Business group says Icelandic wage rises are twice Nordic rate

Iceland’s wage increases are typically about twice those in other Nordic countries, while high inflation expectations remain one of the economy’s biggest problems, the Confederation of Icelandic Enterprise’s deputy director Anna Hrefna Ingimundardóttir told mbl.is.

Inflation reached 5.9% in September, up 0.3 percentage points from the previous month, according to figures published by Statistics Iceland. Ingimundardóttir said the latest reading was not a surprise. The reversal of a reduction in value-added tax on fuel had a considerable effect on the monthly figure, but she said the business group was deeply dissatisfied with inflation overall.

The group is calling for short-term measures, including companies temporarily holding back price increases, as well as structural changes to the labour market. Ingimundardóttir said wage-setting should be aligned with the economy’s underlying value creation to bring down inflation expectations over the long term.

Analysts expect inflation to ease relatively quickly over the course of next year, she said, but the outcome will depend largely on how the current labour-market situation is resolved, following a breakdown in the assumptions underpinning wage agreements.

When stability agreements were signed in March 2024, economic growth and productivity gains were expected but did not materialise as hoped, Ingimundardóttir said. She argued that wages have repeatedly been negotiated above what the economy can sustain, contributing to higher inflation and interest rates than in comparable countries.

She said labour-market parties in other Nordic countries established their systems before the turn of the century and have maintained them, with more moderate inflation and interest rates after reforms. Ingimundardóttir added that workers and companies both take risks when agreeing to wage rises, since neither can know in advance how the economy or a company’s business will perform.