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Unemployment falls to four-year low

Unemployment fell month-on-month in May and now measures 3.0%, its lowest in more than four years. The labour market is tight, a large share of firms still consider themselves understaffed, and strong demand for labour has been met with foreign workers.

According to recent data from the Directorate of Labour (DoL), registered unemployment measured 3.0% in May, down from 3.3% in April and 3.7% at the beginning of 2023. Registered unemployment has not been this low since January 2019, before airline WOW Air failed, causing the jobless rate to spike. Unemployment is generally lowest during the summer, so we expect the current rate of 3.0% to hold broadly unchanged in coming months.

Significant tension in the labour market

The market is tight, and demand for labour is strong. According to the seasonally adjusted results of Gallup’s survey among executives from Iceland’s 400 largest companies, 30% of firms were planning to recruit staff in the next six months, and only 12% were planning to downsize. The share planning to add on staff has fallen from its Q1/2022 peak of 40%, however, and the share of firms planning to lay off staff has shrunk, although it remains high in historical context.

The recent surge in labour demand has been addressed with foreign workers, who now constitute an all-time high of 22% of the labour market. This massive influx of foreign workers explains most of Iceland’s recent population boom. Population growth measured 3% in 2022, setting an all-time record, and the outlook is for continued labour importation in the near future – at least while the need for workers remains strong. This can be seen clearly in Q1/2023 population data, which show that the population increased by over 3,000 during the quarter, including 2,790 foreign nationals.

Unemployment to hold broadly steady through the year-end

The labour market has shown once again how adaptable it is under stress. Unemployment now measures 3.0%, after hitting its pandemic-era peak of 12% just over two years ago. We expect it to remain broadly at the current level. In our most recent macroeconomic forecast, we project an average unemployment rate of 3.4% for the year as a whole. Then, as tension in the labour market eases next year, we expect it to rise marginally, to around 4% in 2024 and 2025.


Bergthora Baldursdottir