulgarian 15 year olds scored low on the PISA 2006 reading literacy tests – a significantly higher share than their peers elsewhere in the EU – new and old Member States alike – and other developed economies. Moreover, the situation has worsened since 2000. This suggests that Bulgarian youth may be graduating from school unprepared for the needs of the knowledge economy.

17

Older workers8 21. Older workers in Bulgaria, women and men, are less active in the labor market than their peers in the EU 15, yet the difference is not large. As Figure 13 (left panel) shows, there are differentials between older men and women, but the same is true, and with similar magnitudes, for the EU15. Low employment rates among older workers in Bulgaria, as elsewhere among new EU Member States is explained by early retirement. Figure 13 (right panel) presents average exit rates and employment rates for older workers (aged 55-64) in Europe. Unsurprisingly, there is a clear relationship between average exit rate and employment rates, with those countries where workers leave the labor market earlier, such as Bulgaria, having lower employment rates among older workers. In Bulgaria, as in the EU15, this is particularly true for older women who, due to their earlier formal retirement age, are more likely to be inactive than older men.

Figure 13: Older Bulgarians are less active than their EU15 peers, but only just, while early retirement explains low employment among older workers, particularly for older women

Activity rates and gender, 2006

0

10

20

30

40

50

60

70

55-64

perc

ent

Bulgaria Male Bulgaria Female EU15 Male EU27 Female

Average exit rate and employment rate for 55-64 year olds (2005)

EU25EU15EABE

BG CZDK

EE

IE

GRES

FR

IT

LV

LTLU

HU

MT

NL

ATPL

PTRO

SI

SK

FI

SE

UKNO

CH

55

57

59

61

63

65

20 30 40 50 60 70 80Employment rate (55-64)

Ave

rage

exi

t age

Source: World Bank (2007) and Eurostat 22. The statutory retirement age for men in Bulgaria is 63 which is below the 65-67 range which is becoming increasingly common across the EU15, and actual retirement is even earlier. While the statutory retirement age for men in Bulgaria is 63, the average median actual retirement age of men was 61 in 2005 (see Figure 14, left panel). For comparison, in countries such as Denmark, Ireland, the Sweden and UK the median male workers retire at the age of 62 to 64. The difference for women in Bulgaria is negligible (see Figure 14, right panel), especially compared to some of the other new EU Member States. However, the Bulgarian statutory retirement age for women, at 59.5 years in 2008 (and 60 from 2009), remains below that of women in other countries in the region.

1. 8 This section draws heavily on World Bank (2007), Labor Markets in EU8+2: From the Shortage of Jobs to the Shortage of Skills, World Bank: Washington, DC

18

Figure 14: Bulgarian men retire before the statutory retirement age, while Estonian men retire after, Official and Actual (Median) Retirement Age in New Member States, 2005

Men

52 54 56 58 60 62 64 66

PL

SI

HU

HR

SK

BG

CZ

RO

LV

LT

EE

OfficialMedian

Women

50 52 54 56 58 60 62 64

PL

SI

SK

HR

CZ

HU

BG

RO

LT

LV

EE

OfficialMedian

Source: Romans (2007) on median retirement age; MiSSOC Database, National Strategy Report on Adequate and Sustainable Pensions (2006) on official retirement age; Bank staff calculations. 23. While Bulgaria’s differential in older workers’ labor market activity with EU15 is minor, its demographic challenges suggest it will have to do look at deferring actual retirement ages for men and women. There are interesting experiences among other new EU Member States. For example, while the official retirement age in Estonia for men is the same as in Bulgaria, Estonian (and Lithuanian) men retire after reaching the official retirement age. They are thus dealing with labor shortages by mobilizing the labor supply of older workers. The Baltic States discourage early retirement by reducing pension benefit, and encourage deferred retirement through higher accrual factors. For example, in Estonia pension benefit is increased by 0.9 percent for every month after the statutory retirement age and in Lithuania by 8 percent for each year. At the same time, in both countries pension benefit is reduced by 0.4 percent for every month of retirement before the official age. This suggests that the way toward raising the labor force participation by older workers is not only through raising the official retirement age but also — and perhaps more importantly — through creating economic incentives for postponing the retirement decisions and encouraging economic activity. Already Bulgarians can continue to work while receiving a pension, but the challenge is to defer actual retirement age.

D. DEMOGRAPHICS, SKILLS AND HUMAN CAPITAL

24. Bulgaria faces a dramatic demographic decline and is projected to lose about 1.5m people between 2000 and 2025. According to a recent World Bank study on aging in Eastern Europe (“From Red to Gray”), this is the largest decline among the new EU Member States in percentage terms, at 18 percent9. Outward migration in recent years has been a major contributor to this decline. Obviously this dramatic development has major implications for the labor market: The size of the working age population is projected to

1. 9 From Red to Gray: The “Third Transition” of Aging Populations in Eastern Europe and the Former Soviet Union, World Bank: Washington, DC

19

decline by about 750,000 workers by 2020. However, World Bank simulations presented in “From Red to Gray” indicate that this decline in the working age population could be limited to about 100,000, if Bulgaria were to raise its labor force participation from current levels to the EU 25 average.

25. Employment activation is essential given the demographic decline, yet measures to raise skills and human capital, and thereby productivity, are even more important. Even with increases in labor market participation to EU average levels Bulgaria will not be able to stem the lowering effect of the demographic decline on long-term growth prospects. Figure 15 presents population charts for Bulgaria for 2005 (left panel) and 2035 (right panel), broken down by labor force status for each age bracket. It clearly denotes the shares of the inactive (dark red), and 2035 projections are based on the assumptions of constant activity and employment shares compared to 2005. The figure clearly shows that the population decline is so substantial that even an increase in activity rates cannot make up for the overall decline in the population. Continued high rates of economic growth and living standard convergence will above all require efforts to raise the human capital of every worker.

Figure 15: Stemming Bulgaria’s demographic decline requires activating the working age population and raising human capital

Source: Bank staff calculations 26. Averting the demographic decline will also rely on a rapid improvement in living standards triggered by growth and convergence. The challenge, therefore, is to create a virtuous cycle: to invest in skills and human capital to promote growth and convergence which translate in rising living standards which help reduce the population decline.

27. Already Bulgarian firms are listing lacking worker skills and experience as one of their major concerns. The World Bank Enterprise Survey conducted in 2007 asked Bulgarian employers about their biggest concerns. Worker skills came out as one of the areas of most concern to employers (see Figure 16). The picture is even more obvious for Bulgaria’s innovative firms who called lacking worker skills the main concern in 200710.

1. 10 World Bank (2008), Bulgaria: Investment Climate Assessment, World Bank: Washington, DC

-4 -3 -2 -1 0 1 2 3 4

x 105

0

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Population in each age group (x 105)

Age

Age distribution in year 2035

Male Female

Pre-schoolPrimarySecondaryTertiaryNot enrolledUnemployedEmployedNot in labor force

-4 -3 -2 -1 0 1 2 3 4

x 105

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10

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Population in each age group (x 105)

Age

Age distribution in year 2005

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Pre-schoolPrimarySecondaryTertiaryNot enrolledUnemployedEmployedNot in labor force

20

Figure 16: Worker skills are a major concern among Bulgarian employers

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Cor

rupt

ion

Polic

yin

stab

ility

Info

rmal

Com

petit

ors

Wor

ker

educ

atio

n

Tax

Rat

es

Crim

e

Cou

rts

Elec

trici

ty

Tax

Adm

inis

tratio

n

Land

Bus

ines

sLi

cens

ing

Labo

rR

egul

atio

ns

Fina

nce

Tran

spor

tatio

n

Trad

eR

egul

atio

n

perc

ent o

f firm

s rep

ortin

g is

sue

as m

ajor

pro

blem

Source: World Bank Enterprise Survey 2007

28. Consistent with that, the unemployed often lack the skills and qualifications required by the employers and cannot fill available job vacancies. Figure 17 shows that the number of workers with basic skills (lower secondary education and below) in Bulgaria, as in many other countries in the region, is higher than the number of jobs requiring only basic skills.11 This implies that unemployed with low skills will not be able to find employment even if there are more job vacancies because they lack the skills that are required in the newly created jobs. There is thus an excess supply of low-skilled labor in Bulgaria, pointing to a strong structural component of unemployment and explaining the high rate of long-term unemployment noted earlier.

Figure 17: Low skilled workers are in excess supply: the unemployed tend to have lower education than that required by employers, limiting their employment prospects

“Excess Supply” of Labor by Educational Attainment, 2006

-20

-15

-10

-5

0

5

10

15

20

25

30

CZ EE HU LV LT PL SK SI BG RO EU15

Primary and low er secondaryUpper secondary and post-secondaryTertiary

Notes: “Excess supply” is measured as the difference between the percentage share of workers with given educational attainment in unemployment and in employment. A positive (negative) value means that that the unemployed more (less) frequently have given educational attainment than the employed. The educational structure of employment proxies that of labor demand. The educational structure of unemployment proxies that of excess labor supply. Thus the difference between those two structures shows the magnitude of the educational mismatch.

Source: Eurostat 29. Despite their concern with regard to worker skills, few firms actually provide training. Figure 18 presents data from Eurostat’s Continuing Vocational Training Survey

1. 11 Under the assumption that the total number of jobs equals the labor force.

21

(CVTS) which captures patterns of adult training organized by the employer. Bulgaria’s performance is unimpressive compared to its EU partners, including other new EU Member States. The share of workers participating in training is low, as is the share of companies offering such training (left panel of Figure 18). Moreover, the duration of training is short. The likelihood of organizing worker training varies substantially with company size, with smaller companies substantially less likely to provide training. However, even the larger Bulgarian companies are lagging behind their European peers (see right panel). The data from the CVTS is confirmed by data from the World Bank 2007 enterprise survey.

Figure 18: Few Bulgarian workers participate in continuing vocation training, because few companies train

Training enterprises as % of all enterprises by size, 2005

0

10

20

30

40

50

60

70

80

90

100

EU 27 bg Bulgaria cz Czech Republic uk United Kingdom

perc

ent

Total 10 to 49 50 to 249 250 or more Source: Eurostat Continuing Vocational Training Survey (CVTS) 2005 30. While this data documents the facts on the limited provision of adult training, they do not shed any light on the underlying reasons. More diagnostic work is needed to establish the barriers that prevent Bulgarian employers from providing and investing in more training – whether these relate to insufficient financing12, lacking information about the returns to investing in adult training, concern about losing well trained workers to competitors or other. It is also not clear whether employers consider their existing workers insufficiently skilled – a problem they could

1. 12 The World Bank’s recent Investment Climate Assessment finds that access to financing has improved significantly in recent years, suggesting that insufficient financing is likely not an important reason (World Bank (2008), Bulgaria: Investment Climate Assessment, World Bank: Washington, DC)

Percentage of employees (all enterprises) participating in CVT courses, 2005

0

10

20

30

40

50

60

70

cz C

zech

Rep

ublic

si S

love

nia

lu L

uxem

bour

g

fr F

ranc

e

se S

wed

en

be B

elgi

um

fi Fi

nlan

d

sk S

lova

kia

dk D

enm

ark

nl N

ethe

rland

s

EU27

es S

pain

at A

ustr

ia

uk U

nite

d Ki

ngdo

m

mt

Mal

ta

de G

erm

any

cy C

ypru

s

it It

aly

no N

orw

ay

pt P

ortu

gal

ee E

ston

ia

pl P

olan

d

ro R

oman

ia

hu H

unga

ry

bg B

ulga

ria

lv L

atvi

a

lt Li

thua

nia

gr G

reec

e

perc

ent

22

fix themselves – or whether they are concerned about the skills of new hires and the difficulty of finding sufficiently skilled new staff.

Table 2: Tertiary Education Participation Rates in Bulgaria, EU8 and EU15 2000 2005 Czech Republic 30.2 35.6 Estonia 60.8 67.4 Hungary 40.1 54.6 Latvia 64.1 74.1 Lithuania 59.9 68.9 Poland 54.1 61.8 Slovakia 29.8 34.2 Slovenia 60.8 69.9 Average EU 8 50.0 58.3 Average EU 15 52.6 58.0 Bulgaria 24.3 26.9 Source: UNESCO Institute of Statistics

31. Bulgaria faces dramatically low tertiary education participation rates, although this may now be changing. Table 2 presents UNESCO data which shows that Bulgaria compares unfavorably with its peers among new and old Member States in terms of participation in tertiary education. This is surprising given the low unemployment and good labor market opportunities for university graduates. In addition, it is worth noting that there has been a strong recent trend in outmigration for education purposes (see Figure 19). The reasons for the low tertiary participation remain understudied. One explanation is that upper secondary enrollment had remained low for many years in the early 2000s. This has improved markedly in recent years, with the share of 20-24 year olds having completed at least upper secondary education jumping from 75 to 83 percent between 2000 and 2007, taking Bulgaria well above the EU 27 average and close to the EU’s 2010 target of 85 percent.

32. However, there are a number of potential remaining barriers to greater higher education participation. An important one is likely to lie in the fact that the Bulgarian education system relies on early selection into profile and non-profile schools after 7th grade. Students in non-profile schools appear to face fewer incentives to aim for university studies, less opportunity to learn compared to their peers on profile schools and less expectations on their achievement on the part of teachers and principals. Other reason may include the cumbersome university admission process before the introduction of the Matura in 2008, with students having to sit for as many exams as universities they were applying for and the absence, so far, of student loans or needs-based scholarships to finance university studies. It is therefore, welcome that the Bulgarian Government is in the process of introducing a student loan system.

23

Figure 19: A growing number of young Bulgarians study elsewhere in the EU

Percentage of students enrolled in other EU or candidate countryed

0

2

4

6

8

10

12

14

Uni

ted

Kin

gdom

Spai

n

Net

herla

nds

Pola

nd

Italy

Hun

gary

Latv

ia

Cze

ch R

epub

lic

Fran

ce

Slov

enia

EU-2

7

Ger

man

y

Swed

en

Den

mar

k

Rom

ania

Lith

uani

a

Bel

gium

Finl

and

Portu

gal

Esto

nia

Aus

tria

Gre

ece

Mal

ta

Slov

akia

Bul

garia

Irel

and

perc

ent

2000 2005 Source: Eurostat

E. CONCLUSIONS AND POLICY RECOMMENDATIONS

33. Over the last several years Bulgaria has achieved remarkable improvements in the labor market, and unemployment is at record low levels. Sustained high rates of economic growth have been associated with strong job creation, and there are increasing signs skills mismatches and shortages, evident in a growing share of long-term unemployed and extremely low unemployment rates for upper secondary and tertiary graduates. However, increased tensions on the global financial markets, sharp adjustments to global commodity prices and expectations of recession in most advanced countries are likely to have implications on Bulgaria’s growth which would lead to a rise in unemployment in the short- and medium-term.

34. Bulgaria’s convergence agenda critically depends on mobilizing the inactive and helping the unemployed to become employed and to enhance the skills of current and future workers – both for the short and the longer term. The improvement in the skills of the available workforce is a prerequisite to improved productivity, a further reduction in unemployment, and will help those losing their job find new employment in sectors and activities generating higher value added. Addressing labor market challenges requires increasing the effective labor supply, i.e. the supply of workers that have incentives to actively seek employment, and skills that enable them to take the newly created jobs.

i. First, this note finds substantial untapped labor supply reserves that need to be activated to boost Bulgaria’s employment rate. Bulgaria’s performance in youth labor market participation is unimpressive compared to its European partners further north. Moreover, there are groups such as adult women who are out of the labor force for family reasons. Lastly, Bulgaria’s older workers participate less in the labor force than their European peers.

24

ii. Second, Bulgaria’s economy has been hitting skills shortages, suggesting that efforts to raise human capital – crucial for Bulgaria’s long-term convergence agenda – have become a short term challenge.

Mobilizing untapped domestic labor supply reserves

35. Challenge 1: Many youth are inactive in the labor market: In light of the substantial labor supply reserves among the Bulgarian youth, policies to raise the employment rate in Bulgaria need to adopt a “youth lens” – i.e. what are crucial policies that can promote youth employment while also boosting participation in education and training?

• Pilot and test apprenticeship, internships and wage subsidy programs for young workers. Facilitating the school to work transition and preventing the NEETs phenomenon will require testing proactive measures like apprenticeships, internships, placement and job subsidies programs for young people to help them not only get into the labor force, but build some relevant skills. This is an agenda that requires active contributions and partnerships between the Government and employers and trade unions. For example, internships are often a cost-effective way for companies to attract and test talented students and young people, and this is one area where employers should take the lead. In addition, experience from across the OECD shows that wage subsidy programs can have positive employment effects for young workers13.

• Promote greater use of part-time and flexible work arrangements: Non-standard forms of employment and part-time and temporary jobs are a key entry point into the labor market for young workers in many OECD countries, in particular for low-skilled youth, and allow combining study and work. Experience from across West European countries shows that an initially high share of school leavers in temporary jobs typically declines substantially after several years of work experience, suggesting that they serve as stepping stones into more permanent employment14. Bulgaria has recently made part-time and temporary work arrangements more flexible but barriers remain, in particular with respect to the ease of contracting.

(i) Introduce simpler forms of contracting for part-time and temporary employment. Several EU countries have introduced simple short-term and limited employment contracts with reduced tax and social insurance obligations, for example Germany’s “Mini-Jobs” and “Midi Jobs”.

(ii) Introduce legislation for temporary work agencies. One way to promote more part-time and flexible contracting is through temporary work agencies, and many EU Member States have promoted the establishment of such agencies. The European Union recently approved its Temporary Agency

1. 13 Kluve, J (2006), The Effectiveness of European Active Labor Market Policy, IZA Discussion Paper No. 2018, Bonn 14 OECD (2008) Employment Outlook 2008, Chapter 1, “Off to a Good Start? Youth Labor Market Transitions in OECD Countries, OECD: Paris

25

Workers Directive, clarifying the status of temporary agency workers, which may facilitate the adoption of relevant legislation in Bulgaria.

(iii) Reduce barriers to part-time contracting in the social security system, i.e. through the minimum contribution thresholds and recognition of service record.

• Develop a mandatory and intensive youth-centered activation approach focused on NEETs. Experience from across the OECD shows that youth employment interventions have to be early and sustained, with a focus on preventing long-term unemployment of youth, retaining them in formal education and training and focusing on career counseling and job search assistance15. It has also been found that programs that explicitly target disadvantaged youth are more likely to be effective than non-targeted programs16. The United Kingdom, like several other EU neighbors has introduced a youth activation regime called “New Deal for Young People” (see Box 2). Based on this model, Bulgaria’s Employment Services could offer a menu of services centered on intensive counseling, with job placement services, training and remedial or second chance education for older youth and back-to-school programs for the younger. It could also entail outsourcing of the full range of activation services to qualified agencies, for example with experience in working with disadvantaged youth such as socially excluded Roma. Bulgaria can learn from the experience in other EU countries and elsewhere, but needs to carefully test and evaluate what works in the Bulgarian context.

1. 15 Quintini and Martin (2006), Starting Well and losing Their Way? The Position of Youth in the Labor Market in OECD Countries, OECD Social, Employment and Migration Working Papers No. 39, OECD: Paris 16 Betcherman et al (2007), A Review of Interventions to Support Young Workers: Findings of the Youth Employment Inventory, World Bank Social Protection Discussion Paper No. 715, World Bank: Washington, DC

26

Box 2: Youth-focused employment activation: The New Deal for Young People in the United Kingdom

The United Kingdom, through its “New Deal for Young People”, emphasizes early, continuous activation and contact as well as more specific help after 6 months of unemployment. Participation in the New Deal for Young People (NDYP) is mandatory for young people between the age of 18 and 24 who have been unemployed for 6 months and who receive Job Seeker Allowance (JSA). The program has multiple stages, with an initial four months period of intensified job search and job referral through job counselors (“gateway”) to place the job seeker in the primary, unsubsidized labor market. If unsuccessful, the “gateway” is followed by a period of up to eight months of targeted programs and a shorter period of “follow-through”, again devoted to intense job search (see Figure 20). As for programs, job seekers can choose from a menu of subsidized employment, voluntary sector employment, full time training and education and work on environmental task forces. In an innovative feature, the NDYP promotes partnerships with employers to encourage the training and employment of young people, facilitated by training grants (up to £750) and employment subsidies (up to £60 for six months). An individual training plan is agreed by the Jobcentre Plus adviser with the young person. In addition the employer signs an agreement that he/she will be expected to pay the going rate for the job and that states the employer will (i) keep the employee on as long as they show the aptitude and commitment needed and provide or arrange for their training as appropriate and (ii) monitor and record their progress and identify areas of action, in the same way that the employer would for any other employee to help them settle in and make progress. A range of initial evaluations have found that the program has been returning young unemployed to the labor market faster than without, with the intensified job search during the gateway period being particularly effective. Meanwhile, several long-term studies have found evidence of churning between NDYP participation and unemployment spells and some worsening of performance. As a result, the UK Government is in the process of reforming the program to strengthen its ability to place clients into sustainable jobs with more focus on employment retention and progression through more personalized and flexible service provision, in particular for disadvantaged job seekers and NEETs, and through greater partnerships in service provision with private and third sector providers17.

Figure 20 : The New Deal for Young People in the United Kingdom

6 7 8 9 10 11 12 13 14 15 16 17 18

months

environmental task force

follo

w-th

roug

hGateway, 4 months

subsidized employment

6 months unemployment,

aged 18-24

voluntary sector

full-time training and education

36. Challenge 2: Certain adult groups are inactive in the labor market. As shown in the note, certain adult groups face specific barriers to labor market activities, most notably adult women (of all levels of educational attainment) for reasons of child care and low skilled workers more generally.

1. 17 OECD (2008), Jobs for Youth: United Kingdom, OECD: Paris

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• Enhance the provision of child care through crèches and nurseries as well as kindergartens. This not only addresses early childhood education needs, and helps prepare young children for school, in particular those from socially disadvantaged backgrounds (see below), but also frees up parents to participate in the labor market. The analysis in this report shows that the most important reason for inactivity of adults aged 25-45 is their need to care for children. Many countries in Europe have recently re-focused on the need to provide child care, with Germany, for example, launching a nationwide initiative to boost supply. Clearly, this is a medium term agenda and likely a costly one, due to the need to create new physical infrastructure for kindergartens and nurseries. With responsibility for kindergartens and nursery resting with the municipalities, the key question is the financial space available for such investments. However, in Bulgaria the availability of financing from European Structural Funds through the Operational Program Regional Development, through the social infrastructure window, is one attractive way to address kindergarten supply constraints.

• Promote second chance education programs. Around 50 percent of the inactive in Bulgaria has low levels of education (7th grade and below). Second chance education, starting from basic literacy and opening a path back into the formal vocational training system with recognition of competencies, will help getting unskilled inactive back into the labor force. The Government has undertaken initial steps to re-open the formal training system to early school leavers through literacy courses managed by the Employment Agency. Successful completion of literacy courses now result in the recognition of attainment of 4th grade equivalent. Moreover, minimum entry requirements for vocational training has been lowered from 6th grade to 4th grade, thereby enabling graduates from literacy courses to get back into formal education and training. The key is now to take measures to promote this program among the low-skilled long-term unemployed, for example socially excluded Roma to ensure strong take-up.

37. Challenge 3: Older workers leave the labor market too early. Bulgaria’s demographic decline suggests the need to prolong working lives of the adult population, following the direction other EU Member States, old and new, have moved:

• Strengthen incentives to remain active in the labor market even beyond the statutory retirement age and consider raising the statutory retirement ages for men and women. With its statutory retirement age below that of many European neighbors, Bulgaria may wish to bring its provisions in line. Moreover, some European countries, for example Germany, have introduced measures to raise the retirement age above 65. Moreover, Bulgaria may wish to explore policies adopted in the Baltic States to discourage early retirement by reducing pension benefit and encourage deferred retirement through higher accrual factors.

Efforts to address skills shortages and raise human capital

38. The long-term agenda of raising Bulgaria’s human capital requires an all-out effort to enhance access to quality education and training at every level from early childhood education and development programs through to adult training. While the

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skills and human capital agenda are of a medium-term nature, the time for action on laying the ground for future human capital increases is now.

39. Challenge 4: Too many youth drop out of school early and become NEET:

• Promote early childhood education and development (ECED) interventions to promote school readiness, particularly for children from marginalized backgrounds such as Roma. There is strong international evidence that investments in ECED interventions, including health and educational programs, have a substantial impact on subsequent education outcomes in primary and secondary schooling and yield greater returns than later investments18. ECED interventions typically aim at developing cognitive, motor and behavioral as well as language skills through educational components. Likewise, their nutrition and health components affect individual growth and brain development well ahead of school age. While such programs play an important role in raising human capital across the population, they are particularly important for children from marginalized backgrounds. Recognizing the importance of ECED, Bulgaria has already introduced one year of free and mandatory pre-school and raised its pre-primary enrollment rate from 66 to 77 percent between 2000 and 2005. However, while the mandatory year remains not fully implemented, in particular among the more marginalized children such as Roma, preschool enrollment in the advanced EU countries is above 90 percent. Further promoting the ECED agenda will involve developing new child welfare services aimed at children aged 0-3 focused on community outreach and parental training as well as expansion of the supply of crèches/nursery as well as kindergarten places for the 3-6 year olds.

• Intensify efforts to prevent early school leaving and boost retention in education and training. More than 60 percent of Bulgarian youth neither in education nor employment have basic education and less. They should be in education.

(i) Introduce incentive measures to keep youth in school for longer. Several OECD countries have introduced incentive measures to promote retention in school beyond compulsory school age, and there are examples for positive and negative incentives: (i) cash incentives for youth from low income families to stay in school post compulsory age, such as the Education Maintenance Allowance (EMA) Program in the UK (see Box 3), or (ii) the extension of mandatory schooling until the completion of upper secondary education or until the age of 18, as recently introduced in the Netherlands. Cash incentives could be provided through raising the individual eligibility threshold for Guaranteed Minimum Income (GMI) for those youth between 15 and 18 who remain in school beyond compulsory schooling19.

1. 18 Cunha, F., Heckman, J., Lochner, L. & Masterov, D. (2005), Interpreting the evidence on life cycle skill formation (North Holland, Amsterdam). 19 However, given the large variance in schooling outcomes between schools (as opposed to within schools), as documented in the OECD PISA 2006 assessment, Bulgaria needs to also focus on improving school quality, in particular for children from marginalized backgrounds. If schools are bad, efforts to keeping young people in school for longer will not result in improvements in education outcomes and skills.

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(ii) Promote early outreach through school counseling and professional orientation to identify and counsel those youth at risk of drop out. Prevention of early school leaving, and retention in formal education and training requires early outreach to and advisory services for those at risk of drop-out. The experience of the United Kingdom’s “Connexions” services tasked with providing guidance to 13-19 year olds, in particular disadvantaged youth, suggests that the Bulgarian child protection services at the local level could more proactively, and in a more formalized manner, support schools in engaging youth at risk and counseling them about their options to remain in school or training beyond compulsory schooling.

(iii) Introduce more varied, alternative and flexible pathways to education and training and more choice for youth beyond the compulsory school age. Many OECD countries have introduced apprenticeship and training programs and other programs that combine work and training for young people who do not wish to remain in formal schooling beyond the compulsory school age. The United Kingdom is moving towards a policy mix of (i) guaranteed place in education or training program after age 16 (“September Guarantee”), (ii) a broadening of learning options (“14-19 Strategy”) ranging from formal schooling through diploma programs linking academic and vocational learning, apprenticeships to work-based learning programs, and choice with respect to providers, including schools, colleges, private training providers or accredited employer-provided training. The aim is to ensure that all youth participate in education and training until they are 18 or achieve a formal qualification (whichever is earlier)20. In addition, it will be important to introduce and develop mechanisms to recognize the qualifications of individuals obtained through informal and non-formal education., for example through the development of a National Qualification Framework.

Box 3: The Education Maintenance Allowance (EMA) in the United Kingdom: A Conditional Cash Transfer to reduce the number of youth NEET In 1999 the United Kingdom Government introduced a pilot program in ten Local Education Authorities to address the low participation of youth in post-compulsory upper secondary education as well as the high share of youth not in education, employment or training (NEET). The Education Maintenance Allowance (EMA) is a means-tested conditional cash transfer (CCT) available to 16-18 year olds from low income families who remain in full-time education, academic or vocational, after the 11th year of schooling, typically after 16 years of age, when schooling is no longer compulsory. Available for a maximum of two years, EMA consists of (i) a weekly allowance available during term time, (ii) an annual retention bonus and (iii) a one-time achievement bonus paid at the end of the course the person has enrolled on, provided he/she meets the outcomes of a learning agreement signed at the time of entry into EMA. EMA is available to youth whose parents’ incomes were below a certain threshold. The level of the allowance depends on family income and at the maximum level the allowance is the equivalent of about a third of average net earnings for the target age group. The pilot was associated with a series of rigorous multi-year evaluations of the impact of EMA on participation in education programs as well as retention and completion. All studies show unanimously that EMA has had a significant impact on the participation in post-compulsory upper secondary education. EMA was found to have raised participation rates by between 4.5 and close to 6 percentage points for the first year of participation and by even more for the second and subsequent year, suggesting

1. 20 OECD (2008) Jobs for Youth: United Kingdom, OECD: Paris

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that the program was effective in retaining those young people that had enrolled under EMA and even after the end of the allowance eligibility. EMA was found to be particularly effective for youth coming from the poorest socio-economic backgrounds as well as for young people at year 11 who had previously been low achievers. Moreover, the program drew as many young people from inactivity (NEET) as from work or training, suggesting it was a very effective tool to reduce youth inactivity, particularly among the most disadvantaged. Recent studies have also found a substantial increase in attainment of participants relative to a control group21. Given the demonstrated success of the pilot program, the UK Government rolled out the program nationwide in 2004.

40. Challenge 5: Youth leave education insufficiently prepared for the knowledge economy.

• Complete the ongoing process of modernizing the primary and secondary school system, also including vocational education and training. Bulgaria has initiated a substantial reform of the primary and secondary school system building on international experience, with delegated budgets, school-based management, per-student financing, external assessment and enhanced teacher training. This reform, currently under implementation, will decentralize decision-making to the school level and provide more autonomy to the school to improve learning environments and enhance the accountability of the school to the local community. It is also achieving financial savings which can be reinvested in measures to promote education quality.

(i) Place a greater focus on developing good monitoring systems to track performance of the system at the school level. Bulgaria has been building up systems of data collection, including on external student assessments. The challenge now is to ensure that the systems are used to provide timely feedback on the education system overall, but also on how individual schools are doing and guide school improvement plans. Recent OECD PISA results suggest a large variance in student achievement between schools, as opposed to within schools, suggesting that there are many high quality but also many failing schools. This is consistent with anecdotal knowledge of vast underperformance of schools in socially excluded Roma localities – likely to be confirmed by external assessments at 4th and 7th grade. The new, decentralized Bulgarian education system with school-by-school student assessments allows more easy identify poorly performing schools and tackle their problems in a targeted manner.

(ii) Adopt active measures to attract, train, retain and reward effective teachers. International experience suggests that the quality and performance of teachers is a key predictor of student performance. This suggests the need, over the coming years, to focus on the development of the teaching profession, in particular through in-service teacher training to attract and retain highly qualified teaching staff.

1. 21 For more details, see Chowdry et al (2008), Education Maintenance Allowance: Evaluation with Administrative Data, Learning and Skills Council Report, Coventry; Dearden et al (2005), Education Subsidies and School Drop-Out Rates, Institute for Fiscal Studies, Briefing Note No 45, London; Middleton et al (2004), The Evaluation of Education Maintenance Allowance Pilots: Three Years Evidence, A Quantitative Evaluation, Department for Education and Skills, Research Report No. 499, London;

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(iii) Move to a competency-based approach in curriculum and learning. Because of rapid technological change and the need for continuous adaptation, the knowledge economy requires education systems to increasingly focus on equipping the future work force with generic and transferable skills and competencies. Curriculum reforms across the world are introducing elements of a competency-based curriculum with emphasis for example on problem solving and teamwork, creative use of knowledge and information, and building the basis for continuous life-long learning. This requires a redefinition of curriculum content, tasks and standards, more geared towards “situated” learning and less focused on disciplinary knowledge and absorbing “raw” information.

• Promote tertiary education participation by increasing the pipeline of qualified upper secondary graduates and offering more pathways to tertiary education.

(i) Enhance options for financial support for university students. Boosting tertiary participation will also require the provision of financial support, through student loans (to be introduced shortly) and scholarship programs for financially constrained students.

(ii) Improve the quality of secondary education in non-profiled schools, delay early selection of students and open multiple pathways into tertiary education. International experience suggests that delaying streaming of students out of general education into vocational education contributes to raising performance. Delaying the currently early selection into profile and non-profile schools (after 7th grade) and delaying the streaming of students into vocational education until after the completion of compulsory general education may contribute to raising the effective cohorts qualified to enroll in tertiary education. This would also involve developing curricula for vocational secondary schools that balance vocational and general skills (in particular mathematics, science and language skills) and introducing pathways from vocational secondary schools to universities.

(iii) Expand the number of occupationally-oriented tertiary colleges. A part of Bulgaria’s low tertiary participation overall can be explained by the fact that it has a much smaller share of occupationally oriented short-cycle tertiary colleges compared to many EU neighbors. These colleges offer degree programs in more applied and vocational subjects22.

• Enhance labor market relevance of university degree programs by promoting competition among tertiary institutions. Bulgarian universities already face increasingly stiff competition from universities abroad, evident in the large and growing share of Bulgarian university students moving to study abroad. However, greater labor market relevance of university studies need more domestic competition to expand, diversify and modernize degree programs. Bulgaria may

1. 22 For more, see World Bank (2007). "Accelerating Bulgaria's Convergence: The Challenge of Raising Productivity", World Bank: Washington DC.

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wish to move to a system of empowered demand, i.e. a system where students have greater choice, and universities compete for students. This would require, in particular, a move to a financing system based on actual rather than historic enrollments as well as changes to university governance23.

41. Challenge 6: Few adults participate in life-long learning.

• Pilot and test various approaches to promoting adult training. The Bulgarian Employment Agency has just launched a program to provide matching grants to employers for training their workforce, with financing from the European Social Fund (ESF) under the Operational Program Human Resources Development (OP HRD). While this is a step in the right direction, little is known whether the barriers to training are predominantly financial or whether there are others. For example, with access to finance having much improved over the last few years, the constraints will not be purely financial. Another important constrain may be the concern of companies that better trained workers will move to other companies (“poaching”). This is why programs that provide financial incentives to employers should be subject to rigorous evaluation to establish their impact and ensure that public funds are well spent (see also Box 4). Additional approaches to be piloted and tested are the widening of the offer of distance education programs at all levels

• Ease alternative entry routes into higher education for adults and to continuing education programs provided by universities. Linked to the point on the recognition of qualifications obtained through informal and non-formal education, efforts to introduce and ease alternative entry into higher education for adults is an important avenue to boost adult education. Such special entry routes would build on qualifications obtained through prior formal education, but also qualifications obtained through work.

Box 4: The policy laboratory: Program pilots and impact evaluation

It is important to recognize that there is no single or certain solution to employment and skills shortage challenges discussed in this note. Countries across the OECD and EU have been dealing with the challenges of youth unemployment, early school leaving and long-term unemployment for years and continuously introduced and tested new approaches. In recent years many countries have placed a greater focus on piloting promising new programs and then rigorously evaluating their impact before scaling them up or rolling them out nationally.

Like follow new EU Member States, Bulgaria has the opportunity to adopt a similar “reform laboratory” approach, taking advantage of the availability of funding from the Operational Program “Human Resources Development” (OP HRD). This would involve carefully reviewing international experience, adapting it to the Bulgarian context and designing promising pilot interventions with in-built impact evaluation, all financed by OP HRD. Impact evaluations establish the causal effect of a particular policy or program on outcomes, comparing a “treatment” group—those who receive an intervention—and a “control” group—those who do not receive the intervention for the duration of the evaluation. It can therefore, directly attribute the contribution of the new policy to change in outcomes. Conducting program pilots and evaluating their impact prior to a national roll-out can save money and help tailor programs most effectively to meet their objectives.

1. 23 Ibid.

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42. The proposed policy measures are of both a short and medium term nature and differ in terms of cost implications. Tackling the activation and human capital agenda is a matter of careful prioritization. However, this note argues that the time for strategic planning is now. It goes beyond the scope of this policy note to assess detailed cost implications of each measure proposed as well as a detailed prioritization. However, Table 3 provides an overview of the proposed policy actions, with a simple characterization of short-term versus medium-term and likely size of cost implications.

Table 3: Bulgaria’s employment activation and human capital agenda - reform recommendation matrix Impact Complexity Cost low medium high Employment Activation Challenge 1: Many youth are inactive in the labor market Promote flexible and part-time work arrangements

Introduce legislation on temporary work agencies MT T P € Introduce of simpler contracting for part-time and temporary employment ST T P € Reduce barriers to part-time contracting in the social security system ST T P ?

Pilot and test apprenticeship, internship and wage subsidy programs ST T/P € Develop youth-centered employment activation ST P T € Challenge 2: Certain adult groups are inactive in the labor market Enhance provision of child care MT P T €€€ Promote second chance education programs ST T/P €€ Challenge 3: Older worker leave labor market too early Strengthen incentives in the pension system to work longer MT T P ? Skills and human capital Challenge 4: Too many youth drop out of school early and become NEET Promote ECD programs to promote school readiness MT P T €€€ Intensify efforts to prevent early school leaving and boost retention in education and training

Introduce incentive measures to prevent early school leaving ST P T € Promote early outreach through school counseling and professional orientation MT T/P €€ Introduce more varied, alternative and flexible pathways to education and training MT P T €€

Challenge 5: Youth leave education insufficiently prepared for the knowledge economy Complete ongoing school education reform to improve quality and relevance

Place a greater focus on developing good monitoring systems MT P T € Adopt active measures to attract, train, retain and reward effective teachers MT P T €€ Move to a competency-based approach in curriculum and learning MT P T €€

Promote tertiary participation Introduce student loans and scholarship programs ST P T €€ Delay early selection into profile and non-profile secondary schools MT P/T € Develop curricula for VET secondary schools balancing vocational and general skills MT P T € Expand occupationally oriented short-cycle colleges MT P T €€

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Enhance labor market relevance of university degree programs Reform financing of higher education to enhance competition among tertiary institutions MT T P € Reform governance of higher education institutions MT T P €

Challenge 6: Few adults participate in life-long learning Pilot test adult learning approaches ST T/P €€ Ease alternative entry routes into higher education for adults MT T/P €€ Note: The complexity and cost indicators are meant to give some broad guidance as to how difficult it will be to introduce the various reform recommendations and to help identify the easier solutions. “ST denotes short-term impact; “MT” denotes medium-term impact. “T” denotes technical complexity; “P” denotes political economy complexity. €, €€ and €€€ denote magnitude of fiscal costs.