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Regional development in Bulgaria remains highly uneven, and the recovery from the COVID crisis in 2021 has reshuffled the ranking, especially among the least developed regions. This is evident from the published data on the gross domestic product (GDP) at the regional level by the National Statistical Institute (NSI) for 2021.

The economy of the capital city remains the largest among the regions in the country, accounting for 43% of the total GDP produced in Bulgaria, compared to 7.4% in Plovdiv and 6% in Varna. The economies of Vidin, Silistra, and Smolyan remain the smallest. In nominal terms, Sofia's GDP exceeds 59 billion leva, and Plovdiv is the only other region with a GDP exceeding 10 billion leva, although Varna is likely to join this group in the near future.

There are no particular surprises in the GDP per capita leaders. The capital city is at the top with over 45 thousand leva per capita, followed by Stara Zagora with 20 thousand leva per capita and Sofia Province with 19 thousand leva per capita. In 2021, the influence of the energy sector is especially visible, as it experiences significant growth in the favorable international market environment, thereby pushing up the levels of economic development in Stara Zagora and Vratsa – a process that continues in 2022.

However, what is more interesting is the distribution of regions with the lowest level of economic development, where the varying degree of recovery from the COVID crisis leads to significant reshuffling. Vidin, which has been the least developed region in terms of GDP per capita for a decade, now surpasses Haskovo, Silistra, Sliven, and Pernik. However, in practice, the differences are tiny – the 10 least developed regions have a GDP per capita ranging around 2 thousand leva, so it would not be surprising if there are further reshufflings in the coming years. We should also note that the data presented here do not yet consider the population census – and the reported additional population decline, especially in certain regions, will lead to an upward correction in the average GDP per capita.

Unlike the crisis year of 2020, in 2021, there is not a single region that does not exhibit economic growth. However, growth is also highly uneven – while Sofia adds 6.3 thousand leva GDP per capita, Haskovo and Kardzhali only grow by mere 600 leva per capita. Among the regions with the fastest recovery is Burgas, which adds 4.4 thousand leva per capita but the collapse of tourism in 2020 "erased" years of economic development, and its recovery will take more than a year.

Gross domestic product is by no means the only indicator viable for measuing and analyzing regional development. However, its dynamics in the year following the crisis clearly distinguish the regions with the most flexible local economies that can quickly recover from the impact of the coronavirus and restrictions and return to growth. Successful models of economic development are also evident – the rapid growth of services in the capital city, the energy centers of Stara Zagora and Vratsa, and the industrial economies of Sofia Province, Gabrovo, and Plovdiv.

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As we approach the end of each year, the minimum wage becomes a subject of dispute and political discourse once again. Popular ideas this year include raising it (to 780 BGN), raising it significantly (to 850 BGN), and a slightly newer proposal - making it 50% of the average wage in the country (around 870 BGN based on Q3 2022 data). In previous years, in addition to the mentioned proposals, there were more complex suggestions - setting it through a set of indicators, indexing it with others, making it different across regions, sectors, professions, and so on.

The National Revenue Agency (NRA) does not provide official statistics on the number of people working for the minimum wage, but according to government officials and parliamentary discussions, it amounts to around half a million people. Some of them receive additional cash payments (probably in the hotel industry, transportation, and construction), and raising the minimum wage will simply pour more money into the treasury and social security systems. Another part is employed by the state and municipalities (mainly in cleaning services), and wages there will need to be increased in any case. However, a third part actually receives only that much in the private sector, and employers will have to raise wages (including for other workers or at least those who earn slightly above the minimum wage) or reduce their workforce, or they too will resort to "under-the-table" payments.

For high-paying sectors, positions, and regions where the generated value-added is higher, none of the proposed increases will have a significant impact. However, the situation varies greatly in different parts of the country and in different industries.

Data for the third quarter of 2022 show that wages are lowest in the Kyustendil, Blagoevgrad, and Haskovo regions, where the current minimum wage is over 60% of the average wage. If the minimum wage is raised to 50% of the average wage for the country, its real share in these regions will increase to nearly 75% of the average wage. It is clear that some low-skilled workers will not remain employed, and more doors will be closed for the unemployed. At the same time, in the capital city - the region with the highest average wage - the share of the minimum wage will increase from 30% to 36%.

The situation is also significant in different sectors. In the hotel and restaurant, water supply and sewage, construction, and agriculture sectors, the share of the minimum wage is above 50%, reaching 66% in hotels and restaurants. If the minimum pay is raised to 50% of the average wage, its share in these sectors will be over 65% (up to 82% in hotels and restaurants). In the ICT sector, this increase will change the share of the MW from 17% to 21%.

If we only consider the payment of unskilled labor, we can see at least 80 thousand individuals in agriculture, wood processing, food and garment industries, construction, and various domestic, communal, and support services receiving an average of about 10% above the minimum wage in 2021. Additionally, we can add another 40 thousand individuals in the trade sector alone, who receive slightly over 20% above the minimum wage on average.

On the one hand, different sectors produce different value-added, concentrate workers with different qualifications, and have different labor organizations, which means significant differences in wages. On the other hand, the regional map shows a large gap between different regions. Naturally, we should strive for cohesion and high incomes for everyone, but in the name of populism, we cannot ignore reality.

The National Statistical Institute (NSI) publishes data from the population census regarding daily labor migration, which refers to the workplace location of employed individuals as of September 7, 2021. This snapshot of daily labor migration, obtained once every ten years, provides valuable information about economic processes in the country. Around 70% of the employed population in the country works in the same place where they live. However, nearly 500 thousand people work somewhere else, commuting daily to their workplace. They account for over 1/5 of all employed individuals in the country, and their movement gives a clear idea of the economic centers that attract workers. It should be noted that 121 thousand people, or a little over 5% of the employed population, work from home, which is also accounted for in the comprehensive census data.

Daily labor migration is particularly visible in the industry sector. Over half of the employed individuals in the mining industry commute to a different locality for work. This is understandable considering that mines in the country are located in small municipalities, such as in the Srednogorie region and Krumovgrad, where non-ferrous and precious metals are extracted, or in the coal-mining area of Radnevo. It is normal for these mines to attract many workers from neighboring areas. What's interesting in this case is that a large portion of this daily labor migration comes from a relatively close region - for example, around 85-90% of the staff at mining companies in the Srednogorie region come from municipalities in immediate proximity to the mine.

In manufacturing and construction, over 1/3 of workers commute to work outside their place of residence. This is also due to the specific nature of these two sectors, where large industrial facilities are often located on the outskirts of major cities, and construction generally involves labor migration toward large-scale infrastructure projects. The three main economic centers - Sofia, Plovdiv, and Varna - are examples of developed industries in peripheral municipalities that attract personnel, including from within the city itself. Regarding the industrial sector, the formation of significant economic centers in the country is evident, as they extend beyond administrative boundaries and shape the economic landscape of the country.

In the services sector, daily labor migration is much lower - less than 20% of workers in sectors such as education, healthcare, culture and sports, and administrative and professional activities commute to work outside their place of residence. Interestingly, in the field of information and communication technologies, less than 10% of employees commute to work outside their home municipality. The digital sector is heavily concentrated in the capital city, Sofia, and in some secondary centers such as Plovdiv and Varna, which suggests more permanent relocation rather than daily commuting to an office. At the same time, the digital sector stands out with the highest proportion of remote workers - over 1/3 of employees in the information and communication technologies sector work from home. In other service sectors such as professional and administrative activities, this percentage is within the range of 10-20%, while in all industrial sectors, it is practically negligible.

The regional breakdown of daily labor migration is also interesting. The highest share of workers commuting to a different locality is observed in Sofia (province) and Pernik. These two regions are closely linked to the capital city, Sofia, which undoubtedly attracts workers from neighboring areas. At the same time, both regions have an industrial character, including contributions from major companies in the Srednogorie region in Sofia Province, which explains the higher percentage of daily labor migration. The positive balance in the capital city is determined by the inflow of daily labor migration, which stands at nearly 58 thousand people. In Pernik, the negative balance due to daily labor migration is around 15 thousand people. In most other regions, the balance is within the range of 3-5 thousand people, with negative balances observed in Pazardzhik, Kyustendil, Vratsa, and Sliven, and positive balances in Plovdiv, Burgas, and Varna. The majority of daily labor migration occurs within the regions themselves. The National Statistical Institute will provide a breakdown by municipalities, including in the new analysis of economic centers in Bulgaria, which can already build upon the data from the latest census.

Against the backdrop of continuing consumer price growth, measures to increase incomes and purchasing power take center stage in parliamentary debates. At this stage, the proposal for aggressive increases in the minimum wage is leading, which threatens to further increase inflationary pressures. The current text examines the dimensions of the impact of price growth on workers' wages both at the regional level and among different economic activities.

This topic is best reflected in data on household incomes and expenditures for the third quarter of 2022. At first glance, the average household per capita income not only reaches but also surpasses the average inflation for the quarter, measured by the Consumer Price Index (CPI) (18%), with a registered growth of 21%. However, this is a direct consequence of the aggressive increase in pensions throughout the year - the registered growth in pension income is 44% on an annual basis, compared to an 11% growth in wages, which lags significantly behind the inflation rate.

The dynamics are highly uneven among different areas of economic activity. The average lag in wage growth compared to inflation in the third quarter is just over 3 percentage points, but a noticeable difference is observed even according to the ownership form, with a slowdown of 2.6 points in the private sector and 5.5 points in the public sector. This primarily reflects the slowdown in wages in several professions in the public sector that depend on the state budget, which lacks the flexibility of the private business to adjust to changes in macroeconomic conditions. Among individual sectors, the smallest lag is observed in agriculture, government administration, and trade, while the largest one is in healthcare and education. The significant lag in hospitals and schools confirms the observation that the public sector has not been able to respond promptly to the decline in real wages of its employees. On the other hand, the outsourcing sector and processing as a whole are relatively coping well. However, there is no sector in the Bulgarian economy where wage growth exceeds that of consumer prices and achieves an increase in purchasing power.

Just like among industries, the 28 regions of the country register significant differences in wage growth compared to inflation. As expected, Vratsa performs the best with a lag of only 0.4 percentage points, thanks to the good performance of the energy sector during the year. Similar results can be seen in Vidin, Blagoevgrad, and Sofia. On the other hand, Smolyan, Razgrad, Yambol, and Lovech experience a lag of almost 10 points compared to inflation. The remaining regions fall within the entire spectrum.

The approach presented here, of course, has some obvious weaknesses - when reviewing economic activities, differences in the dynamics of remuneration for specific positions are not taken into account, and in the case of regions, the different price levels in different parts of the country and the potential for different rates of change. Despite these limitations, however, it demonstrates the heterogeneous impact of price growth on workers in various industries and regions.

This, in turn, has some obvious consequences for the way income policies are reflected, especially changes in the minimum wage, which aim to preserve purchasing power. The significant differences in starting levels as well as in the rates of development of the country's regions and individual industries require an individual approach to each of them, taking these realities into account. Instead, the currently discussed changes assume the simple linkage of the minimum wage to the dynamics of the average wage, which is extremely sensitive to the dynamics of the leading sectors and the fastest-growing regions. This will inevitably lead to even greater problems for the least developed and weakly competitive sectors.

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November 16, 2022

Since 2012, the Institute for Market Economics has been presenting its unique study on the social and economic conditions of the regions in Bulgaria, which is unparalleled in its scope and depth. The Regional Profiles cover 68 indicators that depict the real picture in the country's 28 regions.

All data and materials can be found at www.regionalprofiles.bg. Over the past decade, numerous challenges have been reshaping the economic and social landscape of the country, including investment and growth slowdown, the pandemic and subsequent recession, rapid recovery, political instability, the war in Ukraine, and an energy crisis in Europe. These periods have had different manifestations at the local level, testing the potential for local coping and response, allowing some regions to progress in their development, but ultimately, differences between regions persist, and the gap between the capital and the provinces, large and small, developed and poor, does not significantly narrow. On a broader scale, economic imbalances between Northern and Southern Bulgaria are predetermined by the smaller scale of economic centers in the north and weaker connectivity.

Almost every region distinguishes itself with successful performance in a specific area - for example, education in Smolyan, healthcare in Pleven, investment activity in the Sofia region, and several regions show potential for overall development improvement. The unfolding of this improvement into tangible and lasting enhancements in people's lives and the business environment depends on both the processes in major economic centers and their periphery, as well as the development of secondary economic centers that still lag behind.

In addition to Sofia (the capital), Plovdiv, Varna, Burgas, and Gabrovo, which have consistently performed well overall, the latest edition includes Stara Zagora, Veliko Tarnovo, and Ruse, which have fared relatively well through the challenges of the pandemic.

However, the greatest challenge lies in the demographic situation. The 2021 Census shed light on the severe demographic problems facing the entire country, including the capital. Data on the working-age population (15-64 years) further reveal a deep contraction of human capital - 20 out of the 28 regions have lost at least one-fifth of their workforce. While the decline in natural population growth reflects long-term processes that require vision and time for mitigation, mechanical population growth can be influenced by short-term policies.

However, the lack of adaptation to the declining population, despite being an ongoing process for years, continues to directly impact the provision of public services (education, healthcare, public order, culture, etc.) and the ability of the private sector to employ workers. The problems faced by local authorities due to demographic trends will further deepen in terms of higher costs, the need for optimization, and adaptation to new realities. To enable such adaptation, more local resources and freedom in implementing regional and municipal policies are necessary.

The regions in the country have different economic profiles that predetermine their different development trajectories. Regions with developed industries and strong penetration of digital services tend to have better performance. There are successful examples (such as a group of municipalities in the Srednogorie Regions) that demonstrate there are no insurmountable barriers to local economic and social transformation.

We expect to soon see data showing a new region in Northern Bulgaria that will experience significant improvements in the quality of life and become a dynamic economic hub that spills over its influence into peripheral areas - a process that already allows several smaller centers in Southern Bulgaria to retain and attract people and investments.

This depends on various national-level policies, but also on the powers, capacity, and financial independence of local authorities.

Video of the event (Facebook): https://fb.watch/gQzbnzLsLh/

Presentation from the event: https://ime.bg//var/images/Presentation_ALL.pdf

Summary of the study: https://www.regionalprofiles.bg/var/docs/RESUME_RegionalProfiles2022.pdf

Annual report: https://www.regionalprofiles.bg/var/docs/Reg_Profiles_BG_2022.pdf

Data: https://www.regionalprofiles.bg/bg/data/

The "Regional Profiles: Development Indicators" project is supported by the America for Bulgaria Foundation.