Developments vary by wage-earner group

SI also publishes a breakdown of wage index data for various wage-earner groups. The most recent figures, which extend through the end of May, show clearly that private sector pay has risen the most in the past twelve months. As the chart below indicates, there was a fairly abrupt shift in twelve-month pay increases from one group to another, as it was around that time that new wage agreements were signed for a large share of the private sector. This turnaround occurred because contracts for the majority of public sector workers expired at the beginning of April, and State employees’ YoY wage growth shrank from 10.1% in March to 4.4% a month later. Presumably, the difference in the pace of pay growth across employee groups will begin to narrow when the effects of the most recent wage agreements start to show in the data a few months from now. Furthermore, the contracts still pending will probably be finalised by then.

Real wages have held their own in most segments of the private sector

When the rise in the general wage index is broken down by segment of the private sector, it can be seen that pay has risen the most among workers in transportation and storage, where the twelve-month increase measured 10.1% in May. This group includes airline and distance coach employees, for instance. Other segments of the tourism industry are running a close second, at 9.8% wage growth in May. Only in the utilities and financial/insurance sectors did wages fail to keep pace with headline inflation as of May.

No signs of substantial wage drift on the horizon

The wage agreements signed thus far in 2024 have been moderate in comparison with those from recent years. A year ago, for instance, the twelve-month rise in pay was much larger than it is now. At that time, headline inflation was slightly higher, but the real wage index rose by 2.8%. Labour market tightness has eased marginally in the recent term, and unemployment has been slightly higher year-to-date than over the same period in 2023, averaging 3.5% over the first seven months of 2024, as compared with 3.3% in January through July 2023. So far this year, unemployment has been highest on the Suðurnes peninsula, probably owing in part to the impact of the earthquakes and volcanic eruptions in the region.

Statistics are a bit ambiguous these days, but some of them have been revised, and the newer data sketch out a markedly different picture than before, as we have discussed recently. Surveys among corporate executives show a vast difference in labour demand from one sector to another, but they indicate that the labour market has become better balanced, as we have also discussed in the recent past. The Gallup survey conducted for the Central Bank and the Confederation of Icelandic Employers suggests that labour market tension will start to subside. A year ago, just under 43% of executives reported that their companies were understaffed, down from a high of 54% at the beginning of winter 2022. By this past spring, however, the share had fallen to a three-year low of just over 29%. This trend indicates that there is less risk of significant wage drift in the near future, although the possibility cannot be excluded altogether.

Further disinflation in H2/2024 should prompt an uptick in real wages, which would result in slightly positive real wage growth by the end of this year. In view of this, we do not think there is substantial risk of a steep drop in real wages in the near future.