Minimum wage increased by 92 percent since 2019, faster than inflation, GDP, and productivity

The record increase in salaries for public sector employees this year, as the Croatian Employers’ Association has repeatedly emphasized, was not linked to public administration reform, the growth of public sector productivity, career planning, or targeted rewards for the best employees, but was applied to all employees regardless of their efficiency and results. The consequence is a strong increase in the wage mass at the level of the general government, which has jumped to 13 percent of GDP from 11.5 percent of GDP in 2023, making us the second most generous EU member state right after Denmark according to this criterion.

Without reforming the state administration towards rationalization and efficiency growth, a wage increase in the public sector greater than 30 percent compared to the private sector, where earnings have nominally increased by more than 10 percent will not have a positive effect on either calming inflation or the labor market. In the medium term, gross wages should not nominally increase by more than 5 percent, simply put, above the sum of targeted inflation (around 2 percent) and productivity growth per hour worked (2-3 percent), if we want to remain within limits that do not contribute to strengthening inflation and undermine the competitiveness of the economy.

With its move, the state, which spends about 50 percent of GDP, has directly affected the cost of labor across the economy. Containing the wage mass and rewarding employees based on results in the coming years, abolishing poorly targeted retail price control policies, as well as energy and housing subsidies, is essential for Croatia to improve not only the efficiency of the economy but also to create a buffer in the budget for future shocks. Members of the HUP have also raised total employee earnings nominally by more than 10 percent this year or significantly above the inflation rate, but the private sector makes decisions based on productivity and business and employee results. The strong wage growth in the public sector poses significant challenges for the private sector as the state is now exerting pressure on the growth of employee earnings in domestic companies significantly above productivity growth, and strong wage growth also puts pressure on pension indexing.

Moreover, the announced increase in the minimum gross wage by 15.5 percent to 970 euros in 2025, following a record increase of 20 percent in 2024, further contributes to the rise in inflationary risks. Such an increase in the minimum wage is significantly more ambitious compared to planned increases in several EU member states where proposed ranges vary from just 3.3 percent in Germany to 11 percent in the Czech Republic. Croatia has raised the minimum wage twice as fast as the EU average in the last three years (14 percent compared to 7 percent), and the minimum wage in Croatia has increased by as much as 92 percent since 2019, significantly above cumulative inflation.

‘Minimum wage’ has a negative impact on competitiveness

According to Eurofund data, in Croatia in 2024, there was an improvement in the real purchasing power of minimum wage earners by 11 percent, which is the largest jump in the European Union, and thus we are among the first member states to meet EU guidelines (not obligations) for a minimum wage at the level of 50 percent (60 percent) of the average (median) wage, while this criterion is planned to be reached by our competitive countries (Czech Republic, Estonia, Ireland) only in two to four years. Croatia also records the third largest discrepancy of stronger minimum wage growth compared to nominal GDP growth (among all EU members), 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 tax wedge growth stronger than the EU average, especially at the level of gross wages above 167 percent of the average, which has increased in Croatia for the second consecutive year or cumulatively by 1 percentage point, while at the EU level it has remained unchanged.

Although only 8 percent of the total employed receive the minimum wage, there are several sectors where the minimum wage is a reference point, and its increase automatically leads to an increase in the wage mass and a negative impact on the competitiveness of industries where collective agreements are applied, given that the increase in the minimum wage in these sectors generates wage increases for all employees.

In a situation of renewed recession in Germany, stagnation in EU member states, which are Croatia’s most significant foreign trade partners, and an environment of reduced opportunities, this poses a significant challenge for employers, especially for exporters of goods and services. In the production of textiles, clothing, leather, and related products, the share of labor costs often exceeds 80 percent, so it is not surprising that about 19 percent of jobs in these sectors have been ‘eliminated’ to date. Despite the public perception of tourism as a sector in strong expansion with the highest inflation of prices to end consumers, publicly available data (FINA info.BIZ) show a decline in the EBITDA margin of tourism companies from 22.1 percent in 2022 to 17.7 percent in 2023, which is also below the level from 2019 (19.0 percent). Given that tourism is one of the sectors where the wage mass will significantly increase due to the administrative increase in the minimum wage, further margin erosion is to be expected, which jeopardizes the investments necessary for the medium-term competitiveness of tourism.

Contrary to prevailing views in the public space, the internationally comparable gross