Labour market in Serbia – Workers are not the problem because there are none

The labour market in Serbia is becoming increasingly scarce, while small businesses are struggling to survive, calling for lower taxes and subsidies to encourage the employment of domestic workers.

Large companies are being forced to raise wages and introduce additional benefits for employees while digitalising as much as possible to minimise the need for workers. Labour costs are rising faster than productivity, while the import of foreign labour has been accelerated and liberalised to the maximum, raising concerns about its quality.

Serbia ended last year with an unemployment rate of 8.1%, and the Foundation for the Advancement of Economics (FREN) has assessed that, in the short term, positive trends prevail in the labour market – real wages are growing strongly, employment is slightly increasing, and unemployment is declining.

With a nominal net wage growth of 14.2% in 2024, the average standard of living has exceeded productivity levels and the rise in consumer prices, as economic activity strengthened by 3.9% while inflation settled at 4.3%. However, the increase in unit labour costs is undermining the competitiveness of the economy. Combined with the appreciation of the dinar and a policy of stimulating the economy through domestic demand, this is contributing to a growing current account deficit.

This raises a key question: how can businesses balance the pressures of the labour market while remaining competitive?

Professor Mihail Arandarenko from the Faculty of Economics in Belgrade told B&F that the labour market is in a very good state due to the dynamic growth of employment and real wages. He emphasised that this assessment holds true despite the fact that, mechanically speaking, wage growth exceeding the combined rate of GDP and inflation increases labour costs per employee for businesses and reduces the competitiveness of the Serbian economy.

“However, this is not yet a major cause for concern. Through fiscal consolidation, we have long kept real wages below the equilibrium level allowed by GDP. Let me remind you that GDP statistics were recently revised, and it turned out in retrospect that GDP was significantly higher than previously thought, meaning that the panic about high public debt was exaggerated. That panic was used as a justification for further reducing workers’ rights and lowering the share of labour in national income distribution,” Arandarenko pointed out.

According to him, people today live better than they did fifteen, ten, or five years ago, primarily due to employment growth, and only secondarily due to the rise in real wages.

Labour costs are rising sharply
After stagnating between 2020 and 2023, unit labour costs increased significantly last year. In the first three quarters of 2024, they were 5.5% higher than in the same period of the previous year. Since 2017, they have risen by 30%, and in the industrial sector by as much as 50%, according to the Quarterly Monitor publication by FREN.

Darko Majstorović, chairman of the Board of the Association for the Protection of Entrepreneurs and Businesspeople of Serbia, told B&F that many cases of hidden employment and unemployment exist, and that statistical data should be viewed with caution. He identified the continuous rise in the nominal amount that employers must allocate for wages as one of the biggest challenges in the labour market.

“They reduce contributions by half a percentage point, yet the base salary increases so much that the nominal amount of contributions grows every year. On a salary of 100,000 dinars, there are an additional 58,000 dinars in taxes and contributions, meaning that the worker costs the employer 158,000 dinars.”

He argues that tax burdens on net wages should be reduced, both in percentage and nominal terms, so that employers can pay full wages through bank accounts. “We are all aware that most companies pay part of their wages in cash, which is not reflected in official figures, indicating that the tax burden on salaries is enormous. Right now, it is 58%, and while the percentage is set to decrease in 2025, the nominal amount will be much higher,” Majstorović commented.

Subsidies for employing domestic workers

Darko Majstorović believes that the state must protect domestic labour and even introduce subsidies for employers who hire local workers. According to him, the process of issuing work permits has been accelerated to the maximum, which is certainly beneficial, but the state must also safeguard the domestic labour market.

“This is about large companies pressuring the state to allow uncontrolled labour imports and to issue permits quickly. You can simply apply online without even going to the Ministry of the Interior, and you will receive a unique work permit and an ID card just like any other foreigner. If we are looking at the issue from that perspective, then domestic businesses should receive some form of subsidy because the tax burden is high,” Majstorović suggests.

Professor Mihail Arandarenko points out that employment continues to rise due to strong demand for workers, while the available labour resources are decreasing. Every year, Serbia loses around 50,000 working-age individuals, as more people leave the workforce than enter it. The employment rate for individuals aged 20–64 has reached 70%.

When considering the main factor influencing the supply of foreign workers, wages in euros increased by 80% between 2019 and 2024. Serbia’s rising foreign currency wages have likely been among the highest in the world among labour-importing countries, making it significantly more attractive for workers from poorer regions.

Arandarenko predicts that the influx of foreign workers will begin to slow down but notes that their numbers are still relatively modest. Of the 46,000 foreign workers residing in Serbia at the end of 2023, 19,000 were from Russia, around 11,000 from China, approximately 5,700 from Turkey, and about 4,000 from the Indian subcontinent.

Compensation through digitalisation
Compared to a decade ago, competition among businesses for skilled workers has significantly increased. However, opportunities for digitalisation and international expansion have also improved considerably, says Boris Stojanović, director of the company Biznet. He adds that the cost of hiring labour is undoubtedly rising, but companies are offsetting this through process optimisation, the adoption of new technologies, and increased efficiency through automation.

The company Nelt invested €7 million in employees last year: €5 million for salary increases, €1.4 million for employee benefits, and an additional €600,000 for development and training. When asked whether, as a financial director, he would have invested the same amount in another part of the business for a better return, Marko Cilić told B&F that it depends on the perspective.

“If we look at it from a short-term perspective, there might be a better investment opportunity. However, our long-term perspective is our core value, and we will always prioritise investing in something that will bring benefits in three years rather than something that yields results in six months or a year. Investing in people always pays off in the long run,” Cilić said, emphasising that no financial investment can replace a dedicated and capable team, as it represents a completely different business model.

Slower wage growth in 2024
Milojko Arsić, professor at the Faculty of Economics in Belgrade, predicts that employment and productivity will see modest growth this year, while real wage growth and unit labour costs will slow down. However, he warns that if Serbia continues with a fixed exchange rate alongside an expansionary fiscal policy and real wages rise faster than productivity, this could lead to increasing external deficits and inflation.

Business leaders are slightly less optimistic, as they plan a lower level of hiring in the next three months. The MAT Conjunctural Barometer from November showed that 22.3% of companies planned to increase their workforce in the next quarter, compared to 27.5% in October. Expectations are also lower than in November of the previous year.

Regarding the slowdown of the European economy and its potential impact on Serbia, Professor Arandarenko believes that although Serbia is significantly dependent on Germany and the EU, its economy is fairly diversified, and growth projections for the next three years remain optimistic. “Large public investments under the Expo 2027 initiative may not be the best path to rapid and sustainable economic growth under normal circumstances, but they could help mitigate the spillover effects of a larger economic crisis from Europe or the world, should one occur.”

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