HUP Advocates for ‘Depoliticization’ of Minimum Wage Adjustment

Chief Economist of HUP, Hrvoje Stojić, wrote on Friday in HUP’s publication Focus of the Week that Chancellor Merz’s warning about the structural problems in Germany following the unexpected 0.3 percent decline in Germany’s GDP in the second quarter resonates strongly in Croatia, as both countries – despite being economically different – face the same challenge: how to base wage and social rights growth on productivity, GDP, and fiscal capacities.

In Germany, the unsustainability of the welfare state is emphasized due to declining competitiveness and fiscal pressures, while in Croatia, the growth of the minimum wage and the wage mass in the public sector creates an increasing labor cost and pressure on the competitiveness of the domestic economy, he says.

Croatia leads the Union in income growth, with the minimum wage having increased by 92 percent since 2019, three times faster than the EU average. However, HUP warns that this wage growth has not been accompanied by a proportional increase in productivity, which has negative effects in many industries.

As an additional incentive to labor costs, they state that the wage mass in the public sector has jumped by 58 percent in the last two years and has doubled compared to 2018, reaching 12.3 billion euros, or 13.3 percent of GDP, placing Croatia third in the share of wage mass in GDP, behind much more developed Denmark and Finland.

They also highlight that Croatia is one of the few EU members where the average salary in the public sector is higher than in the private sector.

– There is no doubt that the state, with enormous raises for its employees, is merely throwing a ‘volley’ for raising the minimum wage, causing the entire process of its adjustment to increasingly lose touch with reality in the private sector. Instead of seizing the opportunity of record-low unemployment for transferring employees from the public to the private sector and painlessly reducing administration, it is evident that the public sector is increasingly pushing the private sector out of the labor market, employers believe.

Wage Growth is the Main Driver of Inflation

They note that the gap between the growth of the minimum wage (10.1 percent) and gross added value per employee (6.7 percent), i.e., the productivity indicator, is particularly concerning.

– This confirms the deterioration of cost competitiveness. The consequences are a decline in price competitiveness, especially in export and labor-intensive sectors such as industry, tourism, trade, and construction, followed by closures and relocations of operations, as well as stagnation of margins and investments, they warn.

Among industries, they particularly highlight the textile, metal, and wood sectors, and as a glaring example of the negative impact of minimum wage growth, they cite the company Boxmark. Its number of employees has fallen from a record three thousand to 820, and revenues have dropped from a record around 300 million euros to just 58 million euros over the years. The company, primarily due to the rise in the ‘minimum wage’, is relocating new jobs to Bosnia and Herzegovina and cannot operate positively, HUP states.

They also note that labor productivity remains significantly below the EU and Central and Eastern Europe averages, and research from the Croatian National Bank (HNB) shows that wage growth is the main driver of inflation – not corporate profits.

– Croatia is at the forefront of the Union with a 71.9 percent increase in total employee income (42.3 percent in real terms) from 2019 to 2024, largely thanks to the accelerated growth of the minimum wage and the wage mass in the public sector. These interventions are also responsible for the largest real growth in purchasing power in the EU of 21 percent, totaling 52 percent since 2019. According to real median income, Croatia is ahead of eight EU members, and by 2025 we will surpass the Czech Republic and Estonia, getting closer to the EU average, HUP’s publication states.

Change the Treatment of Breaks, Reduce Sick Leave Costs for Employers, Introduce Minimum Hourly Wage…

Employers emphasize that although Croatian GDP has been growing in real terms at rates of three to four percent in recent years, labor productivity will be reduced in real terms this year, following a 1.2 percent decline last year. They warn that profitability per employee in Croatia is half the EU average and about a quarter lower than the average in Central and Eastern Europe, significantly limiting investments in productivity and technological modernization.

They also state that total employee compensation in Croatia has reached nearly 50 percent of GDP and has for the first time exceeded the EU average, while the share of labor costs in company revenues has risen to 14 percent, and in leading hotels and the textile and metal industries to as much as 27, 24, and 20 percent, respectively.

Given that Croatia plans to further increase the ‘minimum wage’ to 1,250 euros by 2028, HUP advocates for a necessary redefinition of the approach, applying ‘best practices in the EU’, such as those in Slovenia, France, Belgium, and Romania, which are based on aligning the minimum wage with inflation and/or productivity growth, rather than political decisions.

In addition to the ‘depoliticization’ of minimum wage adjustment, employers advocate for changing the treatment of breaks, reducing sick leave costs for employers, introducing a minimum hourly wage due to variations in the monthly hour fund, increasing and linking personal deductions to gross 1 minimum wage, as well as relieving middle and higher wages in high value-added sectors, with the aim of stimulating productivity and encouraging highly qualified workers.

– Unlike most members, the break in Croatia is part of working hours. Sick leave conditions are also milder, and since employers bear the cost for up to 42 days with compensation of up to one hundred percent of salary, this often encourages abuse and further reduces the fund of effective working hours. Croatia is also among the few EU members with a monthly defined minimum wage, which does not depend on the range of working hours (160–184), which is why the definition of a minimum hourly wage should be considered, employers stated.