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Real wages still shrivelling

The general wage index fell marginally month-on-month in July while rising 8% year-on-year. Inflation remains high, however, cutting into real wages, which look set to keep deteriorating over the next few months.

Statistics Iceland (SI) published data underlying the general wage index and the real wage index for July this morning. The general wage index fell by 0.1% between June and July, the first MoM decline in this particular index since July 2021. The YoY rise in the index now measures 8.1%, broadly in line with the pattern seen in the past year. A large share of wage-earners received two contractual pay rises over this period: a regular increase at the turn of the year and the GDP growth supplement that was added to monthly wages in April.

Nominal wage hikes have been substantial in the past year, but they have been eaten up by inflation. Real wages contracted by 1.3% MoM in July and have now shrunk by 1.7% YoY. This is the second month in a row to see real wages lower than they were a year earlier, putting an end to an uninterrupted rise dating back to 2010. This trend is likely to continue, as headline inflation now measures 9.9% and is set to remain high in the coming term, in spite of signs that it will weaken soon.

Wage rises largest in tourism

A detailed breakdown of the wage index is available through May. Closer scrutiny reveals a continuation of the recent pattern, with municipal employees’ wages rising the most in the past year, or 9.4%. Next in line were private sector workers and State employees, at 8.3% and 7.5%, respectively. The Living Standards Agreements provided for unit-based wage rises, and because municipal employees are generally lower-paid than the other groups mentioned above, their proportional pay hikes turned out somewhat larger.

As the chart above shows, wages in the tourism industry have risen most in the past year (nearly 12%), while financial sector wages have risen least (6%). Other sectors have split the difference, with pay rises ranging between 8% and 9% YoY.

Tourism is in full swing by now after a rapid turnaround. Around 870,000 tourists have visited Iceland thus far in 2022, and it has been challenging for companies in the sector to fill available jobs, so it should come as no surprise that wages should rise this steeply.

Real wages continue to shrink despite nominal pay rises

Even though wage agreements are set to expire over the next few months, the final tranche of the GDP growth supplement will take effect next April. It looks as though the supplement paid in 2023 will be the same as the last one, as it is calculated on the basis of GDP per capita. According to our macroeconomic forecast and SI’s population projections, GDP per capita will be 2.7% this year, meaning that pay scales will rise in April by ISK 10,500 and other wages by ISK 7,875.

We project that inflation will remain high throughout this year, and because it is unlikely that wages will rise faster than the price level in the near term, real wages look set to deteriorate further. If inflation starts falling rapidly in 2023, the trend will reverse again. Wage agreements are due to expire in the next few months, and there is every indication that negotiations will be contentious. The outcome will be a major determinant of developments in nominal wages and inflation – and, of course, in real wages – in the coming term.


Bergthora Baldursdottir