Moldova’s Labor Market: Prospects Improving?
The ongoing labor
market restructuring has had a profound impact on Moldova. There has
been a large employment shift out of primarily agriculture, into more
productive sectors of the economy as well as other countries in the
region. The combination of higher productivity and low costs might
partly explain the recent surge in investments which contribute to and
speed up the labor transformation process.
The labor market is
Throughout the 1990s,
Moldova remained much more dependent on agriculture than other countries
in the region. Despite being the least productive, this sector took up
more than a quarter of the economy and employed more than 1 out of 2
workers. Since then agriculture’s share of the economy and employment
have fallen by more than half. The share of agriculture workers in the
labor force in Moldova is now about the same as in Romania.
Whereas many transition
countries in the 1990s saw an industrial restructuring and a shift away
from agriculture and into services, this process has only recently
started in Moldova. Since 2000, the agriculture sector has been marred
by a stagnant job turnover and sharply falling employment levels, while
the construction and service sectors have seen the opposite. The job
turnover in the industrial sector has increased sharply, probably
reflecting the recent shocks as well as the replacement of traditional
industries (many of which are in agriculture) with newer industries.
In contrast to many
other transition economies the transformation of the labor market, in
particular, some 400,000 jobs lost, mostly in agriculture (about a
quarter of the workforce), did not lead to persistently high
unemployment levels. The reason might be that the workers in traditional
sectors moved into other sectors of the economy (and indeed some 100,000
did), thereby depressing wage growth. Hence, monthly wages in Moldova
are now on average 240 dollars less than in neighboring countries—the
difference used to be about 60 dollars just a few years ago. Some of
those that could not find jobs in Moldova went abroad, while others left
the workforce altogether.
The labor market change
has led to large productivity gains, in almost all sectors of the
economy. The largest increases have come in agriculture, as output has
increased substantially despite the sharp drop in agriculture workers.
Compared to other countries in the region, Moldova has had the largest
increases in productivity, although absolute productivity is probably
still substantially below the European average.
And should bode well
for convergence to higher income levels
of the productivity gains and low costs might be one of the key reasons
for the recent surge in domestic and foreign investments.
Private investments have increased from less than 15 percent of GDP to
more than 25 percent of GDP, while annual FDI inflows have recently
increased to more than 500 million dollars from well below 100 million
dollars. These investments might help speed up the labor transformation
process, increase productivity, and in turn probably increase wages.
However, for this to be achieved, further improvements in the business
environment are essential.
The labor market
might begin to gradually tighten. As the overall structure of
the economy and labor market increasingly resembles other transition
countries, the “surplus” of workers might be increasingly exhausted. The
resulting labor market tightening might have already started as there is
anecdotal evidence of labor shortages in certain sectors and sporadic
attempts to attract Moldovans working aboard. However, while some
sectoral labor shortage may occur as new industries develop, any
tightening of the labor market will most likely be gradual as there
might still be a lot of people willing to enter the workforce if job
These trends will help
speed up the convergence process (so as to faster reach European living
standards). But whether they do occur, surely depends on improving the
business environment to attract the necessary investments, ensure
legislation supports labor flexibility between sectors as well as
maintaining a close link between salary and productivity increases.
The author is the Resident Representative of the
International Monetary Fund in Moldova.