Croatia records the third highest growth in total income per employee at 44.2 percent, and second place in real growth at 19.5 percent. In 2024, we expect an average gross wage increase of about 10 percent, marking the second consecutive year of real wage growth above 6 percent. The record increase in the wage mass and net wages of public sector employees is not linked to public administration reform, productivity growth in the public sector and state administration, or targeted rewards for the best employees. There is room for productivity growth, especially in agriculture, manufacturing, and public utility companies where we lag the most compared to reference values. The average nominal gross wage for March (paid in April) jumped by 7.7 percent month-on-month and even 17.9 percent year-on-year (+13.3 percent in real terms), amounting to 1,834 euros in March. Meanwhile, during the first quarter of 2024, the real gross wage growth remained at a remarkably high 10.0 percent, following 10.3 percent in the last quarter of 2023 and 8.2 percent in the third quarter. The average net wage grew somewhat slower, at 6.7 percent month-on-month, which is a result of higher tax burdens as some employees’ wages entered the tax brackets who previously did not pay income tax, according to the latest HUP Weekly Focus. Additionally, some employees have stepped into a higher tax bracket, and this year the maximum monthly base for calculating pension insurance contributions on high wages has also increased. The strong real wage growth is a result of an extremely generous wage increase in the public sector during the election year, a record increase in the ‘minimum wage’ by 20 percent (compared to just 5.1 percent in the EU, significantly above the expected growth rate of collectively negotiated wages in the euro area in 2024 of about 4.5 percent), a shortage of workers in the labor market, especially in labor-deficient service sectors, as well as a continuous slowdown in the inflation rate. – In the Weekly Focus at the end of February, we analyzed the final wage trends in 2023, where a gross wage growth of 14.7 percent (+6.4 percent in real terms) was achieved, while net wages increased by 13.0 percent (+4.7 percent in real terms). Recently published data on the movement of total gross income of employees in EU member states provide a similar picture in relation to the narrower definition of wages, and in international comparison, they place Croatia ahead of the vast majority of EU members – reported HUP. The growth of total income in Croatia of 14.3 percent recorded in 2023 exceeded the average of EU member states of seven percent, and the real increase in income (+5.9 percent) is ten times stronger compared to the EU average (only +0.6 percent). Compared to the pre-pandemic 2019, Croatia records the third highest growth in total income per employee at 44.2 percent, and second place in real growth at 19.5 percent, again above the EU average of 17 percent nominally, or a real decline in their income of -3.7 percent. The flip side is that during the same four years, the unit labor cost in Croatia exceeded the EU average (22.1 percent compared to 14.9 percent), but at the same time grew slower compared to the CEE region average (31.6 percent). When the unit labor cost rises faster than trading partners, it fuels inflation and loses price competitiveness in international trade, and vice versa. In relation to the pre-pandemic 2019, Croatia records the third highest growth in total income per employee at 44.2 percent, and second place in real growth at 19.5 percent, again above the EU average of 17 percent nominally, or a real decline in their income of -3.7 percent. The wage mass at the level of the general government is rising to 13 percent of GDP from 11.5 percent in 2023. Non-taxable payments effectively reduce the tax on total payments to employees, but only tax relief for middle and higher wages as part of a comprehensive tax reform would facilitate strong growth in contracted gross wages. Croatia also records the third largest disproportion of stronger growth in the minimum wage compared to nominal GDP growth (at the EU level), which is unsustainable, and is yet another argument in favor of the necessity for broader tax relief on labor. Despite this, we are witnessing a stronger increase in the tax wedge than the EU average, especially at the level of gross wages above 167 percent of the average, which has grown in Croatia for the second consecutive year or cumulatively by one percentage point, while it has remained unchanged at the EU level. Given the mentioned strong wage growth this year along with a two percent increase in employment, the local government surplus could again exceed the plan and reach 1 percent of GDP, opening up space for relief on middle and high wages along with a more agile tax treatment of tourist rentals. Recent projections from the EC also support tax relief, as the forecast for the impact of aging costs on public finances has improved by 0.4 percent of GDP compared to last year’s forecasts. Aging costs encompass the impact of demographic trends on expenditures for pensions, the healthcare system, care, and education. The EC has also slightly reduced the forecasts for interest expenses in servicing public debt, which provides some breathing room. In 2024, we expect an average gross wage increase of about 10 percent, marking the second consecutive year of real wage growth above 6 percent, placing Croatia at the forefront in the CEE region and especially in the EU. Along with non-taxable income and in-kind benefits, we expect an increase in total employee income of about 15 percent similar to last year. The main reasons for this are the unprecedented nominal wage increase in the public sector of about 17 percent in the election year and an almost record increase in the minimum wage (+20 percent compared to just 5 percent in the EU), which is significantly above the expected growth rate of collectively negotiated wages in the euro area in 2024 of about 4.5 percent. As a result, the wage mass at the level of the general government will jump to 13 percent of GDP from 11.5 percent of GDP in 2023. Labor market tensions continue, as evidenced by data showing that 45 percent of managers in industry, 28 percent in services, and even 63 percent in construction (compared to 20 percent, 28 percent, and 26 percent in the same sectors at the EU level) highlight labor shortages as one of the main constraints in business operations. In 2024, Croatia will therefore face a faster growth in unit labor costs than in our key foreign trade partners.
Growth of total income in Croatia is twice as fast as in the EU. HUP calls for wages to be linked to productivity growth
Necessary reduction of the tax wedge
– The record increase in the wage mass and net wages of public sector employees is not linked to public administration reform, productivity growth in the public sector and state administration, or targeted rewards for the best employees. Without reforms in state administration, a stronger wage growth in the public sector compared to the private sector (below 10 percent) will certainly not have a positive effect on calming inflation. Although HUP members also raised employee incomes by an average of 15-20 percent during 2023, significantly above the inflation rate, there is a big difference when the private sector does it because it makes decisions based on productivity and results, and when the state does the same without clear criteria – say HUP.
Namely, the state, which spends about 50 percent of GDP, has directly influenced the labor cost in the rest of the economy. Containing the wage mass and rewarding employees based on results in the coming years, abolishing poorly targeted policies for controlling retail prices, as well as energy and housing subsidies, is necessary for Croatia to improve not only the efficiency of the economy but also to create a buffer in the budget for future shocks. The strong wage growth in the public sector, they add from HUP, will put the private sector in front of significant challenges as the state is now pressuring companies to raise employee incomes significantly above productivity growth, and strong wage growth also puts pressure on pension indexation, so an eight percent increase in pensions is expected from July 1, 2024.
– With the accelerated convergence of service prices, which are still about 30 percent lower than the EU average, wage growth keeps inflation in Croatia above the euro area average in the medium term, raising the risk of a wage-price spiral. In the medium term, gross wages should not grow nominally by more than five percent, simply put, above the sum of targeted inflation (around 2 percent) and productivity growth per hour worked (two to three percent) if we want to remain within limits that do not contribute to strengthening inflation and undermine the competitiveness of the economy – writes HUP.
The main prerequisite for sustainable wage growth and their convergence to EU averages is higher productivity growth, says HUP. For climbing in gross added value and productivity, a coordinated set of structural policies is necessary through reducing the tax wedge for highly qualified employees, active labor market policies, investments in energy capacities, significant reduction of administrative costs and business regulations, speeding up judicial mechanisms, strengthening platforms for raising venture capital, and continuous reform of education according to labor market needs.
It is imperative for companies to integrate into global value chains to expand potential foreign markets, as well as to transfer knowledge and technology, states the Weekly Focus. Total contributions and taxes for a salary payment of about 4,700 euros gross or 2,600 euros net in Croatia are up to 200 euros higher than in structurally similar countries in the CEE region.
– There is room for productivity growth, especially in agriculture, manufacturing, and public utility companies where we lag the most compared to reference values. The biggest 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 – conclude HUP.
