Tag: Policy Research Georgia

This policy paper examines Georgia’s economic growth and labor market developments between 2017 and 2023, with a focus on structural transformation and income distribution. While growth has been strong and absolute poverty has declined, challenges remain in labor reallocation, wage inequality, and regional disparities. Redistribution mechanisms, particularly social transfers, have played an important role in mitigating poverty; however, the pace of inclusive structural change has been limited. Key policy priorities include fostering productivity growth, expanding employment opportunities, and addressing inequality through targeted labor market and social policies.

Georgia’s Economic Rebound: Growth Beyond Recovery or Superficial Expansion?

In recent years, Georgia’s economy has demonstrated remarkable resilience and dynamism. Following a sharp contraction of real GDP by approximately 6.8 percent in 2020 due to the Covid-19 pandemic, the economy rebounded strongly, posting a growth rate exceeding 10 percent in 2021. This robust performance was maintained also in 2022 and 2023. The recovery was among the fastest in the region, fueled by a combination of strong private consumption, booming external demand, and exceptional inflows of remittances and capital.

According to national accounts data, output in 2023 not only recovered the losses sustained during the pandemic but significantly surpassed pre-pandemic levels. Georgia’s real GDP is on a trajectory above its previous trend, with potential output estimates also being revised upward (see Figure 1). Potential output — the level of economic activity the country can sustain without triggering inflation — is not directly observable and was estimated using a statistical technique known as the Kalman filter. This method uses historical GDP data and economic patterns to produce a smooth estimate of potential output over time, allowing policymakers to assess the gap between actual and sustainable growth. The economy’s output gap, which turned sharply negative during the pandemic, gradually closed by 2022 and moved into slightly positive territory by 2023, indicating that output had surpassed its estimated potential level as the recovery matured.

Figure 1. Output Growth, Output Gap, and Potential Output in Georgia

Source: Geostat. Author’s calculations.

Georgia’s recent economic growth is largely propelled by geopolitical factors linked to the Russo-Ukraine war. The sharp increase in remittance inflows from Russia — which soared by 403 percent to $2.1 billion in 2022 — provided a major boost to domestic consumption. At the same time, the relocation of capital, businesses, and skilled individuals intensified, with over 30,000 Russian-owned firms registered and nearly 115,000 Russian migrants arriving between 2022 and 2023, significantly stimulating investment and labor market activity. In addition, the rapid expansion of re-exports — particularly of motor vehicles and machinery — further accelerated external trade, with re-exports to Russia, Armenia, Kazakhstan, and Kyrgyzstan rising 6.6 times in 2024 compared to 2019, which strengthened the logistics and transport sectors.At the same time, substantial fiscal stimulus during the pandemic years, followed by a gradual normalization of fiscal policy, helped support aggregate demand without triggering immediate macroeconomic instability. Monetary policy remained broadly accommodative, while inflationary pressures — although pronounced — were largely kept under control relative to peer economies.

Despite these positive developments, the underlying composition of growth raises important questions. High headline growth figures do not automatically translate into widespread improvements in living standards or reductions in inequality. Growth that is driven by consumption booms, remittance surges, or temporary trade redirection may lack the deep, productivity-enhancing underpinnings necessary for long-term sustainability. Without broad-based sectoral upgrading and inclusive labor market outcomes, there is a risk that economic expansion will remain concentrated in a few dynamic sectors while leaving large parts of the population behind.

Moreover, the post-pandemic growth episode coincided with rising concerns about external vulnerabilities, including Georgia’s dependence on remittances (17.5 and 13.5 percent of GDP in 2022 and 2023, respectively (NBG, Geostat)) and commodity prices, as well as regional political risks. If these external drivers were to weaken, maintaining high growth rates without deeper structural changes could become increasingly difficult.

Therefore, while Georgia’s recent economic record is impressive by regional standards, it is crucial to assess whether this growth has been accompanied by meaningful structural transformation — namely, a reallocation of labor from low to high-productivity sectors, rising labor incomes, and reduced inequality. A deeper analysis of sectoral dynamics and employment patterns is required to determine whether Georgia’s economy is evolving toward a more inclusive and sustainable growth model.

Structural Shifts of the Economy: Progress Without Transformation?

The structural transformation of Georgia’s economy between 2017 and 2023 (see Figure 2) reveals both encouraging and concerning trends. The analytical framework used to assess structural transformation in Georgia between 2017 and 2023 draws on the methodology developed by McMillan and Rodrik (2011). This influential study emphasizes the role of labor reallocation across sectors as a key driver of aggregate productivity growth in developing and transition economies.

The analysis of the change in sectoral employment shares against relative sectoral productivity shows that, broadly speaking, labor reallocation has followed a growth-enhancing direction. The fitted trend line across sectors exhibits a positive slope, suggesting that workers have been moving, though slowly, away from low-productivity sectors and toward relatively higher-productivity activities. However, the shallow gradient of the trend line indicates that the pace and quality of this transformation have been modest. The most significant dynamic during this period is the continued exit of labor from agriculture. Agriculture remains a highly unproductive sector, with a large share of labor in subsistence agriculture, and experienced a substantial decline in its employment share—a positive signal for economic modernization. Nevertheless, much of the displaced labor appears to have been absorbed by mid-productivity services such as construction, retail trade (wholesale and retail trade; repair of motor vehicles and motorcycles), accommodation and food service activities, and transportation. These sectors have seen rising employment shares but remain relatively close to or below the economy-wide average in terms of labor productivity. Consequently, while labor mobility is evident, the migration has largely been into sectors that do not substantially enhance overall economic efficiency.

Figure 2. Structural Transformation and Productivity Alignment in Georgia, 2017–2023

Source: Geostat. Author’s calculations. Note: Each bubble represents a sector, with its position determined by the change in its employment share (horizontal axis) and its relative productivity level (vertical axis). Bubble size corresponds to the sector’s share of total employment in 2017. The positive slope of the fitted trend line indicates modest progress in reallocating labor toward more productive activities, although the shift remains shallow and incomplete.

In contrast, high-productivity sectors, notably information and communication, financial and insurance activities, and real estate, have exhibited strong relative productivity but absorbed very limited shares of the labor force. These findings point to persistent barriers in accessing higher-value employment opportunities, likely stemming from skill mismatches, limited educational attainment, and structural rigidities in the labor market.

Public administration, education, and health — traditionally labor-intensive sectors — have maintained relatively large shares of employment while operating below average productivity levels, reflecting a lack of dynamism in these essential public service areas.

Overall, the observed pattern suggests that Georgia’s recent economic growth has been accompanied by low-quality structural transformation. Although there has been a reallocation of labor from extremely low-productive sectors, the transition has not been sufficient to significantly lift aggregate productivity or to broaden access to high-wage, high-skill employment.

These trends underscore the critical need for policy interventions aimed at improving the quality of labor mobility. Investment in education and vocational training to match labor supply with demand in high-productivity sectors is essential. Moreover, facilitating entrepreneurship, promoting innovation in services and manufacturing, and supporting labor market flexibility could help ensure that future structural changes generate more inclusive and sustainable economic growth.

Labor Market Dynamics: Recovery in Numbers, Challenges in Structure

Following the period of sectoral shifts and structural transformation outlined above, it is equally important to examine how the Georgian labor market has evolved in recent years. Labor market dynamics provide critical insight into the inclusiveness and sustainability of economic growth. Between 2017 and 2023, the number of employed individuals exhibited a general upward trajectory, particularly after the sharp decline during the Covid-19 pandemic in 2020 (see Figure 3). Employment numbers, which fell significantly in 2020 and 2021, recovered steadily in the following years, reaching approximately 1.33 million in 2023. Preliminary assessments suggest that this recovery is expected to continue into 2024, further consolidating the labor market’s post-pandemic rebound.

Figure 3. Employment and Unemployment Trends in Georgia

Source: Geostat. Author’s calculations.

This recovery has been accompanied by notable improvements in Georgia’s wage dynamics. After a period of stagnation in nominal and real wages between 2018 and 2020, the economy experienced a sharp acceleration in wage growth, beginning in 2021. Average nominal wages rose rapidly, while real wage growth, which accounts for inflation, also turned positive after years of stagnation (see Figure 4). These wage dynamics indicate that the labor market tightening contributed to upward pressure on wages, suggesting better bargaining conditions for workers in certain sectors.

Figure 4. Nominal and Real Wage Dynamics in Georgia

Source: Geostat. Author’s calculations.

At the same time, unemployment rates declined significantly. The unemployment rate, which had hovered between 17 and 20 percent prior to the pandemic, began a gradual downward trend from 2021 and onwards, falling to approximately 14 percent by 2023 (see Figure 3). This suggests that job creation in the recovery phase was relatively strong. However, the persistently high levels of unemployment earlier in the period underscore structural issues that remain unresolved.

Nevertheless, despite these positive headline trends, several deeper challenges persist within Georgia’s labor market. Employment growth has been concentrated primarily in low- and mid-productivity service sectors, as indicated previously. Informality remains high, particularly in agriculture and small-scale services, and labor underutilization (32.1 percent) — including underemployment and discouraged workers— continues to affect a significant segment of the workforce.

Moreover, the share of labor income relative to GDP provides important additional context (see Figure 5). As shown in Figure 5, the wage share of GDP fluctuated throughout the period, declining during the pandemic years and rebounding sharply in 2023. While this recovery is promising, it may however partially reflect inflationary effects or nominal wage adjustments rather than deep, productivity-driven gains.

Figure 5. Share of Wages in GDP and Economic Growth

Source: Geostat. Author’s calculations.

Taken together, recent labor market developments in Georgia reflect a cyclical recovery reinforced by external demand and domestic consumption. Yet, the underlying structure of employment, informality, and the relatively slow reallocation of labor into high-productivity sectors suggest that the labor market’s transformation remains incomplete. Sustainable improvements in labor incomes and employment quality will require addressing skills mismatches, boosting formal sector job creation, and ensuring that future growth translates into widely shared labor market opportunities.

Despite the improvements in employment and wage dynamics, it remains critical to assess whether these labor market gains have translated into broader improvements in income distribution and living standards. Strong aggregate indicators do not necessarily imply that growth has been inclusive or that inequality has diminished. The following section examines how the distribution of income has evolved in recent years, focusing on wage structures, inequality measures, and the extent to which economic growth has been shared across different segments of the population.

Income Inequality and Distributional Shifts: A Fragile Middle and Growing Extremes

Following the developments observed in the labor market, it is crucial to assess how economic growth and labor dynamics have translated into income distribution outcomes. Understanding the evolution of income inequality provides deeper insight into whether the benefits of growth have been broadly shared or have remained concentrated.

Wage income distribution patterns between 2017 and 2023 show a complex trajectory. The wage distribution curve (see Figure 6) reveals that while average earnings have increased over time, the overall shape of the distribution has also evolved significantly. The peak of the distribution has become sharper and shifted toward higher income brackets, particularly around the 1200–2400 GEL range. However, the right-hand tail of the distribution has simultaneously elongated, suggesting the emergence of a relatively small group of very high-income earners.

Figure 6. Wage Income Distribution Curves, 2017–2023

Source: RevenueServices. Author’s calculations.

This dual movement — a general upward shift combined with increasing dispersion — is captured through key statistical measures:

First, the standard deviation of incomes, which reflects the average distance of individual incomes from the mean, increased notably (57 percent) between 2017 and 2023. An increasing standard deviation indicates that income differences within the population have become more pronounced, with greater dispersion around the average wage. In simple terms, not only are people earning more on average, but the spread between low and high earners has widened substantially.

Second, the changes in skewness and kurtosis provide further depth to this picture. Skewness measures the asymmetry of the income distribution. In 2017, the distribution had a skewness of about 1.74, indicating a moderate right-skew, with income values concentrated around the lower and middle ranges and a gradual tapering toward higher incomes. By 2023, skewness had increased to 3.81, suggesting that the income distribution has become much more asymmetrical. A few individuals or households are earning disproportionately high incomes compared to the rest of the population. The visible downward shift in the 2023 wage distribution curve at the lower income ranges likely reflects two reinforcing trends. First, persistent inflation during the post-pandemic recovery years eroded the real value of wages, effectively pushing nominal incomes upward and compressing the lower tail of the distribution. Many workers who previously occupied the lowest wage brackets may have moved into higher nominal categories without corresponding improvements in purchasing power (average real wages declined until 2021, after which they began to recover, rebounding steadily through 2023 following the Covid-19 shock (See Figure 4)). Second, due to low rate of job creation, Georgia has experienced a high rate of labor emigration in recent years, especially to the EU and the U.S., particularly among low-skilled workers. This outflow of labor likely reduced the number of individuals earning wages in the lowest income ranges, further contributing to the observed contraction of the left side of the distribution curve. Together, these factors help explain why the red curve in 2023 dips below previous years in the lowest wage intervals.

Kurtosis, meanwhile, captures the “tailedness“ or the concentration of extreme outcomes. Georgia’s wage distribution moved from a kurtosis of about 5.16 in 2017 to 15.75 in 2023. Higher kurtosis indicates that extreme deviations (very low or very high incomes) have become more common relative to a normal distribution. In Georgia’s case, it points to an increasingly peaked distribution with fat tails: most people are concentrated around a modal income, but extreme earnings at the high end have become more significant.

In parallel, the Lorenz curves for 2017 and 2023 (see Figure 7) offer a graphical representation of these dynamics. The curve for 2023 lies slightly closer to the line of equality than that of 2017, reflecting a marginal improvement in income equality in the early part of the period. However, the difference is modest, and the curve’s arched shape hints at a persistent structural inequality. It should be mentioned that the calculations are based on household expenditures and therefore reflect the redistributive effects of government fiscal policy on income inequality. The Gini index, a summary statistic derived from the Lorenz curve, plots the cumulative share of income held by cumulative shares of the population. It measures income inequality on a scale from 0 (perfect equality) to 1 (perfect inequality) and thus provides a concise way to track changes in distributional dynamics over time.

In the case of Georgia, the index supports the discussion regarding the Lorenz curve. Between 2017 and 2021, the Gini index declined from 0.3711 to 0.3090, suggesting a reduction in income inequality during these years, likely influenced by pandemic-driven wage compression, social transfers, and temporary labor market adjustments. However, from 2021 onwards, inequality began creeping upward again, reaching 0.3271 in 2023. This suggests that the initial equalizing effects of crisis responses were short-lived and that structural disparities in income distribution have reasserted themselves as the economy recovered.

Figure 7. Lorenz Curves (2017 and 2023 comparison)

Source: Geostat. Author’s Calculations.

Together, these metrics paint a coherent picture: the Georgian economy experienced nominal wage growth and a partial strengthening of middle-income segments during the recovery phase, however, this was accompanied by greater income dispersion, higher asymmetry (favoring high-income earners), and an increased concentration of wealth at the very top.

Thus, although the average worker is better off in absolute terms compared to 2017, the relative disparities within the labor force have widened, especially after 2021. Growth has been unevenly distributed, increasingly favoring highly skilled, capital-intensive, or well-connected sectors and workers.

Poverty trends during 2017–2023 (see Figure 8) add an important additional dimension to the analysis of income distribution. Over this period, Georgia achieved a substantial reduction in absolute poverty, with the share of the population unable to meet basic consumption needs falling from 21.9 percent in 2017 to 11.8 percent in 2023. This sharp decline reflects real improvements in living standards for a significant portion of the population and indicates that economic growth, combined with social policy interventions, had a meaningful impact in alleviating extreme deprivation. However, developments in relative poverty tell a more nuanced story.

Relative poverty, which measures economic disadvantage in relation to the median income, declined only modestly from 22.3 percent to 19.8 percent over the same period. The persistence of relative poverty, despite improvements in absolute poverty, suggests that while more people were able to meet basic needs, the income distance between lower-income households and the median population did not significantly narrow. This implies that, although economic growth has lifted many out of extreme poverty, underlying income inequality has remained largely intact. Crucially, redistribution plays a central role in shaping these poverty outcomes. Although Georgia’s tax system is largely regressive and heavily reliant on indirect taxes, fiscal transfers — particularly the old-age pension — play a powerful equalizing role. The pension system alone is estimated to reduce the national poverty rate by up to 18 percentage points, highlighting the critical role of targeted redistribution in mitigating deprivation. These fiscal tools are especially important in the absence of highly progressive taxation, and they help explain why absolute poverty declined so markedly despite ongoing structural labor market weaknesses. At the same time, the relatively limited change in relative poverty underlines the limits of redistribution in addressing inequality in the absence of more inclusive labor market outcomes and equitable income growth.

Figure 8. Evolution of Absolute and Relative Poverty Rates in Georgia, 2017–2023

Source: RevenueServices. Author’s calculations.

An important part of the labor market story is the role of public employment initiatives, particularly those targeting the labor market. While government employment programs have had a visible impact on official labor statistics (see Figure 9), particularly in peripheral regions, a closer examination reveals critical concerns regarding the quality and sustainability of the jobs created. Many of the positions facilitated through this program are characterized by very low wages, limited or no skills development opportunities, and lack of formal career advancement paths. Rather than serving as a bridge to stable, productive employment, these jobs often appear to fulfill administrative or social functions, providing basic income support without contributing meaningfully to workers’ long-term economic mobility.

Figure 9. Share of Social Service Agency (SSA) Program Employment in Total Regional Employment (2023)

Source: Social Service Agency, Geostat, Author’s Calculations. Note: Bars represent regions in Georgia.

Moreover, there is evidence that the expansion of employment facilitated by the government program has, in some regions, been used as a tool for political management, particularly at the municipal level. By creating a network of publicly funded low-skill jobs tied to local government structures, employment program may inadvertently reinforce patronage systems and political dependence, particularly around electoral cycles.

This raises important concerns about the role of public employment programs in structural transformation. While temporary income support can be vital for vulnerable populations, overreliance on low-productivity public sector jobs can entrench regional stagnation and undermine incentives for private sector dynamism. For employment programs to contribute positively to structural transformation, it is essential that they be reoriented toward genuine skills development, pathways into productive sectors, and integration with broader labor market activation strategies.

Taken together, these trends suggest that while Georgia’s economic growth has lifted many individuals out of absolute poverty and improved average incomes, it has also led to greater wage dispersion, increasing concentration of incomes at the top end, and significant concerns about the depth and quality of labor market transformations. Without deliberate policy efforts to promote inclusive structural change, Georgia risks entrenching a dualistic economy, where prosperity coexists with persistent inequality and regional marginalization.

Conclusion and Policy Recommendations

In light of the findings discussed above, a set of targeted policy actions is proposed to foster a more inclusive, sustainable, and equitable economic transformation in Georgia. These recommendations aim to address the structural weaknesses identified in the labor market, income distribution, and regional economic development, ensuring that future growth benefits a broader cross-section of the population.

The findings of this policy paper highlight the need for a more deliberate approach to structural transformation in Georgia. While recent economic growth has been strong, labor reallocation toward high-productivity sectors remains incomplete, income distribution dynamics point to persistent inequalities, and improvements in living standards have not been evenly shared. To ensure that growth translates into broad-based prosperity, the following policy actions are recommended:

Georgia must accelerate the movement of labor from low-productivity sectors, particularly agriculture and informal services, into higher-productivity activities. Policymakers should prioritize sectoral strategies that support emerging dynamic industries — such as ICT, logistics, manufacturing, and modern services — while also upgrading traditional sectors like agriculture and tourism to enhance productivity and employment absorption.

Addressing skill mismatches is essential to enable labor mobility toward productive sectors. Investment in vocational education, digital skills training, and sector-specific workforce programs must be intensified, especially targeting young people, rural workers, and displaced labor from declining industries.

While public employment programs can play a stabilization role, the primary engine of sustainable job creation must be the private sector. Georgia should focus on creating an enabling environment for small and medium sized enterprises, supporting entrepreneurship, streamlining business regulations, and improving access to finance, especially outside of the capital Tbilisi.

Reducing regional disparities is critical for equitable growth. Targeted infrastructure investment, decentralized support for business development, and place-based labor market policies are needed to ensure that structural transformation benefits all regions, not only urban centers.

Promoting formal labor relations through fiscal incentives, simplified compliance procedures, and stronger enforcement can raise job quality and income security. At the same time, reinforcing social protection systems can mitigate inequality without discouraging labor market participation, helping to build a more resilient workforce.

Ongoing reforms must be informed by robust, high-frequency data. Strengthening labor market information systems, expanding coverage of income and employment surveys, and integrating administrative data into policymaking will enhance the government’s ability to monitor progress on structural transformation and distributional outcomes.

References

• McMillan, M. S., & Rodrik, D. (2011). Globalization, structural change and productivity growth. NBER Working Paper No. 17143. National Bureau of Economic Research.

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