From Iceland — Labour, Management & Central Bank Square Off Over Inflation--And How To Stop It

Labour, Management & Central Bank Square Off Over Inflation–And How To Stop It

Published June 23, 2022

Andie Sophia Fontaine
Photo by
James Cridland/Creative Commons

There is no disputing that Iceland’s inflation rate has been steadily rising–from 4.3% in July 2021 to 7.6% in April 2022. The real question is what to do about it, and the Central Bank, business leaders, and union representatives all have different approaches that indicate a tough road ahead in the upcoming wage negotiations.

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Ásgeir Jónsson, the chair of the Central Bank, announced yesterday that the Central Bank would raise the policy rate by another percent, taking it to 4.75%. This is the seventh such policy rate increase in the past year.

The raising of the policy rate is, of course, to try and bring down inflation, and Ásgeir was blunt when speaking to reporters, saying, “We’ll go as high as we need to” when asked how high the policy rate could get. Ásgeir also said that this ought to send a clear message to business leaders and union representatives alike, as wage negotiation contracts are coming up soon, saying that there is no need to “ask for special wage increases to compensate for inflation”.

On this point, there is little agreement.

Purchasing power and wages

Halldór Benjamín Þorbergsson, the chair of the Confederation of Icelandic Employers (SA), told RÚV that he considers it unwise “to get into a staring contest with the Central Bank”, saying that the Central Bank has the tools at their disposal to make policy rates hurt. He added that business owners are also affected by rising policy rates.

While reluctant to say whether he believed it is likely that SA will be able to convince unions to settle for a small wage increase, he pointed out that Iceland’s purchasing power is nearing its peak. Data from Statistics Iceland does show the purchasing power of disposable income rising steadily, and he added that “sometimes you need to take one step back in order to take two steps forward later. I think that applies well to the fragile state of the economy today.”

While Halldór is likely hoping to keep wage increases as low as possible, when asked if he believed business owners were willing to hold off on raising prices, he said, “I choose not to look at this so narrowly.”

The union response

Meanwhile, the Federation of General and Special Workers in Iceland (SGS) say that they are more aiming for a krónur amount increase in wages rather than a percentage increase, as is usually the case in wage negotiations, in the hopes that this will benefit their lowest paid workers in the inflationary market.

Regardless of the purchasing power in Iceland right now, Vilhjálmur Birgisson, the chair of SGS, pointed out that debt service has increased, meaning that the amount of cash people have to pay on interest rates in order to pay down debts has risen.

Whatever the next few weeks and months bear out, one thing is certain: upcoming wage negotiations are going to be hard fought.

Drífa Snædal, the president of the Icelandic Confederation of Labour (ASÍ), pointed out that the policy rate is higher now than it was three years ago, when the previous wage agreements were approved. In response to Ásgeir’s cautioning about wage increases, she said, “Let’s be clear that this trick is always used and this song about the unions and wage earners needing to shoulder responsibility is rather tired. There hasn’t been wage-driven inflation in Iceland for years or decades.” Rather, she believes the inflation rate can be attributed to a runaway housing market.

Wages, housing, and inflation

Indeed, the very idea that rising wages drive inflation is itself a matter of dispute. Paul Kedrosky, an investor and partner at SK Ventures, has said that the idea that wages drive inflation is “nonsensical”, adding that it is “not born out by historical wage-price relationships, where, while there is a relationship, it is messy and nonlinear.” At the same time, he cautioned that expecting wages to go up with inflation could lead to companies laying off workers.

Currently, Iceland is experiencing a massive labour shortage, in sectors such as construction and tourism, so lay-offs are unlikely, and labour shortages are traditionally favourable towards unions in wage negotiations.

The housing market can, however, have a real and significant effect on inflation, brought about by demand outpacing supply to a great degree. Simply put: when housing demand outpaces supply, housing prices go up, which leads to needing an increasingly higher income to afford to buy a home, and the constraining supply in turn contributes to rising consumer prices.

It is no secret that housing prices in Iceland have been rising dramatically while the supply is continuing to be constrained–and rising policy rates contribute to the cost of owning a home. This has in turn affected the rental market, which hits the lowest income earners especially hard.

Whatever the next few weeks and months bear out, one thing is certain: upcoming wage negotiations are going to be hard fought.

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