Addressing Labor Shortage in Croatia1
Labor market shortage is a source of concern for Croatia’s medium-term growth prospects. Population aging and net emigration have been reducing the size of Croatia’s labor force, while deficiencies in the education and adult learning system hinder upskilling and reskilling. A granular analysis of employment patterns provides evidence of untapped resources in some sectors and areas of the country and calls for policies to improve labor mobility and strengthen adult learning and education programs.
A. Introduction
1. Labor shortage represents a key challenge to Croatia’s medium-term growth prospects. Croatia has made substantive progress in the past decade. The successful accession to the European Union (EU) and the adoption of the euro represents landmark achievements underpinned by substantial economic and social progress. Income per capita grew more than 40 percent between 2012 and 2022 and labor force participation has steadily increased to almost 70 percent in 2022. Going forward, however, there are signs of labor shortage that could hamper Croatia’s medium-term growth prospects. Unemployment has reached historical lows of 7 percent in 2023. The share of firms reporting difficulties in filling open positions is 50 percent higher in Croatia than the average of Central and Eastern European (CEE) countries.2 This shortage is driven by lack of both workers and required skills. The number of job vacancies over unemployment has steadily increased in the past decade and this increase has accelerated since 2022. Besides conjunctural factors driving the acceleration of labor demand since the COVID-19 pandemic, population aging and sustained outmigration have contributed to a shrinking working age population—the activity rate has dropped faster than in other CEE countries. At the same time, rapid technological progress (e.g., automation, Artificial Intelligence (AI)) can accentuate skills mismatch, given the predominantly low skilled labor force in Croatia. For instance, the share of working age population with tertiary education has stagnated at about 22 percent since 2018 while the average among CEE countries has grown to about 30 percent.
Activity Rate
(Percent)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A002
Sources: Eurostat, and IMF staff calculations.Note: Activity rate is the percent of total population aged 15-64 (Eurostat).2. This paper focuses on policies addressing structural factors behind the labor shortage. Promoting an efficient labor market would be most effective if embedded in a wider (overall) economic development strategy that includes fostering adult learning program, improving education quality, fostering mobility of workers across the country, and making use of immigrant workers.3 These supply side policies should be complemented with those aiming at fostering entrepreneurship and high-quality jobs (see Annex V of the 2024 Staff Report) to boost potential growth.
B. Croatia’s Labor Market
3. Both cyclical and structural factors contribute to labor shortage in Croatia. While the economy’s strong cyclical position contributes to increasing demand, structural trends, notably population aging, skill mismatches, and emigration, continue to weigh on labor supply. People’s decision to participate in the labor market (the extensive margin) and how many hours to work (the intensive margin) depend on the compensation and the value of leisure. However, the total number of workers is affected by structural trends like aging and migration patterns.
Main Labor Market Indicators, Croatia
(Percent)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A002
4. The labor market remains tight at the extensive margin. The employment rate rose further to 66.5 percent at the end of 2023, still lower than that of its peers. The declining unemployment rate (6 percent in the fourth quarter of 2023) together with increasing wages point to a tight labor market.
Wage Growth
(Year-on-year percent change)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A002
Sources: Eurostat; Haver Analytics; and IMF staff calculations.5. Skill mismatch also contributes to labor shortage. Absent any friction in labor supply, any shortage can be met by increasing wages. In practice, low mobility and skill mismatch may result in companies unable to fulfill their demand for labor even if they are willing to increase wages. This seems to be the case in Croatia where the share of population with tertiary education is substantially lower than the euro area average and the gap has widened since 2018. In addition, data shows that the share of workers in low-skilled occupations4 is above the euro area average and has increased since the pandemic. Prospects for future workers do not look promising either, given that the latest OECD PISA assessment places Croatian students below average OECD achievements in Mathematics and Science—with a smaller gap due to declining OECD average rather than improvements in Croatian students’ score (OECD, 2023b).
Tertiary Education Attainment
(Percent, Share of WAP)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A002
Sources: Eurostat; and IMF staff calculation.Note: CEE include Bulgaria, Czech Rep., Estonia, Hungary, Latvia, Lithuania, Poloand, Romania, Slovenia, and Slovakia.PISA Score in Mathematics
(Score)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A002
Sources: OECD PISA report (2023b); and IMF staff calculations.Share of Workers in Low-Skilled Occupations
(Percent)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A002
Sources: Eurostat; and IMF staff calculations.6. Aging and emigration exacerbate shortage. Population aging and declining birth rates represents medium-term risks for the economy. According to the European Commission (2023) report, the old-age dependency ratio is already higher that the EU average and it will reach 45 percent by 2030. In addition, widespread population aging across European advanced economies compound pull factors for Croatian workers. Indeed, Croatia has been affected by a wave of outflow migration in the past decade that has depleted the economy of workers and valuable skills. While the increasing income per capita could attenuate the incentive to migrate, the adoption of the euro and the participation in the Schengen area reduces migration costs. In 2021, the latest year of crosscountry available data, the net migration rate is still negative.
Dependency Ratio, UN Projections
(Percent)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A002
Source: European Commission. 2024 Aging Report.Net Migration Rate
(Average 2013–2021)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A002
Sources: Eurostat; and IMF staff calculations.7. Labor contribution to GDP growth has declined. Growth accounting provides a framework to decompose GDP growth into three main components: physical capital, labor, and total factor productivity (TFP). Using a Cobb-Douglas production function
Growth decomposition
(Percent)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A002
Source: IMF Staff calculatons.C. Beyond Aggregate Numbers
8. Going beyond aggregates would provide a better understanding of bottlenecks and opportunities. Looking at labor force participation by gender, age groups, economic sectors, occupations, and geographical location can shed light on whether there are untapped sources of labor that could be activated with targeted policies. Similarly, adult learning policies might need to be better targeted to the specific needs of workers in order to foster their participation.5
9. Large territorial differences exist across the country. The tightness of the labor market differs across the country. The unemployment rate in the region of Pannonia (more than 10 percent) is well above the national average. By contrast, the metropolitan area of Zagreb and the Northern region experience the lowest unemployment rate and have employment rates higher than the national average. In addition, territorial differences in the unemployment rate across Croatia have increased since the pandemic.
Regional Dispersion in Unempoyment Rate
(Coefficient of variation across NUTS2 regions)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A002
Sources: Eurostat; and IMF staff calculations.Employment Rate by Regions, Croatia
(Percent)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A002
Source: Eurostat regional datable.Note: Regions within Croatia are classified according to NUTS2 classification.Unemployment Rate by Regions, Croatia
(Percent)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A002
Source: Eurostat regional database.Note: Regions within Croatia are classified according Lo NUTS2 classification.10. Sectoral differences also help to explain recent development. Labor shortage seems to be mainly driven by the construction and tourism sectors. The job vacancy rate, a common measurement of labor shortage, is higher in the construction and tourism sector since 2016.6 By contrast, the job vacancy in industry and services is roughly stable—beside the drop during the pandemic. There is a cyclical component as tourism benefitted from pent up demand after the pandemic, but together with construction the tourism sector has been experienced higher job vacancy rates even before the pandemic. In this context, facilitating mobility across sectors could ease labor shortage. However, the scope for this sectoral mobility is usually limited by the level of skills and education of the workforce.
Job Vacancy Rate by Main Economic Sectors
(Percent)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A002
Source; Eurostat.11. Contrary to most EU countries the share of employment in high-skilled occupations had declined after the pandemic. The labor market in most advanced economies has experience a polarization with an increase of demand for cognitive and manual (low-skilled, non-routine) occupations, while jobs in routine occupations have declined (Goose et al. 2009). The latter refers to blue- and white-collar jobs hit by the off-shoring of manufacturing production and the introduction of robots and automation, which focus more on routine tasks. In Croatia, the increase of employment in middle-skilled occupations may result from the tourism rebound after the pandemic. However, the sharp decline in high-skilled occupations may signal a shortage of skilled workers to fill such occupations, which is necessary for Croatia to move to higher value-added productions that can boost productivity.
Employment Shares by Occupation Skill
(Percentage points change, 2020–2022)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A002
Sources: Eurostat; and IMF staff calculations.Note: Occupations are classified according to European Socio-economic Groups (ESeG, 2016). High-skilled occupations include: Managers and senior officials (group 1), professionals (group 2), and technicians (group 3). Middle-skilled occupations include: clerks and skilled service employees (group 5), skilled industrial employees (group 6). Low-skilled occupations include: service workers and shop and market sales wores and elementary occupations (group 7).12. Although the elderly participation rate has increased, it remains well below the EU average. This low participation of seniors (55–64 year of age) represents untap potential labor force. Similarly, the rate of youth not in employment or education (NEET) is declining but still above the EU average. Therefore, fostering the participation of these groups in the labor force can help ease labor shortage. Female workers are usually underutilized in most countries. In Croatia, however, the gender difference in employment rate has closed and in 2023 it is below the EU average.
Gender Gap: Difference in Employment Rate
(Percentage points; difference in rate [male-females])
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A002
Sources: Eurostat; Haver Analytics; and IMF staff calculations.NEET Rate
(Percent; population age 15–29)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A002
Sources: Eurostat; and IMF staff calculations.Elderly Participation Rate
(Percent, pupulation age 55–64)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A002
Sources: Eurostat; and IMF staff calculations.D. Policy Responses
13. The multidimensional nature of labor shortage requires coordinated policies to foster higher labor participation and upskilling and reskilling. Based on the analysis conducted in the previous sections we can identify priority areas of intervention to ease labor market shortage. Under the EU Recovery and Resilient plan (NRRP), Croatia has already implemented a few labor market reforms with the goal of improving adult learning and better targeting active labor market policies. In addition, amendments to the 2022 Labor Law provide the legal framework to modernize the labor market.7 Still, skills mismatch, net emigration, low domestic labor mobility, and pockets of inactivity among young and older adults represent major sources of labor shortages. Technological progress (e.g., digitalization, AI) is rapidly changing the nature of work, with a decline of employment opportunities in middle-skilled occupations and an increase in both high-skill and low-skill occupations (so called “job polarization”). The education and adult learning system need to prepare students and workers to adapt to new skill requirements and working conditions. In this context, the NRRP’s focus on promoting digitalization represents a step in the right direction.
Strengthening vocational education and training to ease school-work transition. Although inactivity among young people has been declining, it is still above the EU average and the European Commission’s threshold of 9 percent by 2030.8 Strengthening vocational education and training with a closer interaction with the world of work can help students transition from school or inactivity to the labor market. Similarly, improving the quality of the education system would help develop the skillset required by the labor market. Together with providing teachers with training and professional development courses, the authorities’ plan to extend students’ time in school goes in the right direction, as studies show that spending more time in school’s facilities positively affects learning (Wedel, 2021). In addition, Croatia should foster enrollment in tertiary education, which remains below the EU average.
Improving the quality of adult learning. The share of workers in low-skill occupations is higher than the EU average and the gap has widened. At the same time, the time spent in training is below the EU average. Expanding the range of programs offered and allowing customization of curricula to better suit individual needs may boost participation in adult training (OECD, 2023a). Developing distance learning could boost participation in adult learning programs, especially in rural areas where participation is low compared to urban areas, provided that digitalization efforts are accelerated.9 In addition, raising elderly participation rate and extending working life can help ease labor shortage and address pension sustainability.
Improving labor mobility across the country. Labor market slackness is higher in some regions within Croatia. The region of Pannonia, for instance, registers a higher unemployment rate than the national average. Those workers that are looking for jobs and cannot find it in Pannonia could move to another region where there is a higher demand for jobs. The decision however depends on the trade-off between the costs of moving and the benefits in terms of wage and wellbeing. Promoting a more efficient rental and housing market10 would reduce the cost of moving, thus facilitating workers’ mobility. The benefits are linked to job opportunities in high value-added occupations and local workers’ skillset. In this context, adult learning programs should focus on upskilling and reskilling the local labor force and prepare them to take up jobs also in other parts of Croatia. In addition, introducing the possibility for seasonal workers to have permanent contracts could incentivize people to move to touristic areas where demand for jobs is high.
Reversing the emigration trend would require improving the quality of institutions and social benefits. Although net migration rates are less negative since the pandemic, reversing the long wave of emigration would be challenging. Atoyan et al. (2016) identifies three main determinants of migration: differences in per capital income levels; quality of institutions; and employment prospects, including social benefits. The quality of institutions, such as the rule of law and control of corruptions, mainly matters for skilled migrants, while social benefits matter more for unskilled migrants. Croatia has reduced the income per capita difference with more advanced European countries, but it is still behind in terms of quality of institution (e.g., rule of law) and social benefits—government spending on social protection in 2022 was about 13 percent of GDP compared to the EU average of about 20 percent.11 Immigration of foreign workers has increased after the pandemic, fueled by increasing demand for jobs in the tourism and construction sectors. Amendments to immigration law have facilitated the request and granting of working permits. Together with retaining workers and reducing emigration, policies to attract and integrate foreign workers into the Croatian labor market are important to deal with the structural labor shortages.
Time Spent in Training, 2020
(Hours)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A002
Sources: Eurostatrand IMF staff calculations.Adult Education and Training, 2022
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A002
Sources: Eurostat; and IMF staff calculations.Net Migration Rate, Croatia
(Rate over population)
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A002
Sources: Eurostat; and IMF staff calculations.Rule of Law Among EU Countries, 2022
Citation: IMF Staff Country Reports 2024, 247; 10.5089/9798400285400.002.A002
Source: WGI and World Development Indicators, World Bank.Note: Preceived rule of law, index ranges between a min of -2.5 and max 2.5References
Atoyan, Ruben V., Lone Engbo Christiansen, Allan Dizioli, Christian H Ebeke, Nadeem Ilahi, Anna Ilyina, Gil Mehrez, Haonan Qu, Faezeh Raei, Alaina P Rhee, Daria V Zakharova (2016). “Emigration and Its Economic Impact on Eastern Europe”, SDN/16/07, International Monetary Fund, Washington D.C.
Goos, Maarten, Alan Manning, and Anna Salomons (2009) “Job Polarization in Europe.” American Economic Review, 99 (2): 58–63.
European Commission (2023), 2024 Ageing Report: Underlying Assumptions and Projection Methodologies, Institutional Paper 257. European Commission.
OECD (2023a) Economic Surveys: Croatia 2023, OECD Publishing, Paris.
OECD (2023b), PISA 2022 Results (Volume I): The State of Learning and Equity in Education, PISA, OECD Publishing, Paris, https://doi.org/10.1787/53f23881-en.
Wedel, Katharina (2021), “Instruction time and student achievement: The moderating role of teacher qualifications”, Economics of Education Review, Volume 85.
World Bank (2019), Labor Market, National Development Strategy Croatia 2030 Policy Note, World Bank, Washington D.C.
Prepared by David Bartolini. The paper has benefited from insightful comments and discussions provided by the Croatian authorities.
See European Commission Business and Consumer Survey (2023). Data refer to the percentage of respondent firms that indicate that labor is a factor limiting production/business minus the percent of respondents reporting that it is not. CEE countries considered in the calculation of the average include Croatia, Czechia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia, and Slovenia.
Recent World Bank (2019) and OECD (2023a) reports have also highlighted the need to strengthen the skills of the labor force and boost labor force participation.
Low-skilled occupations include services workers, shop and market sales workers, and other elementary occupations.
Although we acknowledge that part of the problem could stem from the demand for jobs (i.e., public policies should aim at fostering entrepreneurship and high-quality jobs according to Annex V of the 2024 Staff Report), this paper focuses on the supply side of the labor market.
The job vacancy rate is defined as the job vacancies to unemployment ratio.
The amendments took effect in January 2023 and included the transposition of two EU directives (on life-work balance and fair working conditions) and the recognition of the status of permanent seasonal workers to address growing labor demand and the extension of the tourism season.
The European pillar of social rights action plan sets targets in several social domain, including equal opportunities and access to the labor market.
The NRRP include €130 million for enhancing broadband connectivity in rural areas.
OECD (2023b) highlights the challenge of a thin rental market and rising house prices as a main impediment for adult workers to relocate to areas with greater job opportunities.
See Eurostat data based on COFOG 1999 classification of government spending. Social protection includes (but are not limited to) unemployment benefits, workers’ sickness and disability benefits, family and children benefits, as well as housing benefits.
