harmonized across entities. Further, entity governments took concrete steps to settle domestic claims to improve fiscal sustainability. Despite the overall positive economic performance in recent years, there exist several macro-economic vulnerabilities. One such vulnerability is the rising price level, although this has moderated in the current global crisis. Figure 1.1 shows that inflation has accelerated sharply in the latter half of the decade, after remaining very low in the first half of 2000s. Some of the price increase in the second half of the 2000s (especially in 2007 and 2008) is due to a global surge in food and fuel prices which affected all countries. Part of the increase is also due to a natural convergence to average EU price level. It is worth noting that global food and fuel price increases may not necessarily lead to a permanent price increase in BiH. The main concern is that domestic demand has risen too fast and is the source of the observed surge in the price level. Signs of intensifying demand pressures are sharp growth in net wages and expanding current account deficit. Wage growth has been rising rapidly and threatens external competitiveness. Some of the past wage growth has been in line with productivity growth. However, between 2007 and 2008, there has been a sharp upward adjustment in the public sector wages, most notably in the RS (). Due to the relatively large public sector such a development has the potential to put further upward pressure on private sector wages and erode competitiveness. Additionally, the acceleration in wage growth puts pressure on public finances and underlying inflation via a feedback loop. Figure 1.3: Nominal and Real Net Wage Growth, Administrative Data Even with these growing wage pressures, labor market slack remains substantial. Unemployment remains a large concern, although it has been on a declining path in the two years prior to the onset of the financial crisis. In the Federation, the number of registered unemployed grew every year between 2000 and 2007, from about 259,000 to 370,000. In 2008, it has declined slightly to 345,000. On the other hand, formal employment initially dropped between years 2000 to 2002, then stayed flat until 2007, when it started growing both as a result of increased formalization, but also growing labor absorption by the economy as evidenced by the reduction in unemployment. In Republika Srpska, with the exception of 2006, registered unemployment decreased every year since 2001. The data on formal employment for Republika Srpska are
harmonized across entities. Further, entity governments took concrete steps to settle domestic claims to improve fiscal sustainability. Despite the overall positive economic performance in recent years, there exist several macro-economic vulnerabilities. One such vulnerability is the rising price level, although this has moderated in the current global crisis. Figure 1.1 shows that inflation has accelerated sharply in the latter half of the decade, after remaining very low in the first half of 2000s. Some of the price increase in the second half of the 2000s (especially in 2007 and 2008) is due to a global surge in food and fuel prices which affected all countries. Part of the increase is also due to a natural convergence to average EU price level. It is worth noting that global food and fuel price increases may not necessarily lead to a permanent price increase in BiH. The main concern is that domestic demand has risen too fast and is the source of the observed surge in the price level. Signs of intensifying demand pressures are sharp growth in net wages and expanding current account deficit. Wage growth has been rising rapidly and threatens external competitiveness. Some of the past wage growth has been in line with productivity growth. However, between 2007 and 2008, there has been a sharp upward adjustment in the public sector wages, most notably in the RS (). Due to the relatively large public sector such a development has the potential to put further upward pressure on private sector wages and erode competitiveness. Additionally, the acceleration in wage growth puts pressure on public finances and underlying inflation via a feedback loop. Figure 1.3: Nominal and Real Net Wage Growth, Administrative Data Even with these growing wage pressures, labor market slack remains substantial. Unemployment remains a large concern, although it has been on a declining path in the two years prior to the onset of the financial crisis. In the Federation, the number of registered unemployed grew every year between 2000 and 2007, from about 259,000 to 370,000. In 2008, it has declined slightly to 345,000. On the other hand, formal employment initially dropped between years 2000 to 2002, then stayed flat until 2007, when it started growing both as a result of increased formalization, but also growing labor absorption by the economy as evidenced by the reduction in unemployment. In Republika Srpska, with the exception of 2006, registered unemployment decreased every year since 2001. The data on formal employment for Republika Srpska are
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