Explaining wage developments in Croatia: the role of the firm composition effect

Josip Raos () and Ivana Cicak ()
Additional contact information
Josip Raos: Energy institute Hrvoje Pozar, Zagreb, Croatia
Ivana Cicak: Croatian National Bank, TZagreb, Croatia

Public Sector Economics, 2025, vol. 49, issue 3, 395-429

Abstract: While wage developments are primarily driven by changes in real economic activity, the role of labour force allocation is often overlooked. Using Croatian establishment-level data (2002-2023), we apply static and dynamic Olley-Pakes decompositions to assess how labour reallocation impacts wages and productivity. The wage allocation premium, defined as the ratio between actual aggregate wage and wage under random worker distribution, reveals a countercyclical impact until 2021, turning procyclical after the pandemic. Dynamic decomposition supports these findings and demonstrates that entering firms depress average wages, while exiting firms raise them slightly. Applying the same approach to productivity, we find that labour reallocation mitigated productivity losses during the recession and moderated growth during the recovery. Unlike wage patterns, this countercyclical effect on productivity persisted post-pandemic. Since 2020, wage allocation premium growth has outpaced the gross value added (GVA) allocation premium, which may have pressured firms to raise prices, potentially contributing to inflation.

Keywords: wages dynamics; decomposition; allocation premium; productivity; firm composition effect (search for similar items in EconPapers)
JEL-codes: D61 E24 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://pse-journal.hr/upload/files/pse/2025/3/raoc_cicak.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ipf:psejou:v:49:y:2025:i:3:p:395-429

DOI: 10.3326/pse.49.3.3

Access Statistics for this article

More articles in Public Sector Economics from Institute of Public Finance Contact information at EDIRC.
Bibliographic data for series maintained by Martina Fabris ().