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Discernible tension in the labour market

The labour market has recovered remarkably quickly after the pandemic, and job numbers are now above the pre-pandemic level. The market is tight, and executives from Iceland’s largest companies consider themselves understaffed, particularly in the construction sector.

According to Statistics Iceland’s (SI) labour force survey, 212,400 persons were employed in the domestic labour market in Q4/2022, and the labour participation rate was just under 80%. Worker numbers were up by 11,900 year-on-year during the quarter. According to the SI survey, 7,200 people were unemployed during the period, giving an unemployment rate of 3.3%, the lowest by this measure since Q4/2018.

This aligns very well with data from the Directorate of Labour (DoL), which show that registered unemployment also measured 3.3% in Q4/2022. According to recent figures, however, the jobless rate rose from 3.4% to 3.7% in January. Unemployment is generally higher during the winter, especially in January and February, but then eases over the summer.

Worker shortages in the construction industry

Demand for labour is strongest in the construction sector, where, according to SI, there are nearly 1,500 job openings, or 8% of total construction industry vacancies. Job vacancies in construction have increased by 2.4% year-on-year. The outlook is for continued growth in a number of sectors, including construction, where the shortage of workers is perhaps the most pronounced. According to the recent Gallup survey conducted among Iceland’s largest companies, 53% of respondents report worker shortages, led by construction companies, 78% of which say they are understaffed.

The second-largest shortage is in retail and wholesale trade, where 63% of firms consider themselves short-staffed. Worker shortages in tourism tend to fluctuate more: 29% of firms reported being understaffed in December, but this figure can be expected to rise again as the peak season approaches.

Job numbers will rise in the near future

Job numbers look set to increase further in the coming term, and a large share of the newly created positions will probably be filled by foreign workers. There are currently just over 46,000 foreign workers in Iceland, or around 22% of the labour market, an all-time high. This percentage can be expected to rise further in the near future, if the need for workers in many of Iceland’s key sectors is any indication.

The labour market has recovered remarkably quickly post-COVID, and job numbers are now above the pre-pandemic level. Unemployment averaged 3.9% in 2022 and was therefore close to the 3.6% seen in 2019. For the sake of comparison, it hovered around 8% in 2020 and 2021, excluding recipients of part-time unemployment benefits.

According to our macroeconomic forecast, published at the beginning of this month, year-2023 unemployment will be broadly at the Q4/2022 level – i.e., around 3.3%, on average – and will rise marginally in 2024 as tension in the labour market eases. We forecast average unemployment at 3.7% in 2024 and 3.8% in 2025.


Bergthora Baldursdottir