Impact Of Unit Labor Cost On Competitiveness And Sustainability Of Croatian Manufacturing Industry

The development and structure of the industrial base is a fundamental determinant of the long-term sustainability of business operations and economic growth in modern economies. This paper, through an analysis of panel data at the firm level from the Orbis database, assesses the relationship between the sales revenue of Croatian manufacturing firms and an important indicator of cost competitiveness – unit labor cost, for the period from Croatia's accession to the European Union to the onset of the COVID-19 pandemic in 2020. The results show that the relationship between unit labor cost and sales revenue is heterogeneous among manufacturing industry sectors, which could be due to varying levels of development and demand sophistication, the degree of technology applied, productivity, or some other sector-specific factor. The analysis indicates that the revenues of more productive firms are less sensitive to changes in unit labor costs, while evidence for market structure, tracked through concentration, is weaker but suggests it could operate in the same direction by reducing revenue sensitivity to changes in unit labor costs. On the other hand, a higher share of labor costs is associated with greater revenue sensitivity to unit labor costs, while capital equipment of labor does not significantly affect the relationship between these two variables.