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R 281627Z NOV 07
FM AMEMBASSY ZAGREB
TO RUEHC/SECSTATE WASHDC 8371
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
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UNCLAS SECTION 01 OF 02 ZAGREB 001043 
 
SIPDIS 
 
SIPDIS 
 
FOR EUR/SCE, EUR/PGI, EUR/PPD, and DRL/AE 
 
E.O. 12958: N/A 
TAGS: ECON EINV ELAB HR ECONOMIC CONDITIONS
SUBJECT: CROATIAN UNEMPLOYMENT DOWN BUT STILL HIGH 
 
 
¶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 
entrepreneurs. 
 
¶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. 
 
Comment 
------- 
 
¶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. 
 
Bradtke