Evolution of minimum wage levels

The development of the minimum wage in Croatia has been a gradual process and the formula for setting it has been changed several times, most recently in February 2013. The current formula uses indicators considered more ‘socially sensitive’. It takes into account inicators such as the monthly poverty risk threshold for a single member household, and any change in the average price index of consumer goods. Unions want a minimum wage that is at least 50% of the average wage.

Background

Two major phases in Croatian economic history have affected the setting of a national minimum wage. The first relates to collective agreements and the second to the introduction of the 2008 Minimum Wage Act.

In March 1998, Croatia introduced the minimum wage after the conclusion of the National Collective Agreement on the Lowest Wage (OG 37/98, in Slovenian). From then until 2007, the minimum wage was updated regularly each year, with the exception of 2001. As shown in the table, it broadly followed the dynamics of the average wage.

Minimum wage in Croatia, 1998–2014
 

Monthly minimum wage (HRK)

Change over previous year (%)

Monthly minimum wage (€)*

Minimum wage as a % of average wage

1998

1,370.00

-

192

33.2

1999

1,500.00

9.5

198

32.9

2000–2001

1,700.00

13.3

223

34.9

2002

1,800.00

5.9

243

33.5

2003

1,858,50

3.3

246

33.1

2004

1,951.25

5.0

260

33.6

2005

2,080.75

6.6

281

33.3

2006

2,169.65

4.3

296

32.7

2007

2,298,00

5.9

313

32.6

2008 January to June

2,441.25

6.2

336

32.4

2008 July to 2009 June

2,747.00

19.5

378

36.4

2009 June to 2012

2,814.00

2.4

385

36.6

2013

2,984.78

6.6

408

37.2

2014

3,017.00

1.1

413

-

*Converted to € by applying the annual average HRK/€ exchange rate.

The second phase started with the introduction of the Minimum Wage Act on 1 July 2008 (OG 67/08, in Slovenian). It defined the minimum wage as a single rate for all employees, with a temporary derogation for employees in the textile, clothing, wood processing and leather industries, where profit margins are very low and it was felt business owners were unlikely to be able to meet minimum wage rates.

The rate for the initial period, from 1 July 2008 to 31 May 2009, was set in the act. It stated that it should be 39% of the average monthly gross wage in the previous year and on this basis, the rate was set at HRK 2,747.

This initial level was neogtiated between trade unions and employers without explicit reference to the criteria on which it would be based. Instead it was agreed that the minimum wage was to be updated each year in June so that the ratio of the minimum wage to the average wage of the previous year should increase by a percentage equal to real GDP growth in the previous year. It should be update annually.

When calculating the amount of the minimum wage the MWA uses the average wage indicator and the GDP rates in the previous year. The Croatian Bureau of Statistics, when calculating the amount of the minimum wage, increases that amount by the GDP growth rate, using the following formula:

hr1402041i-fig00.jpg

MW – minimum wage

ØW – average wage

GDP – growth rate of the real GDP in the previous year

However, the possibility of a global economic crisis was not taken into consideration when the formula was drawn up. One major issue was that the growth rate of the real GDP in the previous year could be both positive and negative – however, in practice the calculations have ignored any negative growth rate in real GDP.

In 2009 the growth rate in real GDP was -5.9%, and this was not taken into consideration when calculating the minimum wage. This was repeated in subsequent reviews of the minimum wage.

A further problem with the formula is that it sets no ceiling on increases in the minimum wage to average wage ratio.

Different types of workers

Concerns were also raised because the law defines the minimum wage as a single monthly rate for full-time work. This definition causes problems when applied to employees who do not work a set number of hours, but instead work to a piece-rate of a stipulated number of products which they must produce each hour, week or month.

Ministry of Economy, Labour and Entrepreneurship rules say an employer cannot pay a worker less than the minimum wage set under the act, even if their work doesn’t meet the required standard. Business owners say this means they cannot make a distinction between a worker who completes a job and one who does not. It raises the question of how to motivate employees to work when the wage is the same for everyone.

New rules on minimum wage-setting

In February 2013, the new MWA was adopted (OG 39/13, in Slovenian). This introduced new rules for setting the minimum wage ‘in relation to indicators that are more socially sensitive’. The indicators are:

  • the monthly poverty risk threshold for a single member household;
  • the coefficient of the total number of inhabitants and the total number of households;
  • the coefficient of the total number of people active in the workforce;
  • any change in the average price index of consumer goods.

The act also specifies that the Government of Croatia should set the level of the minimum wage every year after consultation with social partners using these previously determined criteria.

The social partners may agree that the minimum wage can be up to 5% lower than the level recommended by the government. All sectors are allowed to take advantage of this option in collective agreements at company or sectoral level.

Social partners’ views

Trade Unions believe that the minimum wage should be at least 50% of the average wage, and that current figures show just how poorly paid many Croatian workers are.

Croatian employers’ associations argue that the issue of the minimum wage is an economic question. They believe it is impossible to raise the minimum wage when there is no economic growth, as is currently the case in Croatia.

Commentary

Bearing in mind low levels of productivity in the country, Croatian society will find few arguments to support the relatively high level of the national minimum wage compared to other countries in the region.

In Croatia, the basic policy objective of setting a minimum wage is to raise the earnings of poorly paid workers and to decrease poverty. However, raising the minimum wage risks increasing the rates of unemployment. If there are fewer employment possibilities, the cost to the government in paying for welfare and benefits is likely to rise.

Predrag Bejakovic, Institute of Public Finance

Useful? Interesting? Tell us what you think. Hide comments

Eurofound welcomes feedback and updates on this regulation

Add new comment