Closer scrutiny shows that unemployment was far higher among foreign nationals than among Icelandic nationals, measuring 8.7% and 2.6%, respectively. Joblessness among foreign nationals explains a large share of recent developments in unemployment. Unemployment among foreign workers is highest in the construction, trade, goods transport, and restaurant services sectors, all of which are typically more volatile than others. Among Icelanders, the jobless rate is highest in public services, healthcare and social services, and trade and goods transport.

Statistics Iceland also published the results of its labour force survey this morning, according to which the seasonally adjusted unemployment rate was 5.6% in May and unchanged between months. Unemployment according to the labour force survey tends to fluctuate more than registered unemployment, as the two measures are different. The labour force survey has shown unusually high unemployment in recent months, but Statistics Iceland’s change in methodology at the end of last year could have played a role.

Wage growth loses steam

The wage index fell by 0.3% between months in May, according to newly published figures from Statistics Iceland (SI), the first month-on-month drop since July 2023. Annual wage growth has slowed markedly in the past twelve months, with the wage index rising by 5.9% over the period, its smallest increase since the start of 2020.

In spite of increased inflation during the year and more sluggish wage rises, purchasing power held its ground. Headline inflation measured 5.1% in May, and real wages have therefore risen by 0.8% in the past twelve months. With higher inflation and more sluggish pay growth, however, real wage rises have lost considerable momentum.

To a large extent, wage developments have been shaped by long-term contracts that were signed in 2024 and expire in 2028. There was significant wage drift in the recent term, though, particularly during the period when the labour market was tightest. A smaller YoY rise in wages indicates reduced wage drift, which is consistent with a wider slack in the labour market. Furthermore, this year’s pay scale supplement was only 0.06% and had no effect on the wage index in April, whereas a year ago the same supplement equalled 0.6%.

Wage agreements at risk?

The private sector wage agreements signed in 2024 contain two clauses providing for a contract review, depending on inflation movements. In September 2025, the first of the clauses held, as twelve-month inflation measured 4.1%, comfortably below the contract review threshold of 4.95%.

The stakes are higher now, however, as inflation has turned upwards again since last autumn and measured 5.1% in May. Under the second review clause, contracts will be subject to review unless twelve-month inflation wither measures below 4.7% in August 2026 or averages 4.4% over the six-month period from March through August 2026.

Our forecast indicates that inflation will indeed exceed the threshold in August. As things stand now, we project that it will measure 5.1%. In spite of this, we expect the social partners to reach a consensus that will not involve terminating wage agreements. The most likely outcome is that an extra pay rise will be negotiated for 2027.

According to our most recent macroeconomic forecast, year-2027 wage hikes will be marginally larger than is provided for in the current wage agreements. The pay rises will be modest in historical terms, however, as wage drift will be limited. We forecast that wages will rise 6.2% in 2026, 5.7% in 2027, and 4.9% in 2028. This forecast is based on the change between annual averages, leaving different of about a percentage point between the two measures for this year.

These numbers represent considerably smaller wage increases than in recent years; for instance, YoY wage growth measured 7.9% in 2025, slightly above its ten-year average of 7.6%.

If this forecast materialises, real wages will continue to rise in coming years, but at a gentler pace. Based on our inflation forecast, real wages will rise by 1% in 2026, 1.3% in 2027, and 1.1% in 2028.

Unemployment likely to peak in 2026

Unemployment has been relatively high in 2026 to date, and at its highest since 2021, when the pandemic was in full swing. The jobless rate dips in the summer, in accordance with its seasonal pattern, and can be expected to rise again as the autumn advances. We project that unemployment will average 4.5% this year before easing in the two years to follow. The labour market has changed radically since the post-pandemic years, and the previous tightness has given way to a noticeable slack.

High interest rates have put a damper on activity, and increased uncertainty abroad has caused companies to be more cautious. Hiring plans are at a low point at present, with only 15% of executives from Iceland’s largest companies considering their firms understaffed. In addition, immigration has slowed significantly, reflecting reduced demand for labour.

That said, Iceland’s labour market is well known for its flexibility, and unless something unforeseen happens, even though unemployment peaks during the year, it will probably retreat from its high point fairly quickly. When the economy starts to rebound, unemployment can be expected to fall. We project it at 4.0% in 2027 and 3.6% in 2028.