What Lies Behind the Monthly Decline in Gross Wages

The average nominal gross wage for December (paid in January) increased by 15.9 percent year-on-year, amounting to 1620 euros. During the fourth quarter, the real growth of income significantly accelerated to 10.3 percent from 8.2 percent in the third quarter and 5.0 percent in the second quarter. The recorded decline in gross wages of 3.5 percent on a monthly basis is largely a result of an anomaly, given that bonuses and rewards are paid in December, states the Croatian Employers’ Association in this week’s analysis..

The average net wage grew by 13.9 percent annually and amounted to 1191 euros, also with an acceleration of real growth to 9.0 percent in the fourth quarter after 6.2 percent in the third quarter and 3.4 percent in the second quarter. The strong real growth of income is a consequence of an increasingly severe labor shortage, especially in deficit service sectors, a decline in general inflation, and several consecutive extremely generous improvements in collective agreements in the public sector.

The nominal wage growth in Croatia in 2023 is nearly three times higher compared to the euro area average of five percent, and the real wage growth (6.2 percent) significantly exceeds the real stagnation of wages in the euro area last year.

On the other hand, the Croatian economy has achieved nearly double the stronger growth of unit labor costs of 11.6 percent compared to the EU average (6.6 percent) and slightly below the average in the CEE region (12.2 percent). When unit labor costs rise faster than those of foreign trade partners, it drives inflation and loses price competitiveness in international trade.

According to Capital Economics, the growth of unit labor costs by 25 percent since 2020 has worsened the competitiveness of the CEE region by 14 percent compared to key trading partners, and further growth of 14 percent by the end of this decade lowers the potential export growth rate by 0.6 percentage points annually. The still relatively high wage growth remains in focus for the European Central Bank as a limiting factor in reducing inflation to the targeted level of around two percent and increasingly louder calls for a reduction in benchmark interest rates in light of the impending recession in the euro area.

Of course, European companies could easily absorb increased labor costs in a situation of reduced aggregate demand through lower profit margins. However, the sub-indices of purchasing managers for the euro area again show an increased tendency for companies to raise prices – both for service providers and for industrial companies, which vividly illustrates what potentially lies ahead with faster wage growth compared to the sum of targeted inflation (around two percent) and the expected productivity growth in the euro area of barely one percent.