Icelandic wage rises run at twice Nordic levels

Wage increases in Iceland are typically about twice those in other Nordic countries, Anna Hrefna Ingimundardóttir, deputy director and head of economics at the Confederation of Icelandic Enterprise, an employers’ association, told mbl.is. She said high inflation expectations are one of the biggest problems facing the economy.

Inflation reached 5.9% in September, up 0.3 percentage points from the previous month, according to figures released by Statistics Iceland. Anna Hrefna said the result was not entirely unexpected: the reversal of a cut in value-added tax on fuel had a considerable effect on the monthly reading. She said the association remained very dissatisfied with inflation.

She said analysts expect inflation to ease relatively quickly over the coming year, but that will depend largely on how the current situation in the labour market is resolved, following a breach of the assumptions underlying collective agreements.

The association is calling for structural changes to the labour market to bring down inflation expectations permanently, alongside short-term measures such as companies pledging to hold back price increases temporarily. Anna Hrefna said wage-setting needed to reflect the economy’s underlying ability to create value.

When collective agreements were reached in 2019, she said, forecasts had pointed to economic growth and productivity gains that did not materialise as hoped. That has added to inflationary pressure, she said, arguing that wages are repeatedly negotiated at levels the economy cannot sustain, contributing to higher inflation and interest rates than in comparable countries.

Anna Hrefna said labour market participants in the other Nordic countries established their current systems before the turn of the century and have kept them because they see the benefits. Inflation has been considerably more moderate there since reforms to those systems, she said, with interest rates also lower.

She added that collective bargaining relies on forecasts of economic growth or estimates of sustainable growth. Workers take a risk when agreeing to specific wage increases, she said, and businesses also take a considerable risk when agreeing to increases without knowing how their operations will perform.