Salary increase as a driver of productivity

Purpose: The paper analyzes the relationship between wages and labor productivity across Croatian sectors (2019–2023), focusing on sectoral and temporal specificities. The main goal is to confirm the positive relationship between wage growth and productivity and highlight sectoral differences. The study is based on theories of efficiency wages, human capital investment, and sectoral heterogeneity. A review of previous research emphasizes the importance of technological innovation and sector specific characteristics in productivity. Methodology: Data from the FINA database were used for descriptive statistics, correlation analysis, and a fixed-effects panel regression model, allowing for control of sectoral and temporal influences. Results: A 1% wage increase is associated with a 0.738% productivity growth. The highest effects were observed in sectors C (Manufacturing) and J (Information and Communication), while sectors I (Accommodation and Food Services) and R (Arts and Entertainment) showed weaker impacts. Significant productivity growth was recorded in 2022 and 2023. The results confirm the theoretically expected positive relationship between wages and productivity and emphasize the need for sector-tailored policie—technological modernization for more productive sectors and human capital investments for less productive ones. Conclusion: The positive relationship between wages and productivity calls for targeted policies addressing sector-specific needs. Study limitations include potential data constraints, while future research should focus on cross-country comparisons and additional productivity factors.