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Unemployment back to pre-pandemic level

Unemployment is now roughly where it was at the beginning of 2019, indicating that the labour market has regained its footing after the pandemic. Actually, a recent survey conducted among Iceland’s 400 largest firms indicates a significant shortage of labour – one that will probably be resolved with imported workers.

According to recent figures from the Directorate of Labour (DoL), registered unemployment weighed in at 3.2% in July, around the same as in the month beforehand, when it measured 3.3%. Unemployment has fallen swiftly after peaking at 11.6% in January 2021, and is now broadly where it was at the beginning of 2019, just before the collapse of airline WOW Air. It rose after WOW failed in spring 2019, and then the pandemic pushed it through the roof.

The jobless rate declined in July in all regions of Iceland except the West Fjords, where it remained flat. As in the recent term, it was highest on the Suðurnes peninsula, at 5.5%, although there, too, it has plummeted since peaking at 26% in January 2021. The second-highest unemployment rate, 3.5%, was in greater Reykjavík.

The rapid economic recovery has been the main reason the jobless rate has fallen as rapidly as it indeed has. The tourism industry is back in action: Some 870,000 foreign nationals have visited Iceland year-to-date, and the total for the year looks set to equal or exceed 1.6 million, as we have discussed recently.

Strong demand for labour

In a recent Gallup survey taken among executives from Iceland’s largest companies, an all-time record of 55% of respondents consider their firms understaffed. The shortage is most pronounced in construction, specialised services, and tourism. According to the DoL, the number of unemployed fell in all sectors in July, and unsurprisingly, the biggest proportional decline was in tourism-related sectors and IT.

It has undeniably been a real challenge for companies to recruit staff in sectors such as tourism in the recent past, and foreign workers have increasingly been hired to fill job vacancies. Data from Statistics Iceland (SI) on imported labour only extend through March, but they clearly show a marked increase in the number of foreign workers in Iceland, who now account for around 20% of the labour force. This is close to the year-2019 peak, and presumably, the foreign labour force has grown even more in the past few months.

What’s in store for the job market?

The labour market has recovered more or less entirely from the pandemic, and the jobless rate is broadly back to the pre-COVID level. The rapid economic recovery has fostered job growth, causing the steep drop in the jobless rate seen in the newest numbers. We expect unemployment to remain around this level for the rest of the year.

Wage agreements are set to expire one after another in coming months. Chief among them is the 1 November expiry of the Living Standards Agreement, which covers more than 100,000 workers in the country’s largest labour unions. The outlook is for contentious wage negotiations this coming winter – unemployment is low, inflation is high, and real wages have begun to shrink after a decade of uninterrupted growth – but the outcome will be a major determinant of developments in both inflation and real wages in the coming term.


Bergthora Baldursdottir