HUP: Earnings Will Grow at a Rate of 12 to 15 Percent, Faster than Inflation

The nominal gross salary for June (EUR 1,590) paid in July increased by 14.1 percent year-on-year, writes Hrvoje Stojić, HUP’s economist in the analysis ‘Focus of the Week’.

In the second quarter, the real growth of earnings significantly accelerated to five percent annually after only 1.4 percent in the first quarter. The average net salary (EUR 1,150) grew by 12.4 percent annually, also with an acceleration of real growth to 3.4 percent in the second quarter after stagnation in the first quarter.

Real improvements, writes Stojić, reflect stronger than expected activity in the service sectors, significant growth in the minimum wage (+12.2 percent), a slowdown in inflation alongside a still tight labor market, which exerts pressure on wage growth in deficit service sectors.

In the domestic labor market, a certain acceleration of economic activity is evident, especially regarding personal consumption. Moreover, current labor market data signal that the demand for workers will remain high, and the pressure on wage growth combined with the weakening of inflation supports the recovery of real wages, i.e., purchasing power, states the analysis.

– This year, we expect wage growth, i.e., total earnings of employees to increase by 12-15 percent, significantly above the expected inflation rate (7.5 percent) and an increasingly pronounced growth in the public sector alongside rising social transfers. We also expect employment growth of 2.7 percent thanks to stronger immigration and stronger economic activity – predicts Stojić.

Despite high inflation, in the first half of this year, Croatia leads the CEE region in real wage growth of nearly 3.5 percent, compared to an average decline in the region. The decline in real wages is acute in Hungary and the Czech Republic (-9 percent and -4 percent, respectively). The so-called outperformance of Croatia is based on real productivity growth per hour, which has exceeded the CEE region average for the first time in the last three years (2.7 percent compared to 1.8 percent).

In addition to the pressure on wage growth caused by the lack of quality labor, the main prerequisite for sustainable wage growth and their convergence to the EU average is stronger productivity growth through policies aimed at knowledge development, raising productivity levels (three times lower than in Germany), a more flexible labor market, and finally further tax relief for the labor market.

Moreover, further integration into global value chains of private non-financial companies positively affects productivity. This enhances the transfer of technology, managerial skills, and increased exposure to international competition motivates domestic companies to strengthen initiatives regarding their own productivity, concludes Stojić.