Labor Constraints and Sustainability of the Economic Growth in Croatia—An Input–Output Approach

After EU accession, Croatia has leveraged the advantages of EU membership, such as access to a large market and EU funds, to accelerate economic growth and reduce the development gap in comparison to advanced EU economies. Although EU membership has stimulated economic growth, it has also brought negative effects, such as labor emigration to more developed EU economies with higher wages and increased inflation due to price convergence and the adoption of the Euro. The weak growth of labor productivity in Croatia is a consequence of the slow transformation towards technology-intensive industries, the dominance of traditional labor-intensive sectors such as construction and hospitality, and the rapid growth of employment in the public sector. The novelty of the research lies in applying an input–output model to estimate direct and indirect labor requirements in Croatia, an example of a small, service-oriented economy that, after joining the EU, witnessed a significant increase in final demand. Research is based on the Eurostat FIGARO database. The increase in gross value added across industries during 2015–2024 is separated into price and real growth effects. Analysis indicates that the current Croatian growth model is unsustainable because of high labor requirements and slow productivity growth. Results imply that European Union membership brings many advantages, but if not coupled with an adequate industrial development strategy, economic growth based exclusively on increasing final demand could reach its limits. Labor constraints and continued demand growth without substantial structural changes could result in rising wages and prices rather than real GDP growth.