Minimum Wage in Focus: Between Real Growth and Budgetary Pressure

The increase in the minimum wage in Serbia is not a new topic, but this year brings a change: in addition to the regular January increase, an extraordinary increase has also been introduced in October. The non-taxable portion of wages will, as usual, rise from January, and an additional increase has been announced for next year, which will be the subject of negotiations in September.

Viewed through data since 2020, this change shows an acceleration in the growth of the minimum wage, but it also raises the question: how do companies balance preserving employees’ purchasing power with maintaining the sustainability of their budgets?

Review of Trends to Date

Chart 1. Growth of Minimum Net Wage and Consumer Basket Since 2020

• The growth of the minimum wage over the past five years has accelerated, particularly since 2021, partly because of inflationary pressures and the aim to ensure it covers the minimum consumer basket.

• Inflation 2022–2023. eroded part of the impact of the increase, so the real benefits for employees were limited.

Chart 2. Change in Minimum Net Wage and Non-Taxable Amount Since 2020

• Non-taxable amount has shown continuous growth, easing pressure on employers and increasing employees’ net wages.

News

Increase in the minimum wage rate in Q4 – extraordinary from October 2025. Although the regular practice is to raise the minimum wage rate in January of the calendar year, this year we have an extraordinary increase starting in the last quarter — a rise of 9.4%, from 308 to 337 dinars.

Announcement of additional increase of 10.1% for January 2026, which would set the new wage rate at 371.04 dinars. The next step is negotiations, and the final outcome is expected to be known in September.

Announcement of an increase in the non-taxable portion of wages from 28,423 to 34,322 dinars has been announced. While some details remain unclear, it is expected - based on established practice - that this change will take effect in 2026. The percentage increase in the non-taxable amount more or less follows the growth of the minimum wage, so if the new wage increase is implemented as announced, it will confirm this trend.

Companies practice

From HR sector practice, several models of response to minimum wage increases can be observed:

1. Linear increase - Increasing all salaries by the same nominal amount or percentage in order to maintain internal balance between positions.

1. Targeted increase – Focusing on the lowest salaries (close to the minimum wage) while keeping higher-level salaries unchanged. This is most challenging in very limited budgets. Often, the approach involves increasing only what is legally required, and when the budget is lacking, other salaries remain the same. This narrows the gap in the lower pay grades, with wages “catching up,” which has multiple negative effects. Employees whose salaries are not increased due to budget constraints become dissatisfied, lose motivation to take on greater responsibility, or leave the company altogether. One cycle of this approach is already significant, but two to three years under such a system can cause considerable damage.
   If we’re being completely honest, it’s not always the case that a company cannot bear the cost of salary increases. More often, the expectations tied to results whether profit or another metric depending on which KPIs are tracked are overly ambitious, lacking in restraint, and becoming more ambitious with each passing year.

1. Combined approach - Increasing the mandatory part of the minimum wage while making additional investments in benefits, bonuses, or flexible work arrangements, without significantly raising the base salary. If there are not enough funds in the budget for salary increases, savings are sought by reducing or cancelling various initiatives in other areas to free up the necessary resources. The first to be cut are usually training programs, marketing activities, and projects that are not deemed urgent at that particular moment.

Increasing the mandatory component of the minimum wage while channeling additional resources into benefits, bonuses, or flexible work arrangements without substantially raising the base salary is another approach. When there aren’t enough funds in the budget to support salary increases, companies look for savings by scaling back or cancelling initiatives in other areas to free up the necessary resources. The first to be trimmed are typically training programs, marketing activities, and projects that are not considered urgent at that time.

Challenges with extraordinary increase - summarized

The extraordinary October increase brings several challenges:

• Budget unpredictability - Plans for 2025 were made with the assumption of only one increase, so costs now need to be rebalanced.

• Compensation compression - The gap between entry-level salaries and those of more experienced employees is narrowing, which can affect motivation and turnover.

• Labor cost and productivity - Without productivity growth, the additional cost can put pressure on profitability, especially in labor-intensive sectors.

How figures look like?

The approved increase and the announcement of further growth in the minimum wage and the non-taxable portion of wages can be illustrated as follows (monthly wage calculated based on the average monthly number of hours 174).
There are different practices for determining the monthly minimum gross salary:

• Multiplying the minimum wage rate by 174 (the average monthly hours) and paying an additional amount in months with more working hours (176 or 184).

• Multiplying the minimum wage rate by 184, which eliminates the need for additional payments in months with the highest number of working hours, while in months with fewer hours, employees earn above the minimum.

• Multiplying the minimum wage rate by 176 or 168 and paying an additional amount in months with more working hours (184 or 176).

• Rarely, 160 hours are used to set the wage — this would be the most rigid approach, resulting in the lowest possible wage, with more complex calculations due to the need for additional payments.

The total payroll cost for the employer depends on the final decisions regarding parameter amounts.

1. With the increase in the minimum wage in Q4, without applying the new non-taxable portion of wages before 2026, total payroll costs rise by 10%. If the non-taxable amount were applied immediately, this increase would be 8.8%.

1. If there is no additional minimum wage increase in 2026, employees would see their net pay rise by an additional 590 dinars due to the higher non-taxable portion of wages (the so-called “wage spillover” effect). The total payroll cost for the employer would remain the same.

1. If there is an additional increase of approximately 10.1% in 2026, employers will negotiate new gross salaries (which removes the 590 dinar spillover effect), and the new rise in total costs compared to Q4 2025 would be 9.6%, giving a total increase of 20.4% compared to September 2025.

Conclusion

The growth of the minimum wage, combined with an increase in the non-taxable portion, has a twofold effect:

• Positive - increases employees’ purchasing power and contributes to social security.

• Challenging – creates additional pressure on employers, especially when the increase is unexpected and outside planned cycles.

Managing these changes requires a strategic approach to compensation—one that goes beyond simply reacting to the legal minimum and is instead part of a broader reward policy that takes into account market pay levels, internal equity, and long-term sustainability.
Do not overlook the importance of maintaining and revising pay grades. It is all too easy to dismantle an established system, and the consequences are often cascading and long-lasting. The EU Pay Transparency Directive has “pushed” many companies to develop solid grading and pay systems, and perhaps it is time for us to address this matter proactively and prepare accordingly.