Since 2019, the minimum wage in Croatia has increased by as much as 92%, significantly outpacing the rates of inflation, GDP growth, and productivity. While this increase improves the standard of living for workers with the lowest incomes, it also brings challenges in terms of competitiveness and economic stability. In this analysis, we explore the impact of the rapid growth of the minimum wage on the Croatian labor market and economy and offer suggestions for the further development of this policy.
Record Growth in the Minimum Wage
In the last three years, the minimum wage in Croatia has risen at twice the EU average (14% versus 7%). Although the improvement in real purchasing power by 11% in 2024 is among the highest in the European Union, such a rapid wage increase, according to the analysis of the Croatian Employers’ Association (CEA), comes with certain risks. Specifically, an increase in the minimum wage that is not accompanied by productivity growth can lead to increased inflationary pressures and reduced competitiveness in sectors where labor intensity is high and labor costs are a key factor.
Impact on the Public and Private Sectors
The CEA points out that record wage increases for employees in the public sector this year have contributed to rising labor costs across the entire economy, yet they were not accompanied by public administration reforms or productivity growth. While the private sector bases wage increases on business performance and employee efficiency, wage growth in the public sector was applied uniformly to all employees, regardless of individual productivity. This has resulted in an increase in the public sector wage bill to 13% of GDP, compared to 11.5% the previous year, placing Croatia second in the EU, right behind Denmark.
Increases in the Public Sector – A Threat to Inflation?
Continued rapid wage growth in the public sector, which exceeds that of the private sector, could negatively impact inflation and the labor market. According to CEA recommendations, to maintain economic stability, gross wages should not grow above the target inflation rate (around 2%) and productivity per hour (2-3%). Without a reform of state administration toward rationalization and efficiency improvements, wage growth beyond these limits could result in a loss of competitiveness in the Croatian economy.
Impact on Sectors with High Labor Cost Shares
For sectors like textile, clothing, and footwear manufacturing, where labor costs account for more than 80% of total costs, the rise in the minimum wage presents a particular challenge. These industries have already seen job losses, and additional labor cost increases could exacerbate these issues. Meanwhile, although tourism has seen consumer price increases, the EBITDA margin of tourism companies fell from 22.1% in 2022 to 17.7% in 2023, below the level of 2019. An administrative increase in the minimum wage could further erode margins in this sector and threaten the investments needed for sustainable competitiveness.
The Need for a More Transparent Minimum Wage Policy
The CEA suggests introducing a transparent formula for determining the minimum wage that would consider national economic productivity. This would allow the business sector to better plan labor costs over the medium and long term, creating clearer and more sustainable criteria for future wage increases. Similar practices already exist in some EU countries, such as Germany and the Baltic countries, where the minimum wage is determined based on specific economic parameters, such as exports and productivity.
Increasing the Minimum Wage – Between Social Security and Economic Sustainability
The goal of increasing the minimum wage is to ensure a basic standard of living for workers with the lowest incomes. However, if increases are not based on productivity growth, they will create long-term inflationary pressure and reduce the competitiveness of Croatian businesses. It is essential to balance social security and economic sustainability to maintain long-term stability in the labor market and the economy as a whole.
A more transparent and sustainable minimum wage policy, considering productivity and market specifics, could provide a solution to many of the challenges currently faced by the Croatian economy.
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