Labour market seeking equilibrium

Labour market tightness has eased, and real wages are holding their own. The general wage index rose marginally between months is broadly keeping pace with inflation year-on-year.

The general wage index rose 0.5% month-on-month in January, according to new figures from Statistics Iceland (SI), and the year-on-year increase now measures 7.0%. At the same time, the base wage index rose by 0.4% MoM and 6.4% YoY. Twelve-month inflation measured 6.7% in January, according to SI figures. As a result, wages and inflation have been broadly keeping pace with one another. Real wages according to the wage index picked up slightly in January, while they shrank marginally according to the base wage index. The outlook is for inflation to fall swiftly in coming quarters, giving rise to the hope of further real wage gains, particularly if the results of the ongoing wage negotiations are favourable.

Keeping real wages intact primarily requires lower inflation. If wage negotiations are successful, the ISK remains relatively stable, and other key assumptions outlined in our recent macroeconomic forecast are borne out, prospects are favourable for real wage growth in coming years. In that forecast, we assumed that real wages would rise by 1% in 2024, 2.2% in 2025, and 1.6% in 2026.

Pressures in the labour market set to ease

According to data from the Directorate of Labour (DoL), registered unemployment rose MoM in January and now measures 3.8%, an increase of 0.2% since December and 0.1% since January 2023. The DoL unemployment rate is at its highest since May 2022, when it hit 3.9%. This January, the jobless rate was highest on the Suðurnes peninsula, at 6.7%, after rising 1.1% MoM. In our new forecast, we projected average year-2024 unemployment at 3.9%, which is in line with the latest figures. The January numbers also indicate slightly reduced labour market tension than in the recent past, and not only because of the seasonal lull in tourism.

The market is still tight, but many indicators imply that it is easing in line with reduced domestic demand and weaker export growth. Employee shortages appear to have eased as well. According to the Gallup survey of Iceland’s 400 largest firms, carried out for the Confederation of Icelandic Employers and the Central Bank (CBI), 34% of executives reported a shortage of staff in Q4/2023. This is the lowest understaffing ratio since 2021. The highest to date is 56%, recorded in Q3/2022.

As growth in the economy slows down, we expect tension in the labour market to ease still further and unemployment to creep upwards in the near future. We forecast average unemployment at 4.0% in both 2025 and 2026.

Tourism could make a pivotal difference

The tourism industry is likely to be a major determinant of near-term developments in unemployment. In our macroeconomic forecast, we assume continued growth in the sector, as indicators imply that 2024 could set a new record for visitor numbers. In all, we expect over 2.4 million tourist arrivals this year. Recent media reports of a possible setback in bookings, coupled with concerns about lower revenues per tourist, have given analysts cause for consideration, as we have discussed recently. It is clear that such a turn of events could strongly affect the labour market, including the unemployment rate.

Iceland’s labour market is far more flexible than those in most other advanced economies. This flexibility stems from a number of factors, including relatively easy cross-border labour migration, a high participation rate among students, unemployment-related fluctuations in demand for further education, and flexible retirement for those reaching the end of their working career. As a result, elevated unemployment is unlikely to be a significant drag on living standards and growth in Iceland in coming years, and a number of indicators imply that the labour market will rebalance in coming quarters, after having been very tight in the recent term.


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Birkir Thor Bjornsson