Cablegate: Croatian Unemployment Down but Still High

DE RUEHVB #1043/01 3321627
R 281627Z NOV 07





E.O. 12958: N/A

1. SUMMARY: Despite a steady decline in recent years, the Croatian
unemployment rate remains high, at 11.8%. One contributing factor is
a mismatch between the skills job-seekers have and those employers
want. The mismatch stems from two situations: students are pursuing
the "wrong" majors, and workers let go from industrial jobs do not
have the skills for new jobs. An active (though decreasing) grey
economy also dampens regular employment levels, though no one knows
its exact extent. Labor market rigidity, largely due to stringent
employment protection legislation, is a third and often cited
factor. Together, these factors have given Croatia one of the lowest
rates of labor market participation in Europe and act as a brake on
economic growth. End summary.

Too Many Unemployed: Too Inexperienced,
Too Uneducated, and for Too Long

2. Although unemployment in Croatia has declined steadily over the
past several years, its current level of 11.8% is high enough to be
a concern for government and citizens alike. Data from the Croatian
Bureau of Statistics indicate some dimensions of the problem. Youth
are hardest hit. The unemployment rate among 15- to 24-year-olds is
about 29%, compared with an EU rate of 17% for the same age group,
and about a quarter of all unemployed Croatians fall in the age
range of 15 to 24. Many of the unemployed (42%) have been seeking a
job for more than two years. The majority (63%) have no more than
eight years of education. [Note: This figure presumably includes
many older people. However, the GOC recently passed a law making
secondary school mandatory.]

3. To get a fuller picture of the situation, we spoke with trade
union, employers association, and employment service
representatives, as well as researchers at the Institute of
Economics, Zagreb (EIZ).

They Don't Want the Skills We Have,
And We Don't Have the Skills They Want

4. While only the Croatian Employers Association representative
stressed the need for economic growth to spur job creation, everyone
with whom we spoke pointed out an apparent mismatch of the skills
employers seek and the skills the unemployed have. One aspect of the
problem is that many younger Croatians are pursuing social sciences,
with economics the most popular major. Correspondingly, enrollment
in technical sciences has dropped. Mario Svigir, chief economist at
the Union of Autonomous Trade Unions of Croatia (UATUC), told us
this focus on social sciences is partly a hold-over response to the
need for people with training in economics, political science, and
journalism to build Croatia as an independent nation. The supply of
such people now, however, exceeds the need. Maja Vehovec, senior
research fellow at the EIZ, Zagreb, noted that it is cheaper for
universities to offer--and cheaper and easier for students to
pursue--social science courses than technical science courses. She
also said there is a shortage of technical science teachers.

5. In September, Martina Dalic, State Secretary for Development
Strategy and Coordination of EU Funds, told us that the mismatch of
education and industry contributes to unemployment. She said the
government has identified education as a key long-term input to its
development strategy, but it will not identify particular sectors as
priorities. Instead, the government aims to provide the conditions
for a strong education system (i.e., human capital and
infrastructure) while leaving the choice of priority sectors to the

6. The second aspect of the skills mismatch is a consequence of
economic restructuring. From 1987 to 2005, the number of industrial
workers in Croatia decreased by 300,800. As in other countries, many
of these workers have not been able to find new jobs using skills
from their former jobs. Representatives from both the UATUC and the
Independent Trade Unions of Croatia (ITU) told us that employers do
not invest enough in their employees. Bernard Jakelic, deputy
general director of the Croatian Employers Association, agreed that
some employers do not understand the value of investing in their
employees, but they are those who lack managerial skills and operate
from an "old mentality." In contrast to the union representatives,
he added that the economy needs further liberalization and more
government support for research and development.

The Grey Economy Tempts Us All

7. Although the methodology used to calculate the unemployment rate
includes an estimate of unofficial labor, it is difficult to
estimate the full size of the grey economy and the extent to which
it lowers employment levels in the regular economy. The people with
whom we spoke believe the grey economy has shrunk over the last
several years and that the decrease is due more to the growth of the
regular economy than to government efforts. Valerija Botric, a

ZAGREB 00001043 002 OF 002

research associate at the EIZ, explained that Croatia's grey economy
includes two kinds of workers. The first type is "unemployed" people
who work unofficially. Aided by Croatia's tradition of supporting
family members, some in this group choose to live with their parents
or other relatives and work undeclared jobs to get by rather than
relocate or accept a regular job below their desired wage.

8. The second type of grey-economy workers is those who have regular
jobs but work undeclared overtime, have cash jobs on the side, or
receive cash wages in addition to their declared wages. According to
Kresimir Sever, president of the ITU, high tax, health and pension
obligations are a significant factor prompting employers to offer
workers undeclared overtime or schemes of a declared wage plus cash.
Workers accept these opportunities because they value the immediate
cash benefit over the potential future pension benefits they
forfeit. Mr. Sever acknowledged the difficulties the government
faces in trying to reduce tax, health or pension obligations. He
said, however, that these arrangements of declared and cash wages
will likely continue to decrease in prevalence as smaller businesses
are replaced by bigger companies for whom the hassle and risks of
such schemes outweigh the financial savings.

If We Can't Fire, We Won't Hire

9. In 2003, the World Bank identified stringent employment
protection legislation as the key labor market institution behind
low job creation and high unemployment in Croatia. That same year,
Croatia enacted legislation that made it easier and less costly to
fire and hire workers. The law reduced the severance pay requirement
to six pay periods and shortened the required notice period. It also
extended the maximum length of fixed-term contracts from one to
three years and eased the provisions for when employers could use
such contracts. A result of the law--and an indication of employers'
desire for more flexibility-- is that 85% of new contracts are
fixed-term. Despite these changes, however, the World Bank and
others continue to cite labor market rigidity as a primary hindrance
to employment growth and business competitiveness for Croatia. A new
labor law is expected next year. The UATUC will seek extension of
notice period requirements and a cap or other provisions to reduce
the number of fixed-term contracts. In contrast, the Croatian
Employers Association will seek changes to make it yet easier both
to fire and to hire workers.


10. The steady fall in unemployment in Croatia is a good sign of the
country's economic growth. Although there is no indication that the
trend will stop or reverse in the near future, it remains to be seen
how far unemployment can decrease before reaching the structural
level. If and when unemployment begins to approach the structural
level, one factor the GOC will need to consider is how to increase
Croatia's very low labor market participation rate of 48.2%. To
date, the GOC has focused little effort on improving this rate. The
63% of unemployed persons with no more than an elementary education
may be largely unemployable in the modern economy. The GOC and
business groups talk frequently about the need for Croatia to move
into a "knowledge economy" to secure future growth. However,
continued subsidies for failing industries such as shipbuilding and
textiles divert resources and crowd out more productive state
investment. In the end, it may require a generational change before
Croatia makes substantial gains in employment. End comment.


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