Wage Growth is the Main Fuel of Inflation, and it Will Continue as Employers Have No Choice
Author: Gordana Gelenčer
May 10, 2023
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HUP estimates that wages will grow by about eight percent or slightly more this year
Most companies have below-average productivity that wage growth can further undermine
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Further wage growth remains the key fuel of inflation in Croatia. It is so serious that the vice-governor of HNB, Michael Faulend, recently had to publicly appeal to employers to refrain from further increases. However, the trend and direction of wages at this moment are not dictated by employers but by the labor market and the huge shortage of workers of almost all profiles, which cannot be filled even by around 200,000 foreign workers who will enter Croatia this year (last year, 124,000 were employed, so that number is also increasing).
The likelihood that wage growth will not stop is confirmed by domestic companies that carefully weigh all numbers and indicators. Thus, Mojca Domiter, Executive Director of Human Resources and Culture at Atlantic, says that the compensation approach in Atlantic Group is based on the cost of labor as a fundamental principle, and the basis for this is the systematization of jobs (internal compliance and basis for comparison with the external market, data on reference values of external compensation, and the performance management process that values individual and team contributions as well as company success).
– We regularly monitor the situation in our markets regarding the competitiveness of the conditions we provide and respond promptly. Since we care about our employees, during 2022 we also had significant wage corrections in an effort to respond to inflationary movements in the markets. On average, we can talk about an increase of 12 percent, and corrections have covered almost 75 percent of our employees. In the budget for 2023, we have also planned additional investments through wage increases for almost 50 percent of employees, on average of six percent. Keeping in mind that further unlimited increases in wage bases are not sustainable in the long term, we have additionally focused on improving the conditions of our employees by increasing material rights through increased one-time cash payments such as Easter bonuses, vacation pay, and similar, as well as through increased allowances for hot meals and local transport. Also, in the case of exceptional business achievements, we share success with our employees through additional reward payments. The basis of our reward system remains the assessment of the performance of the company, the team, as well as each employee because it is in our interest to have stable growth and long-term sustainable business, which is based on satisfied employees – explains Domiter.
A similar trend is seen in Tim Kabel. The company’s CEO Ivan Topčić says they are trying to act responsibly given the high inflation over the past year. – A thousand euros today and a year ago are not worth the same. Aware of this situation, we take care to reduce the significant impact of inflation on our employees. Thus, in the last six months, from October 2022 to March 2023, we paid 18.7 percent higher wages than six months earlier (June 2022 – September 2022). It is important for us to monitor the movement of price increases and the cost of living, which have been significant in recent years, and we strive to compensate for this by increasing wages.
Interestingly, in 2022, compared to 2021, we achieved 36 percent higher revenue, but 16 percent lower net profit. This means we had to work harder for less profit. We do not complain, as we invested a large part of that difference in employee wages. We want to build an organization where employees and their families feel good and for Tim Kabel to become a desirable place to work. Our wages have long been more than 50 percent higher than the average in Croatia. We will always show through our employees’ wages that we value and respect the work, loyalty, and dedication of our employees, and we ask the state to support us in this and contribute to the well-being of all citizens with its measures. I believe that we in the private sector are leading in this competition, and the state has much room to show itself – says Topčić.
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Ivan Topčić
photo Ratko Mavar
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Real wage growth continues
Clearly, companies will not have too many choices if they want to maintain business at the same level. The question is only how much more wage mass increases can the profit margin bear, but also all other indicators of the company’s performance. Therefore, it is important to listen to estimates of macroeconomic movements.
Hrvoje Stojić, chief economist of HUP, says that wages, according to estimates made a few weeks ago, should grow by about eight percent or slightly more this year.
– Therefore, expectations are that this growth will be somewhat higher given that we know the labor market is still in a tense state. The shortage of labor is acute in some sectors, and we are still facing the consequences of emigration, so the labor market will remain very tense for the foreseeable future – estimates Stojić, adding that compared to last year, when Croatia recorded a decline in real wages, we started this year with real wage growth.
According to the latest data, it has exceeded two percent, which is on the other hand good news for the growth of personal consumption, consequently for the overall GDP growth this year. – What we always advocate in HUP is the need for wage growth in the long term and at the average level to correspond to the productivity of the overall economy. If productivity can be raised, then it will naturally spill over into freer wage increases for employees. However, as we know, the situation is never average, so there are companies that manage to achieve a higher level of productivity, which are more profitable, and they are in a position to raise wages more easily and without worry – explains Stojić, clarifying that most companies are still below average productivity, which wage growth can further undermine.
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Hrvoje Stojić
photo Ratko Mavar
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As this game of wage growth and inflation plays out at the EU level, the European Central Bank continues to raise key interest rates. Hence the reaction of our vice-governor. – When we talk about comments from central bankers, what was meant is that it is not good in these inflationary conditions to resort to various indexations. I am talking about the wage mass in the public sector, that is, about that part of wages that is collectively negotiated. Therefore, these warnings refer to an appeal to the state not to resort to mass indexations that have no basis in productivity and efficiency, along with the absence of any reasonable systematization that rewards those who know how to work and raise overall productivity – adds Faulend.
Stojić emphasizes that all employers who have resorted to investments to maintain revenue growth and wage continuity should not worry about the European Central Bank’s decision to continue raising interest rates due to inflation and accelerated wage growth. – The situation in the medium term will be approximately equal to the difference between the average wage growth and productivity. For example, if you have wage growth at a level of about four percent, and the long-term productivity growth rate in the euro area has been around one percent for years, then inflation will be above the central bank’s target of two percent. In other words, this means that the ECB needs to continue raising interest rates – explains Stojić.
What the bank has just done, raising key rates for the seventh time by an additional 0.25 percentage points. How this will affect investment lending and wage levels, no one currently wants to predict.
