Solid economic activity, a tense situation in the labor market, an explosion of wage mass in the budget, and a 20 percent increase in the minimum wage are the ingredients that will inevitably lead to new high wage growth in 2024.
After this year’s double-digit income growth, estimated by the Croatian Employers’ Association at 15 to 18 percent, the wage growth spiral will continue into the coming year.
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—In 2024, we expect an average employment growth of 1.5 percent, which, thanks to solid economic activity, is still significantly above the average employment growth of 0.4 percent in the European Union, which is expected next year. Our nominal wage growth forecast for 2024 is 8.5 percent, but considering the possibility of average growth of non-taxable income significantly above 20 percent, the growth of total employee income could exceed 12 percent. Despite inflation higher than the average in the euro area, Croatia will achieve its second consecutive year of strong real growth in gross wages in 2024, leading in the CEE region and at the EU level – presented forecasts Hrvoje Stojić, chief economist of the Croatian Employers’ Association.
Entrepreneurs in a Squeeze
However, strong real wage growth along with accelerated convergence of low service prices raises the risk of a wage-price spiral, which could complicate the establishment of price stability in the economy. In addition to pressures from the real and public sectors, nominal wage growth is also favored by the mismatch between supply and demand in the labor market, i.e., a shortage of labor in certain sectors. All of the above will result in persistent inflation, which will also be higher than the EU average in Croatia next year.
How much workers’ demands for raises will translate into price increases for services and products, and how much will be absorbed by reduced company profits, will depend on numerous factors. Primarily on which sector a particular company operates in, its market position, and the situation in the market,
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—We are in a squeeze where, due to still high inflation, citizens’ purchasing power is falling, the pressure on employees to increase wages is rising, and on the other hand, there are pressures from other rising input costs, so companies have no choice but to compensate part with lower profits and part by increasing output prices. The strength of the pressures will also determine the increase in output prices in the next period – explained Dragutin Kamenski, owner of the construction company Kamgrad, who expects that the trends of this year – employment growth and a decrease in unemployment, as well as additional growth in the employment of foreign workers – will continue in 2024.
Kamgrad currently employs just over 350 foreign workers, or 40 percent of the total number of employees, and despite the significant shortage of construction workers in Croatia, Kamgrad states that it will strive to maintain that ratio in the coming period.
Hopes for Return from Abroad
Given the solid economic growth and the continuous tension in the labor market, the Croatian Employers’ Association expects that the total number of work permits next year will exceed 200,000 (up from 170,000 to 175,000 in 2023). In the first ten months of this year, 39 percent more work permits for residence and work were issued than last year, totaling 147,301, of which two-thirds relate to the construction and tourism sectors. According to some estimates, between 80,000 and 100,000 foreign workers are currently employed in Croatia, which is five to six percent of the total workforce this year. For comparison, in Slovenia, foreign workers make up about 16 percent of the workforce, and this share, according to current forecasts, Croatia could far exceed by 2030.
However, precisely because of wage growth and the approach to the European Union standard, some entrepreneurs hope that some workers could return from temporary work abroad.
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—There is still a significant shortage of qualified labor in the labor market. Part of the need for it will be partially filled by foreign workers next year, and I believe we will see some of the workforce temporarily working abroad starting to return – is convinced Marin Štenglin, a member of the Management Board of the Alfa stan group, which does not employ foreign workers itself, but its subcontractors are increasing their number year by year.
Many Logistical Problems
As in the construction sector, foreign workers are already common in the tourism sector. This brings numerous logistical, as well as other problems.
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—Of the total number of workers, we employ about 20 percent from abroad. Mostly, these are workers from the region, but recently, due to the labor shortage, we also have some staff from third countries. Since these are people coming from other places, it is necessary to provide them with accommodation, and when we talk about challenges, one of them is certainly that, after securing a worker from abroad, they often leave Croatia very quickly – explained Dino Sokol, executive director of Sunce hotels, who expects the continuation of previous trends next year – pressure on wage growth due to the increase in the minimum wage and collective bargaining, as well as increasing imports of labor.
– Of course, the increase in employee costs poses a challenge, and whether we will raise prices and by how much, or whether the increase in costs will come at the expense of profits will largely depend on the situation in the market – Sokol told us.
Solution Comes from Norway
The company Kanaan also faces increasing problems with the workforce, not only in terms of wage growth but also motivation, and it plans to solve them through imports. However, instead of Nepal, India, and China, it is turning to Norway, from where it plans to import robots.
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—I have not yet employed foreigners and have tried to find local labor, but the trends I see do not please me at all. Young people are quite uninterested and increasingly unmotivated. It is becoming increasingly difficult to find quality workers, so now we have the option – either hire foreigners or buy robots. We are currently negotiating the purchase of robots that would replace workers in packaging. One robot replaces two workers, and since we have four shifts, it will ultimately replace eight workers in production. The investment in one robot amounts to 250,000 euros, but when you calculate today’s labor costs, it is clear that this investment pays off in just two years – explained Zvonko Popović, owner of Kanaan, who emphasized several times that he currently sees no other solution.
Kanaan has previously robotized part of its production, and with the new acquisition, it will have a total of seven robots, which will completely cover the segment in production that requires the most labor, packaging, with mechanical labor.
– This year we have increased wages by 20 to 25 percent, and we will certainly raise them next year as well. The final result of the growth of these and all other costs is that we will no longer be competitive compared to Eastern countries. Due to numerous regulations, standardization, rising labor costs, energy prices, and high taxes, Europe is becoming less and less competitive – Popović is pessimistic.
Amendments to the Aliens Act
According to an analysis by the Vienna Institute for International Economic Studies, Croatia ranked third among the new EU member states in terms of average gross wage in the first quarter of 2023, with only Slovenia and the Czech Republic having higher average wages. Compared to regional countries, the average Croatian net wage is a quarter lower than Slovenia’s but a third higher than Serbia’s. The situation is somewhat worse for Croats when looking at the minimum wage – Croatia is in the middle of the ranking of new transitional EU member states. Slovenia, Lithuania, Poland, the Czech Republic, and Estonia have higher minimum gross wages, but the announced high increase of the ‘minimum wage’ in 2024 to 840 euros gross will likely change that order.
For many industrial sectors, such a large increase in labor costs poses a risk to business, especially for the industry, which is already heavily burdened by the necessity of green transformation. Given the tense situation in the labor market, which is also reflected in survey results, for example, 68 percent of respondents on the Moj posao portal announce a job change in the coming year, the only solution currently emerging is to increase the import of labor. To facilitate this further in the future, amendments to the Aliens Act are being prepared, under which residence and work permits would be granted for three years instead of the current one year. These amendments reportedly foresee that a certain number of foreigners will immigrate to Croatia based on a special government decision and that they can seek jobs themselves after arrival, which has not been the case so far. This special government decision would include the number of immigrants that Croatia wants to accept, along with, of course, meeting certain criteria and conditions for such workers, but the public is still not aware of the details regarding their number or the mentioned conditions.
Extending Work Permits
The Croatian Employers’ Association (HUP) is also vocally advocating for the facilitation of worker employment, and among its proposals, in addition to extending work permits from one to three years, is the expansion of the list of deficit occupations for which a labor market test is not required, simplification of administrative procedures for issuing work permits, and reduction of retroactive health insurance payments to HZZO for the last twelve months during which foreign workers were not present in Croatia.
In parallel with the amendments to the Aliens Act, the Ministry of the Interior is also active in drafting a strategic document on immigration policy, which is a clear indication that the chronic shortage of labor in construction, tourism, hospitality, trade, and the processing industry will increasingly be addressed through the import of foreign labor. The question is whether this will help reduce tensions in the labor market. What is currently certain is that the announced easing of the state budget in the coming year will further fuel the already significant pressure on wage growth.
