HUP: Earnings Will Continue to Grow This Year, by 15 Percent

The average nominal gross salary for February (paid in March) increased by 0.5 percent month-on-month and grew by 11.9 percent year-on-year (+8.0 percent in real terms) to €1,703. The average net salary grew somewhat slower, by 0.3 percent month-on-month, indicating a slightly higher tax burden on salaries as employees who previously did not pay any income tax entered the tax brackets. Additionally, some employees with higher salaries stepped into a higher tax bracket, and this year there has been an increase in the maximum monthly base for calculating contributions for pension insurance on high salaries.

The strong real growth in salaries is a result of a record increase in the minimum wage by 20 percent (compared to 7.2 percent in the EU, significantly above the expected growth rate of collectively negotiated salaries in the euro area in 2024 of around 4.5 percent), a shortage of workers in the market, especially in labor-deficient service sectors, falling inflation, and extremely generous improvements in collective agreements in the public sector. The effect of salary growth in the public sector will be fully seen in the salary announcements for March, or in April.

After last year’s growth of 14.5 percent, in 2024, the Croatian Employers’ Association expects an increase in average gross salaries of 10 percent, which gives us two consecutive years of real salary growth of around 6 percent, making Croatia a leader in the CEE region and at the EU level. If we add non-taxable earnings and in-kind benefits, this year we expect an increase in total employee earnings of an additional 15 percent, after earnings jumped nearly 20 percent last year.

Unit Labor Cost is Also Rising

The growth of salaries in 2024 will be accelerated by an unprecedented increase in the wage mass from the state budget of 32 percent in favor of salary growth in the public sector exceeding 15 percent this year and a jump in the minimum wage of as much as 20 percent, which is close to the EU record, along with subsequent indexing to the ‘minimum wage’ in labor-intensive sectors such as tourism, trade, or construction. In 2024, Croatia will therefore face a faster growth in unit labor costs than in our key foreign trade partners.

HUP in its analysis of economic trends this week also reminds that unit labor costs in 2023 grew by 11.6 percent, which is almost twice as fast as the EU average. When a country’s unit labor cost rises faster than that of its foreign trade partners, it fuels inflation and loses price competitiveness in international trade.

At the same time, sub-indices of purchasing managers for the euro area have been showing an increased tendency for companies to raise prices for both service providers and industrial companies for some time, which vividly illustrates what potentially awaits us with wage growth faster than the targeted inflation rate (around 2 percent) and the expected growth in productivity per hour worked in the euro area of barely 1 percent, according to HUP.

Economic Growth Possible Only with Productivity Growth

Given the strong real growth in salaries (around 6 percent), relatively high indexing of pensions for prices and salaries last year, an increase in benefits to citizens from the budget (+16.9 percent or €1.1 billion) and an acceleration in the growth of non-purpose consumer lending (above 10 percent after 6.0 percent in 2023), HUP expects a stronger real growth in personal consumption of 3.7 percent this year after 3.1 percent in 2023.

They also expect a strengthening of personal consumption through a stronger tourist season, as indicated by positive announcements from leading tourist operators and improved confidence in the services sector in the EU.

The strong real growth in salaries, along with accelerated convergence of service prices, which are still about 30 percent lower than the EU average, will keep inflation in Croatia above the euro area average for the next few years, which also fuels the risk of a wage-price spiral. Gross salaries should therefore not nominally grow by more than 5 percent in the medium term, simply put, above the sum of targeted inflation (around 2 percent) and productivity growth (2-3 percent) if we want to remain within limits that do not contribute to inflation strengthening and undermine the competitiveness of the economy.

The main prerequisite for sustainable salary growth and their convergence to EU averages is higher productivity growth. For climbing in gross added value and productivity, a coordinated set of structural policies is necessary through reducing the tax wedge on high-skilled employees’ salaries, active labor market policies, accelerating judicial mechanisms, strengthening platforms for raising venture capital, and continuous education reform in line with labor market needs. Total contributions and taxes for salary payment of around €4,700 gross or €2,600 net in Croatia are up to €200 higher than in structurally similar countries in the CEE region. There is room for productivity growth, especially in agriculture, manufacturing, and public enterprises where we lag the most compared to reference values.

Meanwhile, the greatest progress has been made in the ICT sector, where gross added value per employee has jumped to 58 percent of the average of the German ICT industry in just two years, up from only 34 percent recorded in 2019.