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Wages still climbing

Both the wage index and the real wage index rose month-on-month in September, and the pace of twelve-month wage growth is relatively swift in historical terms. Public sector employees – municipal employees in particular – are in the lead in terms of pay hikes at the moment.

Statistics Iceland (SI) has recently published data underlying the wage index and the real wage index for the month of September. The wage index rose by 0.7% month-on-month and by 7.7% year-on-year. Twelve-month wage inflation has been broadly stable in recent months and remains brisk in historical terms, although the rise in the wage index has lost pace after peaking early this year. In February and March 2021, for instance, it measured 10.6%, as the twelve-month measurements taken in those months included two contractual pay increases.

Real wages increased by 0.2% MoM in September but have risen by 3.3% in the past twelve months, whereas inflation stands at 4.4%. Although inflation is quite high, real wage growth remains robust, although it, too, has lost momentum since February, when it measured 6.2% – largely for the same reasons the wage index has followed this pattern.

Municipal employees lead the pay rise parade

The public sector has been in the forefront of wage growth in the recent term. Examining the index from the beginning of 2019 (when the Living Standards Agreements took effect) until July 2021 shows that local government employees have received the largest proportional pay rises over this period, or nearly 25%. Next in line are State employees and private sector workers, at 18% and just over 16%, respectively, for the same period.

The aforementioned wage agreements provided for unit-based increases, which means lower-paid workers receive larger proportional pay rises than their higher-paid counterparts. According to SI data, municipal employees’ wages are proportionally the lowest, which explains to a large extent the more rapid wage growth among this group of workers. In addition, the shortening of the work week affects the wage index, which is designed to measure regular pay per hour worked. The reduced work week has affected public employees more than private sector workers. According to SI, from November 2019 through June 2021, the impact of the shorter work week increased the wage index by 1% for private sector workers, 2.7% for State employees, and 3% for municipal employees.

Real wages rising despite unemployment

Real wage growth shows no sign of abating, in spite of the economic downturn. In Q1/2021, for instance, when unemployment had soared to 11.3%, real wages rose quite strongly. It is highly unusual to see real wage growth juxtaposed with both elevated unemployment and an economic contraction; in fact, this pattern has never before been seen in Iceland’s modern economic history – at least not such a dramatic example of it. Unemployment has been falling steadily in recent months, to 5.5% as of September.

In the coming term, real wage growth will be driven by contractual pay rises set to take effect at the turn of the year, and by the GDP growth increment provided for in the Living Standards Agreements, which will probably be invoked for the first time in May 2022. Based on our macroeconomic forecast and SI’s population projections, the GDP growth increment could add ISK 10,500 to regular monthly pay scales and ISK 7,875 to other wages. Longer-term developments in the labour market will depend largely on the next round of wage negotiations, which are slated for the latter half of 2022.


Bergthora Baldursdottir