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The Balkans: Not Enough Skills or Not Enough Work?

Wolfgang Fengler's picture

City bus arrives at a station World BankIn many economies of the Balkans high formal unemployment is often blamed on insufficient skills in the labor force. But this intuitive diagnosis glosses over two fundamental questions, namely: why are workers not training themselves to find jobs, and why aren’t firms investing in upgrading the skills of their employees? In other words, the market seems to be failing by not allocating resources where high returns can be found. In this blog post, we cast doubt on the diagnosis and look beyond the skills gap explanation to high unemployment in the Western Balkans. But this is not unique to the Balkans. Take the US construction industry, which is among the most productive in the world even though it employs many relatively low skilled workers, often immigrants from Mexico and other Latin American countries, who improved their individual productivity several fold by migrating – not upgrading skills.

There is no doubt about the problem as throughout the region unemployment – particularly formal – remains unacceptably high. Serbia is a case in point: Out of a population of 7.2 million people and a workforce of 4.5 million, only 710,000 Serbians have a formal, private sector job. If you add some 380,000 ‘sole proprietors’ – basically people who run mini-shops – you get to around 1.1 million people in the formal private sector. That means that the livelihood of the whole country is built around this 15 percent of the population. Can it really be that firms are still not able to find sufficiently skilled employees in the large remaining pool, especially given that Serbia has decent education results? If finding skilled workers in Serbia is like looking for needles in a haystack, there are surely a lot of needles to be found.
 

You often get a lot of information from cab drivers – it’s a small sample, but the update is usually colorful and often accurate. The last time I was in Sarajevo, a cab driver talked at length about the latest political deadlock and the economic prospects of Bosnia. The commentary was brilliant. It turns out the driver had a degree in economics but could not find a job better suited to his training. This was another clue that the skills shortage tale did not tell the whole story.

​So what does the data say, and can we get a more robust sample than my anecdotal encounter with the cab driver? If there was a major skills gap in the economy, logically there would also be a high premium on those scarce skills. However, trends in wages do not in fact show this to be true. Based on calculations for the Balkan economies in which the Economist Intelligence Unit collects data, we see that average real wages rose across Bulgaria, Croatia, Macedonia, Romania and Serbia as unemployment went down between 2000 and 2008.  After the 2008 crisis, when unemployment rose again markedly, real wages stagnated. The same held for unit labor costs (ULC) which measure the average cost (not just wages) of labor per unit of output (see figure). If a skills shortage existed, then the market would reward skills by offering higher wages. 


Since the turn of the century, when this data series begins, there have been two clear periods. From 2000 to 2008 economic output grew – real GDP in the Balkans grew an average of about 6 percent between 2000 and 2008 – while labor costs rose even faster. The skills gap story would have made sense in 2008 when unemployment was relatively high, output growth was fast, and wages were growing even faster. But after, average real GDP growth was just below -0.5 percent, while ULCs continued to rise and real wages remained flat. On the optimistic side, positive growth is returning to the Balkans. On the pessimistic side, ULCs have to fall further (which likely means wages have to fall) before firms begin to hire. 

There is enough work in the Balkans and there are enough workers. The challenge is to convert the large amount of work into jobs. Unit labor costs are relatively high in the Balkans.  Governments can help by first shifting taxes from labor to consumption. This in turn would help the tradable sector which is not yet performing at its potential relative to non-tradables (including housing). Second, businesses need to be able to operate more easily. Even in the better-performing countries, companies complain about unnecessary red-tape and tedious processes to hire workers with flexible contracts including many international staff that are constraints by arduous visa requirements.

The clues indicate that the skills shortage hypothesis falls short and this has important implications for policy.  If you don’t fix the business environment and only invest in skills upgrading then next time you visit a Balkan capital you may be welcomed by cab drivers with a PhD in otherwise deteriorating economic environments.

 

 

Comments

Submitted by Chris Okonji on

yes, shifting the tax from labor will make labour as an input factor cheap and be demanded by the employer hence, reducing the unemployment, but then again shifting it to consumption has to be limited,because if the shifting is not controlled the tax burden will fall on the same people who are empolyed as a result of tax shift from labor. I totally agree with the shifting of tax from labor to consumption could help reduce the country's unemployment but should be controlled or monitored.

Submitted by Wolfgang on

Chris,

many thanks. Indeed, each tax policy measure needs to be carefully reviewed as they involve many trade-offs. If you lower taxes on labor in a country where the budget is mainly financed by these revenues you will create a whole in the budget (at least in the short-term). Compensating it by raising consumption taxes could also hurt a portion of the (urban) poor. However, many Countries in the Balkans (and also in other parts of Europe) are facing a strong imbalance where taxes on labor are just too high, especially for the lower skilled. This also explains why so few of them have a formal job. See this blog from Sebastian Eckardt and his colleagues who looked at this issued in-depth:
http://blogs.worldbank.org/futuredevelopment/can-tax-reforms-help-create-jobs

Submitted by Benny Johans on

Agreed. It's not only about skills or proper training, many people do not want to take up a job if the income tax slab is way beyond their expectations.

Submitted by Chris Okonji on

Thank you very much Mr.Wolfgang, I have actually learnt someting new which is very important. Many thanks.

Submitted by Wolfgang on

Many thanks Chris. This is what this blog aims to contribute to. Wolfgang

Submitted by Jasmina Ahmetbasic on

Dear Wolfgang, International organisations contributed to current Western Balkans economic situation by constantly changing diagnosis and subsequent "remedies". To my opinion diagnosis can be made only by insiders, who learned a lot from these diagnosis in the meantime, and confusion caused by millions of diagnosis and development models is becoming lower. You have to understand past and present context of these economies, which shouldn't have been treated like countries that never had certain level of development before transition, starting from zero. Your skills shortage questioning is correct, question is where are companies that can absorb, for example in Bosnia, more that 500.000 unemployed? Pushing for micro enterprises (one of popular "remedies") means that we need, some 250.000 micro enterprises (average SME in BiH has 2-3 employees). I know that the answer should be given by local governments, but developed countries should know better, right?
Best regards

Submitted by Wolfgang on

Dear Jasmina,

Thanks for your interesting comment. I agree that with you that sustainable development needs to be anchored in domestic efforts. International partners can only contribute, sometimes, modestly and align with domestic forces who want to advance their countries. Some of this thinking is also reflected in “Delivering Aid Differently” which Homi Kharas (another host of this blog) and I published.
However, successful economies are those that have integrated with the rest of the world and as such are also learning and adapting from other countries policies and business practices. One of these general lessons is that “people respond to incentives”. Countries need to create an environment in which private business can thrive. The rest (almost) comes automatically. Investing mainly in skill development when the private sector cannot absorb these skilled young people, we think, sets the wrong priorities.

Wolfgang

Submitted by Sylvia Misik on

I'll try to do the impossible and sit on two chairs (Jasmina's and Wolfgang's) at the same time.

Chair 1: I agree with Jasmina that aid policy is too often governed by fads, short-termism and donor agency requirements/cycles. Case in point: Macedonia, where app. half of all SMEs are in retail, so nothing much gets developed and produced. International aid organizations have undertaken measures to increase the purchase of domestic goods, that may have aided the SMEs, but these companies usually also import a lot. So the can with the difficult stuff gets kicked down the road.

Chair 2: I support your view, Wolfgang, that isolationism is not a good economic path to follow.

But: is shifting the tax burden to consumption without problems? I'd like to see more data on what kind of purchasing power, inequality, etc. the informal economy in the Balkan countries generates and if employees in this sector do even consider 'legalization' (in Macedonia many do not, but I don't know why)... Additionally, at least for SMEs: what about improved access to finance and better repayment terms - and less symbolic politics as regards active labour market measures, employed by local governments and condoned by international donors?

Regards, Sylvia

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