The labor market performance in Croatia did not change much in the recent years.<sup>7</sup> Based on the LFS data, about 65% of the working-age population (15-65 years old) participated in the labor force, of which 55% were employed. Despite the relatively strong overall macroeconomic performance, the unemployment rate in Croatia, according to the definition of the International Labor Organization (ILO),<sup>8</sup> hovered around 14-15% (table 1).

**Table 1: Labor force participation rate, employment rate, and ILO unemployment rate in Croatia (2002-2004)**

||Labor fo<br>mean<br>value|rce participation rate<br>95% confidence<br>interval|Em<br>mean<br>value|ployment rate<br>95% confidence<br>interval|ILO u<br>mean<br>value|nemployment rate<br>95% confidence<br>interval|
|---|---|---|---|---|---|---|
|2002|64.88%|[64.09% - 65.66%]|53.94%|[53.15% - 54.72%]|15.04%|[14.36% - 15.72%]|
|2003|64.73%|[63.85% - 65.62%]|54.13%|[53.25% - 55.00%]|14.51%|[13.74% - 15.28%]|
|2004|65.90%|[65.05%- 66.75%]|55.36%|[54.55%- 56.17%]|13.98%|[13.30%- 14.67%]|

Note: According to the International Labor Organization, the labor force participation rate is a measure of the proportion of a country’s working-age population that engages actively in the labor market, either by working or looking for work; the employment rate (employment-to-population ratio) is defined as the proportion of a country's working-age population (15-65) that is employed. The unemployment rate is defined as the proportion of the labor force (working-age population that is employed or unemployed) that does not have a job and is actively looking for work.

For the individuals who are employed, the distribution of their monthly earnings (in kuna) also stayed relatively stable in the period of 2002-2004, although the mean level in nominal terms increased slightly (graph 2).<sup>9</sup> More than 90% of the individuals employed have a monthly earnings level of less than 5000 kuna. The relatively high density of the 7 The unemployment rate in Croatia did not change much since the late 1990s (Rutkowski, 2002). Although the mean level of employment rate increases / unemployment rate decreases slightly in the period of 20022004, the changes are not significant in statistical senses.

8 The ILO unemployment rate, based on the LFS carried out by the Croatian Bureau of Statistics, is lower than the administrative unemployment data, which is maintained by the Croatia Employment Service. According to the statistics of the Central Bureau of Statistics and Croatian Pension Insurance Fund, the registered unemployment rate was around 20% in 2002-2004. The administrative data are affected by the incentive to register as “unemployed”. On the one hand, some persons may register as unemployed in order to be eligible to unemployment benefits, pension, health insurance, and social assistance benefits, although they are not genuinely unemployed; on the other hand, the persons who are genuinely unemployed may not register if they are not eligible for the benefits associated wit the registration (Rutkowski, 2002). Overall, the administrative data may overestimate the actual magnitude of unemployment. In this study, we use the LFS data and follow the ILO unemployment definition.

9 Based on the LFS questionnaires, earnings is measured as the usual net monthly earnings/salary on the main job in kuna. In Croatia, the average level of monthly earnings is around 3013 kuna, 3205 kuna, and 3326 kuna respectively in 2002, 2003, and 2004 in nominal terms. In this study, we examine the determination of employment and earnings of the individuals with positive earnings reported. The analysis may be subject to the three data constraints: 1. For individuals who are employed with more than one job, their monthly earnings reported might under-represent the real income. 2. We have to neglect the individuals without positive earnings although they are reported as employed in the survey, which represent about 5% of the population employed. 3. No further information on in kind income is available from the survey. In this paper, all labor market indicators are measured for the individuals who are in the working age, and based on the LFS 2002-2004 data if not otherwise specified. We interchangeably use the wordings “wage” and “earning”.

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