Moldova’s Labor Market: Prospects Improving? 

By Johan Mathisen 

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 changing 

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 

The combination 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 prospects improve.  

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.