Have real wages shrunk?

Although Statistics Iceland’s (SI) real wage index suggests that real wages have fallen in the recent term, the picture changes markedly if they are measured in the same way as is done in neighbouring countries. Because inflation has been lower and wage growth stronger in Iceland than in comparison countries, the adverse impact of global economic developments on households will presumably be milder here than in many other countries over the coming winter.

Wages per hour worked rose by 0.8% month-on-month in September, according to SI’s general wage index. The MoM increase is not due to contractual pay hikes, however; wages rise every year in September, when various differentials and supplements kick in again after summer holidays. Wage drift could also explain a portion of the increase.

The general wage index has risen 8.1% in the past twelve months, while CPI inflation measured 9.3% in September, indicating that real wages have contracted by roughly 1.1% in the past year.

Real wages have grown by various measures

But is it true that Icelanders’ wages stretched further a year ago than they do this autumn, as could reasonably be inferred from a quick perusal of the real wage index? Here it is useful to examine various measures of developments in the price level, as well as considering how wages and prices have developed for groups of workers.

If the general wage index is deflated with consumer price indices other than the CPI calculated by SI, it can be seen that real wages have risen in the past year, according to either the CPI excluding housing (CPIXH) or the Harmonised Index of Consumer Prices (HICP). The increase totals 1.0% in terms of the CPIXH but 2.1% in terms of the HICP. Both of these indices are less sensitive to house prices than the CPI is; for instance, inflation according to the CPIXH measured 7.0% in September, while HICP inflation measured 5.9%.

The latter measurement is particularly interesting, as the HICP is designed to facilitate comparison across the European Economic Area (EEA) and, among other things, is used by the European Central Bank to set its inflation target. In terms of the HICP, Iceland has the second-lowest rate of inflation in the EEA, where the average was 10.9% in September. Further information on the methodology used for the HICP and the differences between it and the Icelandic CPI can be found on the SI website (Icelandic only).

In most EEA countries, general inflation is currently far above twelve-month wage inflation, not least because the cost of home heating and electricity has skyrocketed in Europe, whereas wages have generally risen much slower in neighbouring countries than they have in Iceland. Iceland is therefore a happy exception to the rule when it comes to developments in real wages by this metric.

Low-income groups have seen stronger real wage growth

Because the Living Standards Agreements provided for unit-based pay rises, which were larger for those paid according to wage scales than for other workers, real wage growth has varied from one group to another. Itemised SI data for various employee groups extend through July 2022, when inflation peaked by all of the measures described above.

It is interesting, then, to see real wage growth patterns for these employee groups. In July, the annual rise in the general wage index was slightly larger for private sector workers than for State employees, while municipal employees outpaced both.

In terms of the HICP, all three groups’ real wages rose, on average, in July, while in terms of the CPIXH, State employees’ real wages shrank slightly.

Even clearer differences can be seen among groups in the private sector. According to the CPI, most worker groups’ real wages deteriorated year-on-year in July, while labourers and general service workers kept pace with inflation.

But as the chart shows, substantial differences emerge if other price indices are used as a reference. By these measures, general service workers and labourers have enjoyed a sizeable boost in purchasing power, and only management-level employees have suffered a YoY deterioration by all measures. Developments in real wages vary inversely with each occupational group’s average wages, of course, with managers at the upper end and labourers and general service workers at the lower end.

Icelanders better positioned than most

No matter how they are calculated, real wages are certainly not a universal measure of living standards in the country. The transfer system is also important, as are investment income and tax burdens, not to mention the employment level. Furthermore, these figures are averages, and when itch comes to scratch, each household’s consumption pattern is unique, and some have doubtless been hit hard by the recent surge in inflation. The computation exercise above shows us, though, that in terms of criteria that enable a head-to-head comparison with neighbouring countries, Icelandic households are probably better positioned than most to face the uncertain winter ahead.


Jón Bjarki Bentsson

Chief economist