Statistics Iceland (SI) published data underlying the general wage index and the real wage index for October yesterday. The general wage index rose by 0.3% month-on-month and by 7.9% year-on-year, broadly keeping the pace seen in recent months. CPI inflation measured 9.4% in October, indicating that real wages have contracted by roughly 1.4% in the past year. They have been falling by that measure since June 2022 but had been rising continuously from 2010 until then. This trend is likely to continue as long as headline inflation remains as high as it is.
Wages still rising handsomely year-on-year
The twelve-month rise in the general wage index has kept a steady pace in recent months. In terms of the CPI, real wages have continued to shrink, but in terms of other indices typically used to calculate real wages, they have risen. It looks as though further wage increases are in the cards, as collective bargaining agreements are expiring one after another this coming winter.
However, as we have discussed recently, real wages as measured using the general wage index deflated with other consumption indices from SI have risen in the past year. Volatile items such as house prices are omitted from such indices, including the Harmonised Index of Consumer Prices (HICP), which is often used by other European countries to calculate real wages. In terms of the HICP, real wages are up 1.4%, and in terms of the CPI excluding housing (CPIXH) they have risen 0.6%. Both of these measures show that real wages are still rising but at a reduced pace.
Wage gains weakest for State employees
Alongside the general wage index, SI has published a breakdown of index data through August. Examining wage developments for various employee groups reveals changes that have taken place in the recent term. Municipal employees’ wages have risen the most in the past year, or nearly 9%, the same rate as in recent months. Next are private sector employees’ wages, which have risen 8%, with State employees bringing up the rear at 7%. This is a definite shift, as private sector employees long recorded the smallest annual wage gains. The private sector overtook State employees in March 2022, however, and has remained ahead of them since.
The Living Standards Agreements from spring 2019 provided for unit-based wage rises, and because municipal employees are generally lower-paid than the other groups mentioned above, their proportional pay hikes have been larger. Furthermore, the shortening of the work week has generally affected public employees more than private sector workers. Now, however, there is a growing likelihood that wage gains in the private sector will start picking up speed, as unemployment measures 2.8% in a very tight labour market.
Closer examination of private sector data show that tourism industry wages rose perhaps the most in the twelve months through August 2022, or nearly 12%. Next in line are construction workers’ and utilities employees’ wages, which are up 9%. Financial sector wages have risen the least, at only 6%, while other sectors are somewhere in the middle, or around 8%.
The Living Standards Agreements probably account in part for differing developments across sectors. Under those agreements, workers with the lowest pay receive the largest increases. Nevertheless, it is impossible to ignore the fact that the labour market is squeezed by a significant shortage of workers, especially in industries such as tourism and construction. According to Gallup’s most recent corporate survey, conducted among Iceland’s 400 largest firms, 56.5% of executives consider themselves short-staffed – the largest share since measurements were introduced in 2006. It is unsurprising, then, that private sector pay has risen and that tourism and construction should be in the forefront.
Further pay increases on the horizon
Wage agreements are set to expire one after another in the near future. For much of the labour market, it looks as though negotiations could be complicated, as there is a gaping difference between leading labour unions’ demands and employers’ proposals. In our macroeconomic forecast from September, we projected that wages would rise by 7.6% this year, but the most recent figures make an even bigger increase likely. For 2023 we had forecast that wages would rise 7.4%, slightly above the recent average. The uncertainty here is probably concentrated on the upside, and we consider it clear that hefty pay hikes are in the offing. Just how hefty will hopefully come clear in the next few months.