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Will unemployment fall still further in 2023?

Unemployment remained flat month-on-month at just under 4% in February. In general, it is higher during the winter and eases as summer approaches. We project that it will fall further as summer draws near and that the foreign labour force, currently about a fifth of the labour market, will continue to grow.

According to recent figures from the Directorate of Labour (DoL), registered unemployment measured 3.7% in February and was unchanged MoM. Unemployment is generally higher during the winter, especially in January and February, but usually subsides as summer approaches.

In most parts of regional Iceland, unemployment fell between months. It was highest on the Suðurnes peninsula but fell from 6.0% in January to 5.8% in February. The second-highest unemployment rate was in greater Reykjavík, where it measured 3.8% and was flat MoM. Unemployment has fallen rather quickly after peaking at 11.6% at the beginning of 2021. A year ago it measured 5.2% nationwide, just over 5% in greater Reykjavík, and more than 9% on the Suðurnes peninsula.

Population and job numbers on the rise

The labour market has recovered remarkably quickly after the pandemic, and job numbers are now above the pre-pandemic level. In 2022, there were nearly 230,000 jobs, on average, up from 220,000 in 2019. Job growth has kept pace with population growth in Iceland, as recent figures from Statistics Iceland (SI) show the population growing by 11,500 in the past year. On 1 January 2023, Iceland’s population was closing in on 388,000, a jump of 3% year-on-year – the largest single-year increase in the history of SI data, which extend back to 1732.

Closer scrutiny of the data shows that most of the rise is due to immigration, which aligns well with figures on the number of foreign nationals in the Icelandic labour market. There are currently just over 46,000 foreign workers in Iceland, or around 22% of the labour market. This percentage represents an all-time high, and it can be expected to rise further in the near future, if the need for workers in many of Iceland’s key sectors is any indication. In fact, the outlook is for significant growth in sectors such as construction, where staffing problems have been perhaps greatest. According to SI, there are nearly 1,500 vacancies in the sector, or 8% of all construction industry jobs.

Executives from Iceland’s largest companies appear to agree that there is a driving need for workers. According to Gallup’s December 2022 survey among Iceland’s 400 largest firms, 53% of company executives consider themselves short-staffed, a sizeable percentage in historical terms, although it has fallen since last autumn. Staffing woes are most pronounced in the construction sector, where 78% of executives say need workers, followed by retail and wholesale trade (63%). Worker shortages in tourism tend to fluctuate more: 29% of firms reported being understaffed in December, but this figure can be expected to rise again as the peak season draws closer. Job numbers therefore look set to increase further in the coming term, and a large share of the newly created positions will probably be filled by foreign workers.

Unemployment set to fall further

According to our macroeconomic forecast, published at the beginning of February, year-2023 unemployment will be broadly at the Q4/2022 level of around 3.3%, on average. We therefore expect it to taper off from the current monthly levels as the year advances and then rise marginally in 2024,as tension in the labour market eases. We forecast average unemployment at 3.7% in 2024 and 3.8% in 2025.


Bergthora Baldursdottir