- Income growth in Bulgaria outpaces labor productivity by far, signaling the end of the low-cost labor model.
- The country needs an alternative but has to do more to attract a different type of investor.
- Government policies-particularly in the public sector and minimum wage regulations-are further distorting the labor market.
The faster increase in labour income compared to productivity, is accelerating the decline of Bulgaria's low-cost labor model, which the country has relied on for years to attract investors. A viable alternative has yet to emerge. While labor costs in Bulgaria remain the lowest in the EU, their advantage is diminishing due to a shrinking workforce, rapidly rising wages post-pandemic, and particularly the sharp increase in the minimum wage set by the government.
"We don't employ workers on minimum wage, but as it rises, we're forced to increase wages across the board. From October 1st, we raised salaries by 10% for operators and 7-10% for other roles," a manager in the automotive industry tells the Capital Weekly. He warned that the new mechanism for setting the minimum wage creates a vicious cycle-higher minimum wages push up the average wage, which in turn raises the minimum further. "This can't continue indefinitely; eventually, investors will pull out," he added.
Rising wages, while positive for workers, are putting pressure on businesses. Costs are growing, but productivity and efficiency lag behind. The local business environment is also failing to attract higher-productivity investments. On the contrary, Bulgaria faces its seventh consecutive general election in less than four years and an increasingly populist parliament. Finance Minister Lyudmila Petkova has warned of a risk of potential loss of fiscal discipline, as the 2025 budget deficit could exceed the allowable 3% limit, driven by sharp rises in public sector wages, pensions, and social spending, which may necessitate unpopular measures, including potential tax hikes post-election.
That said, Bulgaria appears to be falling into the 'middle-income trap.' Its current growth model is losing steam, while long-standing issues such as an inefficient judiciary, corruption, and captured institutions prevent a transition to a more sustainable economic model. As a result, businesses relying on cheap labor may exit the country, while those requiring skilled labor and offering higher wages may avoid investing altogether.
Moreover, professionals such as lawyers, accountants, and economists prefer the public sector, where working hours are fixed and responsibilities are lighter.
Wage trends and challenges
Wages in Bulgaria have been growing rapidly, with double-digit increases since 2019. As of mid-2024, the average gross salary has approached 2,300 levs (nearly 1,175 euro), doubling since 2018. The increase has been driven by high inflation, the ensuing rise in living costs, and a tight labor market.
"The competition among employers is fierce, and workers are well aware of their own value," Maria Stoeva, CEO of organizational development and business excellence company SISTEMMA, tells the Capital Weekly. "This gives them leverage to demand more, and if their employer doesn't comply, they can find another who will," she adds.
Bulgaria's unemployment rate is one of the lowest in Europe, while the country's employment levels are similar to those in Central and Western Europe, exacerbating labor shortages. Contrary to concerns, this shortage has made the Bulgarian economy more competitive, driving wages higher.
However, businesses are feeling the impact. Between 2021 and 2024, hourly labor costs in manufacturing, construction, and services rose by 55%-the second-highest rate of increase in the EU, after Hungary. The EU average was 16.5%.
One electronics manufacturer told the Capital Weekly that labor costs, particularly for unskilled workers, are becoming prohibitive. Skilled labor is even harder to find, and regions in Bulgaria are losing competitiveness. In the Czech Republic, wages for the same roles are now lower. Factoring in additional costs like transport and energy, investors see diminishing returns or even losses.
Particularly strained are companies within the global supply chains of Europe's struggling automotive industry. Wage hikes often do not reflect improved productivity. According to Ralitsa Ganeva, associate professor of labor economics and lecturer at the Faculty of Economics at Sofia University, productivity growth significantly lags behind wage increases. From 2021 to 2023, labor costs per hour worked increased by nearly 22%, while productivity grew by just 5.3%.
In modern economies, productivity is driven to a larger extent by skill enhancement than by working longer hours. However, productivity largely depends on employers investing in physical capital, innovation, and labor organization-areas where Bulgaria consistently ranks among the laggards in the EU.
Government intervention complicates the issue
Experts agree that wage increases determined by market competition are not problematic. However, when the government intervenes, which was the case with the recent hikes of the minimum wage, it distorts the labor market. In 2024, the minimum wage increased by nearly 20% to 933 levs ( 475 euro), and a further 15.4% rise is expected in 2025.
The impact is felt most by companies relying on low-skilled labor. This year, Leoni Bulgaria and SE Bordnetze announced that they will close down their factories located in Pleven and Mezdra, respectively, moving production to countries with cheaper labor and leaving 2,500 people in Bulgaria jobless. These cases highlight the negative effects of state-mandated increases of minimum wage without economic justification.
Higher minimum wages also create upward pressure on wages for skilled workers, who may feel undervalued when wage gaps shrink. As Margarita Stoichkova, CEO of the component manufacturing company Bulde, explains, "People either become demotivated or seek higher pay." Consequently, employers face increasing pressure to raise wages across the board. The formula pegging minimum wage to average wage leads to automatic increases, pushing both up simultaneously.
A shifting landscape
Bulgaria can no longer rely on cheap labor to attract investment. While this isn't necessarily negative-cheap labor is a temporary advantage for developing economies-it signals that Bulgaria's labor-driven growth model has run its course. "The goal of the low-wage advantage is for it to disappear eventually," comments Petar Ganev of the Institute for Market Economics in Sofia.
The exit of labor-intensive investors is inevitable, replaced by higher-skilled, higher-value activities. This process has been ongoing for 15 years and is likely to continue. However, a sudden exodus due to sharp wage increases could harm workers lacking sufficient amount of adequate qualifications.
Additionally, poor infrastructure, stalled projects, and weak technological development hinder progress. Investors focus on key indicators-PISA scores, patents, and the share of high-tech exports-on which Bulgaria lags. As a result, companies often prefer Romania, Croatia, or Greece, where conditions are more favorable.
Bulgaria also lacks a robust investment promotion policy, such as ready industrial sites and mechanisms to support training and skills development for employees. Trust in public institutions and the judicial system remains low, deterring potential investors.
Businesses accustomed to low wages must adapt to the new reality. Doing so, however, may prove challenging without significant improvements in infrastructure, education, and governance.
- Income growth in Bulgaria outpaces labor productivity by far, signaling the end of the low-cost labor model.
- The country needs an alternative but has to do more to attract a different type of investor.
- Government policies-particularly in the public sector and minimum wage regulations-are further distorting the labor market.
The faster increase in labour income compared to productivity, is accelerating the decline of Bulgaria's low-cost labor model, which the country has relied on for years to attract investors. A viable alternative has yet to emerge. While labor costs in Bulgaria remain the lowest in the EU, their advantage is diminishing due to a shrinking workforce, rapidly rising wages post-pandemic, and particularly the sharp increase in the minimum wage set by the government.
