Why a new job in Dobrich means more than a similar one in Sofia

Ten new jobs in Dobrich lead to an increase in local employment by a total of 25 positions. While in Sofia ten new jobs do not have a knock-on effect. This is clear from the first study of its kind for Bulgaria on the so-called local employment multipliers. It is the work of the Council for Economic Analysis, which was established last year as part of the Recovery Plan.

The essence of the multiplier lies in the fact that when new jobs are created, the demand for local goods and services increases, which in turn further increases the demand for labour. In other words, wages from new positions flow directly into the local economy, increasing consumption and generating the need for additional employees.

For example, on average, an increase of 10 jobs leads to an increase in local employment of 13 jobs, or a factor of 1.3.

As expected, the picture in Bulgaria is mixed, with large differences in multipliers between municipalities in different regions of the country. In Sofia, for example, 10 new jobs do not lead to an additional increase in local employment. On the contrary, they can lower it because of a tight labour market and a heated housing market.

According to the study, higher multipliers are observed in municipalities with lower levels of employment and economic activity. Such is the case of Vratsa, for example, where employment in the active population is below 60% and the multiplier is above 2.5.

The highest multiplier is in North-Eastern Bulgaria and in some districts, such as Vratsa and Lovech," said Plamen Nenov, an economist at the Norwegian Central Bank and professor at the Norwegian Business School, one of the authors of the study.

In fact, in nearly 60% of the country's municipalities, employment among the working-age population is around or below 50%, and in many municipalities it even falls below 30%.

Just a few days ago, this statistic was confirmed by the Employment Agency, which published an estimate that around 1 million Bulgarians are neither studying nor working.

Their inclusion in the labour market is crucial for the economy in view of Bulgaria's demographic problems, forecasts for which show that by 2050 Bulgaria's labour force will shrink by a third.

The study shows that in areas with lower employment, economic policies aimed at reducing regional imbalances would not only redistribute economic activity, but would boost Bulgaria's economy as a whole. This means a double benefit - correcting some of the regional economic imbalances and boosting the Bulgarian economy.

Policies aimed at reducing regional imbalances would bring higher economic growth to Bulgaria - they would stimulate the economy, not just create redistribution between regions," Nenov explained.

The study also shows that the multiplier is higher for larger municipalities compared to smaller ones, which may be due to the larger effect of the informal economy in smaller municipalities where it is stronger.

The main drivers of its value are local consumption effects, agglomeration effects, which represent productivity growth of other enterprises, part of the local market due to new jobs created.

The third effect is that of 'congestion' - when the local labour market has a higher vacancy rate, then the congestion effect on the labour market is smaller and the local multiplier is higher.

The case of Sofia

However, when the labour market is already very tight and employment is high, new jobs start to compete strongly with existing ones. They

essentially lead to an increase in wage and house price levels, which in turn increases the cost of living (and therefore reduces real purchasing power) in the region," the report states.

Nenov told Economic.bg that to combat this, the authorities should think of measures to improve access to housing, such as incentives for the vast majority of empty housing in Sofia to be rented out. Thus, "the 'congestion effect' in Sofia leads to a more limited absorption of positive labour demand shocks".

Sofia's population is declining at the last census, although housing construction does not seem to be declining and there is a lot of vacant and empty housing in the capital," Nenov added.