Zagreb - Croatia learns that EU membership is no panacea for unemployment

When Croatia joined the EU last July 1, many of its citizens hoped to reverse the growing unemployment that has tormented the country since the outset of the economic crisis. But so far there are no signs of this. The third quarter of 2013 saw Croatia’s unemployment rate reach a staggering 17%, surpassed only by Greece and Spain. Young people are among the hardest hit, with 52.4% of under-25s out of work, compared to the EU average of 23.6%.

Part of the explanation for this is the fall-off in demand for labour since the outbreak of the crisis. There are still job openings throughout Europe, but many of them are in member states that introduced transition periods for employment of Croatian workers. One such is the UK, which unlike at the time of the EU’s “Big Bang” enlargement decided to keep its attractive labour market closed to Croatian workers until at least mid-2015. Most other older EU states liberalised segments of their labour markets where there are shortages, notably for medical doctors, nurses, engineers and ICT specialists. But as the number of these specialised workers is relatively small, the overall impact on Croatia’s joblessness has been negligible.

The main reason that Croatia has been unable to use EU membership to reduce unemployment is its own lack of competitiveness and the rigidity of its labour market. Foreign investment still tends to bypass Croatia because labour costs are higher than in its regional competitors, and the salaries are high compared to productivity. The high procedural and monetary costs of dismissal means employers tend to hire workers for a fixed term rather than on a regular contract. This causes segmentation of the labour market between protected and unprotected workers, and leads both workers and employers to be less interested in training schemes.

Last year, the Croatian government opened negotiations with the social partners over a new labour law. Employers were supporting the government’s push towards greater liberalisation of working time and dismissals, but the trade unions were firmly opposed to some proposals, particularly to working hours liberalisation.

Yet liberalising Croatia’s labour laws will probably not be enough to tackle unemployment. The country also needs to reduce taxes on labour. And the present employment policy is such that funds are mostly used for passive rather than active labour market measures, which is reflected in low activity rates. The pension system is another problem area; last September, 1.3m workers were recorded as supporting 1.1m pensioners, which helps explain why labour costs are so high.

To reverse the worsening unemployment trend, Croatia must implement structural reforms. The current government is half way through its mandate, but has so far hesitated to do so because of low public support for such policies. But as most economic forecasts predict at best a very slim recovery in 2014, reforms seem more pressing than ever.