Croatia’s struggles with flood of minimum wage workers, high prices, and grey economy

Zagreb

As Croatia grapples with economic challenges, growing inequalities between its citizens, regions, and industries have sparked significant debate, as Dijana Jurasić from Večernji list writes.

While the government promises a society of equal opportunities, the reality suggests a different narrative. Dr. Željko Lovrinčević of the Institute of Economics and other experts paint a concerning picture of a nation increasingly divided by wealth, opportunity, and access.

The Prime Minister’s Christmas message assured citizens of efforts to create a society of equal opportunities. Yet, as some splurged on extravagant celebrations, like €300 table reservations in Zagreb, a large portion of the population struggled to afford basic necessities.

Over 850,000 Croatian workers earn below the median income of €1,160, while retirees face soaring living costs.

Lovrinčević highlights the imbalance: rising wages in the public sector have left the private sector behind, where many workers earn near-minimum wages.

Meanwhile, Croatia’s shrinking middle class—estimated at 60% of citizens barely making ends meet—exposes deeper structural issues.

The Role of Grey Economies

An intriguing aspect of Croatia’s economic puzzle is the significant role of the grey economy.

While official income statistics place Croatia near the European average, disparities in wealth accumulation suggest that much of the nation’s wealth is tied to unreported earnings.

According to Lovrinčević, this dynamic exacerbates inequalities, creating a divide between declared incomes and real financial power.

The introduction of the euro has partly legalised grey-market funds, but it also opened avenues for further exploitation. As EU funds flow into Croatia for reconstruction and development, concerns grow about a potential resurgence of unregulated economic activities.

Inflation and Rising Costs

Croatia’s citizens are feeling the pinch of inflation. Basic goods, once staples of the average household, are becoming status symbols. For instance, an espresso in Zagreb can cost €2—more than in parts of Italy or Austria.

This disparity is linked to the behaviour of retail chains and suppliers, who capture a disproportionate share of benefits from reduced VAT or economic incentives.

Lovrinčević notes that while EU norms suggest two-thirds of VAT reductions should benefit consumers, Croatian businesses often retain as much as 70%.

This trend, visible even before the pandemic, has worsened with the euro’s introduction, pushing the cost of living even higher.

Foreign Owners and Profit Extraction

Another significant factor impacting Croatia’s economy is the role of foreign ownership. Lovrinčević explains that companies operating on the EU’s periphery—like Croatia—are being exploited to compensate for losses in Asian and American markets.

Dividends are prioritised for shareholders in Germany, Italy, and Austria, leaving little reinvestment in local markets.

This extraction model worsens regional inequalities. For example, nearly 30% of residents in Panonian Croatia live at risk of poverty, compared to 17.5% in coastal regions.

Without robust intervention from national authorities, this imbalance will likely grow.

Croatia faces complex challenges in addressing its economic disparities. While public sector wages have risen substantially, Lovrinčević warns that private sector workers remain undervalued, and high-skilled professionals are increasingly seeking opportunities abroad.

As industries fail to attract and retain talent, Croatia risks becoming a low-wage economy.

The solution, experts suggest, lies in stronger governance. National authorities and regulators must protect citizens and businesses from disproportionate profit extraction and focus on equitable economic growth.

Without these measures, Croatia’s future risks being defined by deeper divides and lost opportunities.