Why Iceland's wage increase outstrips the rest of Europe

Anna S. Sigurdardottir, supervisor of salaries at Statistic Iceland, told the Morgunbladid newspaper that this could be explained with special Covid benefits and simply a sharp increase after a drop in hourly salaries last year because of the pandemic. So the main cause of this is not necessarily a straightforward salary increase. Sigurdardottir also says there is a tendency for more increases in salaries where there is higher inflation.

That last part is a well-known economical phenomenon in Iceland. Katrin Olafsdottir, assistant professor in economics at Reykjavik University, says that salaries always increase more in Iceland than in most other countries.

“So instead we have more inflation than other countries. It almost doesn’t matter what country you compare with. There is a 2 – 3% salary increase in other countries, while it’s 6 – 8% here. However, purchasing power has increased substantially.”

Olafsdottir says that this is simply how it has always been in Iceland.

“There is regularly a discussion on trying to do this like other Nordic countries, with a more moderate salary increase. We just simply haven’t managed to get there. In my lectures, I’ve always taken random countries and random periods, and the conclusion is always the same – there are larger salary increases in Iceland than anywhere else in Europe.

"This can be explained in the collective agreement model or the lack of such a model. Someone starts, and then all the others come and want a bit more, instead of using the Nordic method, which defines what is available and then the discussion is about is how to divide it.”

Olafsdottir says that the currency value also plays a part.

“The small currency means that our competitive position varies constantly. Sometimes we’re expensive, sometimes cheap, and this large salary increase can be a factor in this.”

The municipal sector has seen the highest wage increases in Iceland, but the timing of the agreements in the different sectors also plays a part. In the private sector the partners agreed to wage increases in April 2019, April 2020 and January 2021, writes Statistics Iceland. Source: Hagstofa Íslands.

The increase is a bit more in the municipalities than in other sectors. Olafsdottir says that has an explanation.

“The municipalities have a larger portion of their employees on the lowest salary. In the last collective agreement, the emphasis was to increase the lowest salaries more than others. It might look like the municipalities are being more generous with their employees but that’s not the case.”

Olafsdottir says that it is difficult to predict the future. The central bank, however, has been predicting strong economic growth.

“We see unemployment fall rapidly and employers, especially in tourism, are even having a hard time finding staff.  We don’t know why that is, it could be low salaries but it could also be that people are not ready to take temporary jobs. And it’s also possible that those who went home when the pandemic hit are not coming back. I know this is also the case in Denmark.”

But inflation, which has gone from 3% to 4.4% in just over a year, can not be explained through higher salaries alone. What increases it now are two things – the housing market and more expensive imports because of higher prices in the world market.

“There are snags in the system. Transport has become much more expensive. Many people say it is a temporary situation but we don’t know how long it will last. We thought this would only take a few months, but this will not work itself out any time soon.”