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Wages up 7.3% year-on-year

The wage index rose month-on-month in February, and its twelve-month pace has been relatively stable in the recent term. Real wages deteriorated MoM, however, with surging inflation putting a damper on real wage growth. The negotiated GDP growth supplement will boost wages even further in May.

This morning, Statistics Iceland (SI) published data underlying both the general wage index and the real wage index for February. The general wage index rose by 0.3% MoM and is now up 7.3% YoY.  The twelve-month rise in the index has held relatively steady at 7-8% in the past year. It is still rather swift in historical context, although the pace has eased after peaking at 10.6% in February and March 2021.

Real wages fell by 0.8% MoM but have risen by 1.0% in the past twelve months, whereas inflation has soared to 6.2%. Real wage growth thus measured has slowed markedly in recent months, which have seen inflation rise to its highest in nearly a decade. Sluggish real wage growth can be expected to continue in the near future, as inflation is projected to keep climbing in the months to come.

The past year’s changes in wages are due largely to pay hikes taking effect at the beginning of 2022, when the [general] wage index rose by 3.7%. These pay rises, which were provided for in wage agreements, affected a majority of the labour market. The most common pay hikes in January 2022 ranged between ISK 17,000 and ISK 25,000 for a full-time position. The shortening of the work week has also pushed index index values upwards in the past year, as the indices measure regular wages per hour worked.

Municipal employees receive the largest pay rises

The publication of the wage index was accompanied by a breakdown of developments in 2021. Breaking the index down by wage-earner group shows that municipal employees’ wages rose most in 2021, or by just over 10%. Next in line were State employees and private sector workers, at 9.1% and 6.4%, respectively.

The Living Standards Agreements provided for unit-based wage rises, and because pay is generally lower in the public sector than in the private sector, public workers’ pay has risen by a larger percentage. Public sector workers have also been affected more by the shortening of the work week. According to SI, from March 2019 through September 2021, the impact of the shorter work week increased the wage index by 3.5% for municipal employees, 3.1% for State employees, and 1% for private sector workers.

Further pay increases on the horizon

The Living Standards Agreements also provided for a so-called GDP growth supplement. According to year-2021 GDP growth data published by SI at the end of last month, GDP growth per capita measured 2.53% YoY.

This variable is important for the calculation of the GDP growth supplement to be paid this May. Based on these figures, pay scales will rise by ISK 10,500 and other wages by ISK 7,875.  Thus the outlook is for continued wage inflation in the coming term, while longer-term developments in the labour market will depend largely on the next round of wage negotiations, slated for the latter half of 2022. The Living Standards Agreements remain in effect through the end of 2022.


Bergthora Baldursdottir