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This year's focus analysis accompanying the release of Regional Profiles: Development Indicators focuses on the latest developments in regional labour markets and seeks to outline the key challenges facing their growth in the near future. Despite there being employment records in most districts and a significant drop in unemployment, several districts remain away from the overall positive development, and structural problems pose difficult challenges for the future.

By the third quarter of 2019, the employment is concentrated mainly in the leading economic centres - Sofia has already exceeded 700 thousand employees, Plovdiv has 324 thousand, Varna - 229 thousand. On the contrary, in districts with continuing labour market problems the number of employees remains below 30,000. Employment growth is also uneven, with the most rapidly developing districts being those where investment in manufacturing has been accumulated.

Even with records in many districts, however, not all of them have reached the same peak in the labour market as the one before the economic crisis. Five districts did not manage to overtake their previous best achievement - Montana, Yambol, Smolyan, Kyustendil and Vidin, but only in one of them the downturn is particularly noticeable. The employment of Montana's active-age population has dropped as much as 15 points since the previous decade, and at this stage there is no indication that it will recover in the near future.

One interesting case is Veliko Tarnovo, which in the last year has set absolute records in employment for Bulgaria - employment over 80% of the active population is a rare occurrence in the economic history in general - but for now it is difficult to predict to what extent the district will be able to maintain these levels. Leading economic centres, on the other hand, have surpassed 70% employment in the last 6 to 8 quarters. Even with the increasing demand for labour, this ratio does not appear to start to decline, except in the event of a major economic crisis, for which at least there are currently no indications. It is also interesting to note that in some districts - most notably in Sliven, Gabrovo and Kardzhali, the employment dynamics are different for men and women, with the number of men employed increasing and women decreasing.

By the end of 2019 the country's registered unemployed are just under 195,000. Their distribution by districts is much more even than that of the employed, but nevertheless the leading economic centres also have the highest number of unemployed persons, mainly because of the significantly larger size of their workforce. It is noteworthy that despite the relatively smaller size of the economy in Blagoevgrad district, there is currently the highest number of unemployed. This is a consequence of the downsizing in recent years of two industries that until recently have been leading the local economy - the clothing and tobacco industries.

Even at the end of 2019, there remain seven districts where unemployment has not yet fallen below 10% of the active age population. In the capital alone, its level has fallen below the "sanitary" 2%, indicating the onset of stagnation in the labour market and impeded labour mobility. In most districts, the unemployment rate is between 5 and 10%, which points to future employment growth potential in the next year or two. This would be more difficult in the districts that have had the most aggressive expansion in the last few years - Varna, Stara Zagora, Gabrovo, where unemployment is gradually decreasing.

Undoubtedly, the most important factors that determine the dynamics of the labour market in Bulgarian districts are the educational structure and characteristics of the skills of the working-age population. The educational structure (Chart 3) certainly reflects on the ability of the districts to create new employment. As for the total share of university graduates in the workforce, the capital is ahead of all the other districts, and at the same time has the smallest share of the low-educated population. There are six districts with a share of university graduates of less than 20%, and none of them has been particularly successful in the labour market in recent years except Sofia district.

The negative demographic processes and the aging of the population are undoubtedly also the most significant problems facing districtal economies in the near future. So far, the restructuring of the economy and the growth of high value-added activities have largely mitigated the impact of the shrinking workforce, but in the medium term, it may present more hard to overcome obstacles.

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For the eighth consecutive year, the Institute for Market Economics presents "Regional Profiles: Indicators for Development" - the only regional developmental almanac of its kind in Bulgaria. The survey is based on 62 indicators that assess the economic and social environment in 28 regions in the country.

The Annual Regional Report for 2019 will be presented on January 30, 2020

Sofia continues to be Bulgaria's main economic driver, but the capital's labour market is already beginning to run out of energy and its expansion is becoming increasingly more difficult. This is clear from the Economic and Investment Profile of Sofia (link in Bulgarian), compiled by IME for the Sofia Municipal Agency for Privatization and Investments.

Sofia produced approximately 40% of the country's gross domestic product for 2018, a share that has gradually increased in recent years. However, the capital has a very different economic structure compared to Bulgaria as a whole, due to the significantly higher role of services, as opposed to a smaller share of agriculture and industry.

Due to the rapid expansion of outsourcing of services and information and communication technologies, the capital is among the districts in Bulgaria that are rapidly increasing their productivity. These subsectors combine a considerable part of the investments in the field and the commercial activity.

If the previous period of economic crisis is of any indication, even with the presence of a marked slowdown in Bulgaria's economic growth, Sofia is likely to remain  less affected than other districts, especially compared to those with an industrial profile.

At the moment the biggest challenge for further development of the capital's economy is its labour market restrictions. In the last quarters with available data employment in Sofia exceeds ¾ of the working-age population, and at the same time, unemployment has almost reached its natural minimum (depending on the quarter, about 10 thousand people), and going below that minimum would severely restrict the labour market mobility.

There are several sources of additional labour resources in the capital - the main one is the positive migration, thanks to which Sofia attracts many of the talented and educated workers from other districts in the country. Over the last two years, there has also been a significant increase in employment among the elderly (over 55 years), which means that companies are increasingly turning to them. Thanks to the boom in construction, even people with lower education are already able to find a job. The least used source of additional labour force for the capital so far is employment of foreigners, mainly due to restrictions on hiring people from third countries, and difficult competition with living standards in other European countries (although in some industries, especially in ICT, this is already changing).

If Sofia manages to overcome the restrictions on the labour market, there are positive prospects of its economic development. Due to its significantly faster growth, the capital is likely to continue to concentrate an increasingly bigger part of the country's economy, especially services, and to attract the best-educated and talented workers and entrepreneurs.

9 months ago, when the first version of the tariff for the new toll system was published, we commented in detail what the expected revenue would be for the state, what would be negotiated and why the government would be forced to make concessions. Today there is already an agreement which confirmed out expectations for the reduction of fees, but at the same time raises two important questions - will there be enough revenue and whether there will be another discussion this year about a new tariff update?

There are two major changes to the new tariff - one is the smaller scope of the toll system and the other is the reduction of fees. The change in scope was anticipated as the initial proposal covered about half of the republican road network - 10,800 km. from the road network, including second and third-class roads. Although some roads were predicted to be zero rate due to poor condition, the range was still too big. The new proposal is for the system to cover 3,100 km, such as highways and first-class roads. It is important to note that this was reflected in the state budget for 2020, with pledged revenues (BGN 450 million in 2020) being exactly within that type of scope of the system.

However, this is not the case with the tariff. The proposed toll taxes have undergone several changes, with the government backing down in the last option and simply accepting the industry’s proposal. The new taxes range from 3 to 20 cents per kilometre, depending on the size and environmental category of the vehicle. In the original version of the tariff, the taxes ranged from 8 to nearly 90 cents per kilometre. For the largest commercial vehicles (3.5 to 12 tonnes) the reduction is within 2.6 times - from 7.8 to 3 cents per kilometre for Euro 6 and from 15.6 to 6 cents per kilometre for Euro 1 and 2. For the heaviest trucks (over 12 tons and 4+ axes) the reduction is more than 4 times - a heavy truck with the highest Euro standard (Euro 6) under the new system will pay 11 cents per kilometre, while in the first version it would have to pay 45 pennies per kilometre.

The original version of the toll system projected BGN 1.3 billion in revenue. With at least double or even triple the scope and reduced tariffs within 2.6 to 4 times depending on the vehicle, the pledged BGN 450 million in the 2020 budget seems difficult to achieve. It is no coincidence that the ministry announced that after three months of commercial operation of the system, if the revenues are lagging behind the budgeted BGN 450 million, the tariffs will be updated. This is very likely to happen, meaning there will be new tensions between carriers and the government in the summer.

It is clear that the government's leading line now is for the system to start working without any further delay – even with the tariffs proposed by the industry, since investments in road infrastructure are already dependent on the expected revenue. Once the system is up and running, pressure could be used to expand and increase tariffs. Preparations for this are in place - even in the last proposal, for example, there are second-class roads, even with zero taxes, and the State Budget Act 2020 states that "in the coming years the plan is to extend the scope of the toll system and to cover second-class roads as well." In short, the long-term push will be for a broader scope of the system and an attempt to update the tariff, and the corresponding tension in the sector can be expected in the coming summer.

Northern Bulgaria will be held hostage to the new toll system and expected revenues more than other regions. The government's strategic infrastructure projects include the Vidin-Botevgrad express road, the completion of the Hemus highway, the Gabrovo perimeter and the Shipka tunnel, the Ruse-Veliko Turnovo highway and the Black Sea highway. These are projects that cover the whole of Northern Bulgaria and provide connectivity between the economic centres in the north as well as better connectivity with the southern industrial zones. If the toll system fails to meet the revenue targets, some of the investment in road infrastructure in the north may be delayed.

Sofia has been the champion of labor market development for the last five years - the capital has been among the fastest recovering municipalities since the economic crisis, and continues to create very new employment even against the backdrop of slowdowns in many parts of the country. In this presentation, we simultaneously look at the individual indicators included in the broader analysis and the projections for their future development.

During the past week the 2018 data for employment and labour costs on district level from the annual statistics has been published. This statistic is particularly interesting because it comes from company reports and is therefore exhaustive, as opposed to the Labour force survey, for example, which is a sample survey. The overall picture for 2018 is already known – the number of employees is only slightly increasing and is now about 2 320 thousand people, and the average salary in the country is increasing by over 10%. In 2018, the average monthly salary in Bulgaria ranges from 752 BGN in Blagoevgrad district to 1 586 BGN in the capital Sofia. However, breakdown by sector and by region is only now available and is particularly interesting.

An important focus is the manufacturing industry where more than 1/5 of the country's employees are traditionally employed. This is a sector where, following the major downturn in 2008-2010 (from 600 to 500 thousand employees), there seems to be little change at first glance - since 2010 the number of employees has been relatively constant, but in 2017 and 2018 they reached 520 000. However, the big change is within the industry itself - there is a constant decrease in employment in traditional sectors, such as clothing and furniture production (where the added value is EUR 6-8 thousand per employee), but at the same time there is growth in the production of electrical equipment, machinery, computer equipment, cars and other vehicles (added value of EUR 15-20 thousand per employee). That is why in the last 7-8 years we have been talking about the transformation of the industry, not so much about growth in terms of the number of employees.

The industry breakdown on district level shows where the dynamics are more noticeable. Although almost 100 000 fewer people worked in the industry in 2018 than in 2008, some areas not only did not lose, but even won more employees. In 2018 the districts Sofia, Plovdiv, Smolyan and Yambol had more people employed in industries compared to 2008, in Targovishte and Kardzhali the number is the same compared to 2008. While Plovdiv was a leader in the accumulation of new employees in the industry in 2016 and 2017, in 2018 the capital and the surrounding industrial zones on the territory of Sofia District came to fore, as well as the districts of Pazardzhik and Haskovo. The leader for 2018 is Haskovo with a growth of 7% (+1 000 employees) in just one year. For the first time a South Central Region takes away the first place from the Southwest by the total number of employees in the industry.

The good news, in terms of salaries, is that almost in all districts the salaries in manufacturing are already above the average. In 2013, for example, the year after which the industry started to increase slightly, the number of employees in more than half of the districts, including the ones in South Central region, the average salary in industry lags (10-15%) than the average for the district. In 2018, in more than 20 districts, including the ones in the South Central region, manufacturing salaries outstrip the district average. Apparently, the transformation of the Bulgarian industry into higher value-added sectors is leading to higher pay. It is logical that this process will continue and the skilled labour in the factories will gradually become higher-paid than others - be it seasonal work abroad or at seaside, farm labour, etc.

Let’s take a look at the most dynamic sector - information and communication technologies (ICT), in 2018 it creates the most job places (+4593 employees), and salaries are 2.7 times higher than those in the manufacturing industry. Here we can add the sector of professional activities (+2083 employees), which includes outsourcing and where salaries are 1.6 times higher than those in the manufacturing industry. In these sectors, however, the capital Sofia is the absolute leader - the growth of the ICT sector employed in the capital in 2018 is 3929, followed by Plovdiv with a growth of 400 people and Varna with 261. In all the other districts there is a negligible increase or even decline.

The total number of employees in the ICT sector in 2018 in these three leading districts is divided as follows: Sofia – 79 050 employees, Plovdiv – 4409, and Varna – 3796. In the ICT sector the following in the list of districts are Burgas (1230 employees), Ruse (890 employees), Veliko Tarnovo (830 employees) and Stara Zagora (695 employees) – there is no tangible growth in employment in 2018. There is an upward growth of salaries in the ICT sector in these cities, which shows a positive dynamic, but there is still a lack of growth in employment, which has been observed in Plovdiv, for example, in the last 4-5 years.

The overall picture in these two sectors is that the manufacturing industry has a marked regional orientation, with South Central region pulling ahead - first with Plovdiv and Smolyan, and in the last year with good results from Pazardzhik and Haskovo. Sofia and the industrial areas around the capital also show very good dynamics in 2018. In the ICT sector, the capital continues to be an absolute leader, which also increases salaries. Only Varna and Plovdiv manage to have a noticeable growth in the number of employees in the IT technologies and this has its effect on salaries. Secondary centres - such as Burgas, Ruse and Veliko Tarnovo still do not manage to follow the dynamics of the ICT sector. However, there is potential - also backed by various news stories in the current 2019, so it would be normal to see some movement in the near future.