The general wage index rose 3.1% month-on-month in January, according to new figures from (SI), and the year-on-year rise was unusually large, at 9.1%, for reasons that are easily explainable. The twelve-month rise in the index contains two negotiated pay hikes, the first of which was paid out in March 2024 and the second in January 2025. The January jump is therefore a temporary spike that will affect YoY measurements until April.
Real wage growth gains steam in the new year
The general wage index rose markedly between months in January, and the twelve-month increase measured 9.1%, according to newly published numbers from Statistics Iceland (SI). The January increase is larger than usual because negotiated pay hikes for a large segment of the labour market were paid out in January, and therefore, monthly rises will probably be much smaller in the near future. Real wages rose as well during the month and are expected to keep increasing at a modest pace in the period ahead.
Year-2024 real wage growth
In Q4/2024, the wage index rose 1.27% YoY at constant prices. In January, it rose by 3.3% MoM and 4.3% YoY, also at constant prices. Real wage growth was therefore robust in 2024, and the inflation outlook implies that growth will continue in the coming term.
The wage agreements made by the SA Confederation of Icelandic Enterprise with member organisations for the period 2024-2028 will come up for automatic review on 1 September 2025 if headline inflation exceeds 4.95% in August. According to our forecast, inflation will be closer to 3% by then. A review will also be triggered on 1 September 2026 if headline inflation is higher than 4.7% in August of that year. Similarly, our forecast assumes that twelve-month inflation will be slightly below 3% at that time. Nevertheless, price level assumptions will be considered to have held if average twelve-month inflation is 4.7% or lower between March and August 2025, and 4.4% or lower over the same period in 2026. According to our inflation forecast, the inflation assumptions in the wage agreements will indeed hold and review clauses will not be triggered during the contract period.
Wage developments broadly similar across employee groups
The most recent itemised data on pay rises for various worker groups and sectors extend through November. Developments have been largely similar across worker groups: private sector wages have risen the most in the past year, or by 6.5%, and public sector wages have risen by roughly the same amount, whereas municipal workers’ wages were up 5.2% YoY in November and State employees’ wages by 4.3%. In this context, though, it should be borne in mind that public sector employers’ wage agreements with teachers, who constitute a large share of State and municipal employees, were still pending at the end of the period.
Rapidly subsiding tension in the labour market curbs wage drift
Unemployment measured 4.2% in January, its highest in nearly three years. Recent opinion surveys also indicate that labour market pressures are easing. According to Gallup’s most recent survey, 23% of corporate executives reported staffing shortages – the smallest share since mid-2021. We assume that unemployment will rise by a scant 0.3 percentage points YoY in 2025, to 3.8%. Other indicators of a calmer labour market can be seen in population growth: according to SI data, Iceland’s population grew by only 660 in Q4/2024, and net migration was positive by only 240. This is a major change since just a short time ago, when population growth was many times stronger.
As the economy gains steam further ahead, we expect the jobless rate to ease to 3.6% in 2026 and 3.5% in 2027. Dwindling labour market tightness and long-term wage contracts with most worker groups have kept wage drift in check, but we still expect robust real wage growth during the forecast horizon. We also project that wages will rise by an average of 5.1% in 2025, 4.7% in 2026, and 4.4% in 2027. If this forecast materialises, real wage growth will measure 1.4% this year, 1.7% next year, and 1.2% in 2027.
