Recently, we learned that last year’s and this year’s strong wage growth is grounded in labor productivity. Namely, Croatia achieved an unusually strong real growth in productivity per hour worked of 11.7 percent in 2021 and 3.7 percent in 2022, which is again the result of greater investments in the efficiency of the real sector and better management.
Considering the real growth of total employee earnings of 8.4 percent in 2021 and a decline of -0.9 percent in 2022, as well as the expected real growth in productivity in the coming years at a rate of up to three percent, it is evident that the economy can withstand a stronger real wage growth before it becomes inflationary, contrary to some popular comments in the media, emphasizes Hrvoje Stojić, chief economist of HUP in the new Focus of the week.
Moreover, Croatia last year, at the level of a three-year average (2020-2022), achieved for the first time since its independence (after 1995) a faster growth in productivity (+2.7 percent) compared to the CEE group of countries (+1.8 percent). The real growth in productivity is also two percentage points above the euro area average (0.7 percent).
The strong real growth in productivity coincided with a strong growth in the export of goods and services in 2021 and 2022 of 36 percent and 25 percent, respectively, which further confirms the growth in the competitiveness of the economy due to increased integration into global value chains prior to joining the euro area.
In light of the above, material tax relief on labor would further strengthen the competitive position of Croatian companies. Due to one of the lowest activity and employment rates, Croatia should also opt for bolder reductions in the tax burden compared to the reference averages of EU member states or CEE region countries, according to OECD recommendations for creating sustainable and quality jobs.
In the baseline scenario, in this decade, Croatia has a great opportunity to significantly increase the average GDP growth rate to around three percent, which is double the average of the last 20 years. To this end, productivity needs to be raised with the help of active labor market policies, increasing investments in research and development, accelerating digital and green transitions, further integrating into global value chains, and reforms in education and justice, states the analysis signed by Stojić.
