In 25 years, we have lost Split and Rijeka, by 2030 we will have half a million foreign workers

Croatia has lost 304,571 inhabitants in the last 25 years, which corresponds to the population of Split and Rijeka. This is a consequence of higher adult mortality compared to the birth of children. The last year in which Croatia recorded a positive natural increase was already a long time ago in 1997, warns the Croatian Employers’ Association in its analysis this week.

Negative trends are also recorded in the EU, which has lost almost three million inhabitants in 25 years. The first population decline was recorded in 2012, while in the last three years the EU has been losing over a million inhabitants annually (0.6 percent of the population). In the CEE region, Latvia (-1.1 percent), Bulgaria (-0.9 percent), and Lithuania (-0.5 percent) are in the worst position. In relative terms, Croatia has lost 14.8 percent of its population in 25 years, which is a trend twice as bad compared to the average of the CEE region (-7.2 percent). Croatia, like Europe (the continent), has a very old population, which threatens the socio-economic model.

Only the Czech Republic expects population growth

The so-called age dependency ratio, or the share of the population that is outside the labor market because they are younger than 14 or older than 65 years, was as high as 58.7 percent in 2023. According to this indicator, Croatia ranks fourth worst in the EU ranking, with the concerning fact that this share has been continuously worsening since 2014. At that time, it was 49.7 percent.

The ratio of employed to retirees in 2022 was 1:1.3, meaning that one retiree is effectively ‘supported’ by one employee, while the economically optimal level is 1:3. Croatia last achieved this standard in the 90s, and in the 80s, there were as many as four workers for one retiree.

In addition to the population decline putting strong pressure on the pension system, the increasing labor shortage forces us to import labor and increase output of higher added value to ensure an adequate basis for pension payments. The relief for contributions for the first pension pillar for gross salaries below 1300 euros, which primarily promotes the employment of low-skilled (foreign) labor, does not contribute at all to the stability of the pension system.

According to Eurostat projections, the estimated population loss by 2050 in the basic scenario in the CEE region countries is around 7 million (7.8 percent of the population). The only country in the CEE region expected to see population growth is the Czech Republic (+1.2 percent), while the largest decline threatens Latvia (-37 percent).

Necessary targeted immigration policy

In the basic scenario, Croatia will lose 550 thousand or 14.3 percent of its population by 2050 due to negative natural increase and emigration. Among the five scenarios of Eurostat, the most favorable for Croatia is the one in which significant inflow of foreign workers continues, resulting in an overall population decline of -10.7 percent.

This is also the only scenario in which Croatia has more than 3.5 million inhabitants. The most pessimistic scenarios include ‘lower fertility’ (fewer births) and reduced migration. In these scenarios, the population of Croatia decreases by 17.9 percent to 3.17 million.

Projections show that we need a rational apolitical discussion about the costs and benefits of immigration and the conditions that could turn it into a driver of economic growth with as few social tensions as possible. Immigration as a structural solution to the labor shortage problem can be a strong driver of the economy, and the USA has long been the clearest example of a flexible dynamic economy combined with limited social security. There, immigration (18 percent of the population compared to 5.3 percent in the EU) helps keep the USA among the most developed economies, encouraging motivated labor through a spectrum of skills, from taxi drivers, software engineers to startup founders, with more than half of the local billion-dollar startups having at least one (co)founder who is an immigrant.

As a kind of warning to our country, the example of neighboring Italy with a rigid labor market and accelerated aging of the population can serve. Given the youth unemployment rate above 20 percent (similar to Croatia), many believe that the availability of labor is not a limitation, not knowing how to activate that part of the population outside the rigid structure of the economy, especially in new industries with higher added value. To make matters worse, strict labor market regulations, generous social transfer systems, and especially in Croatia, a rentier mentality not only weaken the incentive to work but also make it difficult for immigrants to integrate and contribute to the economy.

The Croatian Employers’ Association advocates for an open and flexible economic system that can quickly absorb new labor and a set of incentives that strongly encourages work. Within the framework of a smart immigration policy, it is necessary to promote legal immigration with clear procedures and discourage illegal immigration. Namely, the most successful ‘importers’ of labor (Australia, the Netherlands) target immigrants among the student population (talent identification) and use a points system for the most needed skills. As much as 16 percent of the population has emigrated from Croatia, so emigrants are a significant potential for attracting labor to the domestic market, especially when we know that the gap in median income (in terms of purchasing power at -30 percent from 42 percent in 2018) has been decreasing for six years in Croatia and the countries to which people emigrate.

Half a million foreign workers by 2030

Given the rapid deterioration of demographic trends, strong economic growth, and continuous tension in the labor market, the Croatian Employers’ Association estimates that the total number of foreign workers could reach between 400 and 500 thousand by 2030, assuming GDP growth of around 2.5 percent over the next seven years. Foreign workers would then make up a quarter of the total workforce in Croatia. Croatia, along with immigration in sectors with the greatest labor shortages, should target highly qualified workers for activities that achieve faster real productivity growth compared to the EU average and can be the flagships of the economy such as ICT, tourism, construction, agriculture, and parts of the manufacturing industry (e.g., capital goods production).

At the same time, educational programs need to be strongly aligned with the needs of the labor market, especially in the sectors we highlight as priorities in the Smart Specialization Strategy: personalized health care, smart and clean energy, smart and green transport, security and dual-use, sustainable and circular food, customized and integrated wood products, and the latest area, digital products and platforms. Regarding amendments to the Aliens Act, we emphasize the need to strengthen the use of the ‘EU Blue Card’ for ICT professionals without completed higher education as well as simpler family reunification procedures, which in turn helps attract talent from third markets, integrate foreigners, and ensure social stability.

Modernization of the Labor Act is also essential in the direction of protecting workers instead of jobs, promoting flexible forms of employment, simpler regulations, and abolishing protective clauses. Furthermore, long-term research (Basu, 2009, Botero, 2004) shows a negative correlation between the strictness of labor regulations, the intensity and cost of their enforcement, and ultimately potential growth.

Necessary tax reliefs

Finally, the Croatian Employers’ Association advocates for reducing the tax wedge on medium-high and higher gross salaries (from 167 percent of the average upwards) to the level of the TOP-5 most competitive EU members, which is even 10 percentage points below the current 42.5 percent in 2022. It is crucial to relieve the salaries of highly qualified workers whose employers can directly influence the acceleration of productivity growth, especially by raising the threshold for applying the higher income tax rate. Many EU members (role model Netherlands) are making significant efforts in tax relief for young workers. Lastly, but not less importantly, is equalizing the tax treatment of income from work and rentier activities.

The differences are significant, as the effective rate at which rental income from tourists is taxed (1-10 percent) is more than ten times lower than the effective rate on dependent work, which negatively affects the availability of labor in tourist regions. There is also a significant discrepancy between the tax treatment of long-term rentals and rentals to tourists compared to the effective rate at which distributed profits are taxed (8.40 percent and 4.5 percent compared to 20.8 percent).