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Unemployment back down to boom-year level

The labour market has recovered remarkably swiftly, and unemployment is back to its pre-pandemic level after the COVID-related surge. The labour market is tight, with over half of executives from Iceland’s largest firms reporting staffing shortages. Foreign workers will probably fill these job vacancies to an increasing degree in the near future.

According to Statistics Iceland’s (SI) labour force study, 210,400 persons were employed in the domestic labour market in Q3/2022, and the labour participation rate was 79.8%. The number of employed persons was up by 7,300 year-on-year, and Iceland’s population increased by half a percentage point over the same period.

According to the SI survey, 7,300 people were unemployed during the period, giving an unemployment rate of 3.4%, the lowest by this measure since Q4/2018. These figures align relatively well with the Directorate of Labour’s (DoL) data on registered unemployment. In Q3, registered unemployment measured 3%, and in September the jobless rate was down to 2.8%. This registered unemployment rate is also the lowest seen in Iceland since year-end 2018.

Working hours have grown considerably shorter in recent years, mostly because of provisions in wage agreements on the shortening of the work week. Since the Living Standards Agreements were signed in 2019, the number of hours worked per week has fallen by just over 2, to an average of 37.5 hours per week. The number of hours worked can fluctuate significantly from quarter to quarter, however, and in terms of annual averages, it has fallen by roughly 3 hours since 2019.

Tight labour market

The labour market has rebalanced remarkably quickly, given the outlook at the onset of the pandemic. The rapid economic recovery has fostered strong job growth and caused the jobless rate to fall as rapidly as it indeed has. If anything, there seems to be a shortage of workers, not jobs. According to the recent Gallup survey carried out for the Central Bank (CBI) and the Confederation of Icelandic Employers (SA), 56.5% of company executives consider themselves short-staffed, the largest share reported since measurements began in 2006.

The shortage is most pronounced in the construction sector, where 80% of executives say they are understaffed. Next in line is retail and wholesale trade (75%), followed by tourism (72%).

Foreign worker numbers hit record high

The Icelandic economy is righting itself after the pandemic, and the outlook is for robust growth in sectors such as tourism and construction, where labour shortages seem to be most severe. Job vacancies appear increasingly to be filled with foreign workers. In Q3, nearly 46,000 immigrants were employed in the domestic market, or a record-high 21% of the labour force. Given the need for workers in these sectors, this percentage can be expected to keep rising in the coming term.

Unemployment has now recovered fully from the pandemic, and the labour market is very tight. Clearly, there is a need for foreign workers to fill jobs in Iceland’s key export sectors. Against this backdrop – high inflation and a tight labour market – the upcoming round of wage negotiations will certainly be challenging.

Author

Bergthora Baldursdottir

Economist

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