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Nominal wages rise, and real wages inch upwards

The general wage index rose by month-on-month in May. The twelve-month increase in the index now measures 9.6%, edging past inflation and pushing real wages up by a hair’s breadth, in a departure from the trend of the past several months. The outlook is for continued wage growth in the coming term.

Yesterday morning, Statistics Iceland (SI) published data underlying both the general wage index and the real wage index for May. The general wage index rose by 0.6% month-on-month and by 9.6% year-on-year, broadly keeping the pace seen in the past two months.

With inflation weighing in at 9.5% in May, the 9.6% jump in the wage index boosts purchasing power incrementally, by 0.1%. While small, this increase represents a change relative to much of the past year, which has seen a steady erosion in purchasing power. The exception was December, when private sector wage agreements were signed and a large share of private sector workers received retroactive pay hikes.

Wage gains weakest for State employees

Alongside the general wage index, SI has published a breakdown of index data through March. Perusing the index data by key worker groups shows that private sector wages have risen most, or nearly 12%, followed by municipal employees’ wages (5.4%) and then by State workers’ wages (3.5%). The difference between public and private sector stems mainly from the fact that most private sector wage agreements had been finalised by the year-end, while public sector contracts were signed later and the pay rises were not included in the March index calculations.

Nevertheless, wage developments for the aforementioned three groups have changed markedly, as the chart indicates. From mid-2020 until early 2022, the private sector trailed the other two groups, and municipal employees’ wages rose the most. The difference between groups stems from the Living Standards Agreements signed in 2019, which provided for unit-based pay rises for the entire labour market and therefore granted the lowest-paid workers the largest proportional pay increases. Another contributing factor is the shortening of the work week, which affected public sector workers more than others.

Naturally, focusing solely on twelve-month pay increases can give a distorted view of reality, and it is better to zoom out and examine longer periods of time. Since the beginning of 2019, municipal employees’ wages have risen the most, or by 40%, followed by private sector wages (38%) and then State employees’ wages (29%).

Wage rises largest in tourism

If we drill down into data for the private sector, we can see that tourism industry wages have risen the most in the past year, or nearly 15%. Next in line are construction workers’ wages, which are up 13%. Not only does this accord well with the labour shortages in these two sectors, it also reflects the wage agreements that conferred a mixture of unit-based and proportional pay rises. Utilities sector wages have risen the least in the past year, at only 8%, while other sectors are somewhere in the middle, or around 10-12%.

Further pay increases on the horizon

The Federation of State and Municipal Employees (BSRB) finalised its wage agreements on 10 June, so that all labour market groups have now concluded negotiations. In all likelihood, the wage index will rise higher in coming months, owing to the contracts signed most recently.

The private sector contracts are short-term only, and the next wage negotiations are rapidly approaching. As a result, the labour market situation is highly uncertain, and next winter’s negotiations are likely to be contentious. In our recent macroeconomic forecast, we project that nominal wages will rise by 9% this year and real wages will remain flat. Over time, pay increases will taper off as tension in the labour market eases. We forecast that wages will rise by 8% in 2024 and 6% in 2025.


Bergthora Baldursdottir