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Real wages still on the rise

The general wage index rose month-on-month in September and is now up nearly 11% between years. Real wages have increased steadily since May, after having fallen for nearly a year. The labour market is still tight, and demand for labour is strong. With the market as tight as it is, this winter’s wage negotiations will probably be contentious.

The wage index rose 0.9% MoM in September, according to new figures from Statistics Iceland (SI). The index typically rises during the autumn, mainly because wage differentials and other premiums are generally higher than in the summer, when pay rates tend to reflect summer holidays and work by temporary employees. This also explains the difference between the general wage index and the so-called base wage index, which rose by 0.4% over the same period.

The YoY rise in the general wage index now measures 10.9%, broadly in line with the pattern seen in recent months. This steep increase is due mainly to last winter’s wage agreements, which delivered generous pay rises for large segments of the working population.

YoY real wage growth has turned a corner since May. From June 2022 through May 2023, high inflation eroded YoY gains in real wages almost without interruption, apart from this past December, when the above-mentioned private sector pay hikes kicked in.

But inflation has now subsided from the peak level recorded in February, fuelling handsome real wage gains in the past several months. YoY real wage growth measured 2.7% in September, for instance.

Wage increases broadly similar across worker groups …

The most recent itemised data on pay rises for various worker groups and sectors extend through July. Examining the index by worker group shows very similar wage rises from one group to another. In the past year, private sector wages have risen most, or by 11%, followed by municipal employees’ wages (10.4%) and then by State workers’ wages (10.2%).

Wage developments for the aforementioned three groups have changed markedly, as the chart indicates. From mid-2020 until the beginning of 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 nearly 50%, followed by private sector wages (40%) and then State employees’ wages (38%).

… and economic sectors

In the past year, private sector wage rises have been similar from one sector to another. Wages in the transit and storage sector have increased the most (12.8%), followed by the hospitality industry (12.6%) and the construction industry (11.6%).

Since the beginning of 2019, wages have risen by far the most in the hospitality sector (53%), followed by the utilities sector (42%), while pay in the financial and insurance sector has risen the least (30%).

Labour market still tight

The labour market is still tight, and demand for labour is strong. Demand has been satisfied with foreign workers, who now constitute about one-fourth of the labour force. The tight labour market has caused unemployment to fall rapidly, to an average of 3.0% in September.

Labour demand still appears quite strong, according to the Gallup survey of Iceland’s 400 largest firms, conducted for Central Bank and the Confederation of Icelandic Employers. In September, 40% of executives surveyed reported worker shortages. Although this is well below the mid-2022 peak of 56%, it is very high in historical terms. In the manufacturing sector (58%) and in construction and utilities (56%), the need for workers is greatest in the autumn. But demand for labour can fluctuate widely from one season to another, as can be seen in the urgent need for workers during the peak tourist season.

Given how tight the labour market is at present, the outlook for the coming term is quite uncertain. The wage agreements landed early in 2023 were short-term contracts, and the next round of negotiations is rapidly approaching. In our new macroeconomic forecast, we project that nominal wages will rise by 9.3% this year, bumping real wages up by 0.6% This is a smaller YoY change than is indicated by current measurements, as the private sector contracts were signed at the end of last year, so that measurement will be grouped with 2022 data.

For the next two years, we expect fairly generous pay rises as well: nearly 8% in 2024 and around 6% in 2025. This, together with declining inflation, translates to a real wage growth rate of 2.3% per year in 2024 and 2025.


Bergthora Baldursdottir