The general wage index rose 0.7% month-on-month in September, according to new figures from Statistics Iceland (SI), and the base wage index is up 0.3%. In Q3 as a whole, wages therefore rose by 6.3% YoY and 0.9% between quarters. This month’s rise in the index is the largest since March 2024, when pay hikes negotiated in the first round of wage agreements took effect. This is because the index typically rises more in September than in the months beforehand, mainly as wage differentials and other premiums are typically higher than in the summer, when pay rates tend to reflect summer holidays and work by temporary employees.
Nominal wage growth eases, while real wage growth picks up
The general wage index increased between August and September and has risen by 6.1% year-on-year, according to newly published figures from Statistics Iceland (SI). The pace of the increase has eased but is still in excess of inflation, and real wages are therefore on the rise.
Real wages on the rise
As can be seen in the chart above, real wage growth has picked up in recent months. In September, the real wage index had risen 0.9% YoY. The real wage index rose by 1.4% this past March, when the above-mentioned wage agreements took effect, but the pace eased over the summer. Real wages have risen by 0.61% thus far in 2024.
In our most recent macroeconomic forecast, we projected that nominal wages would grow this year by 5.7%, while real wages would contract marginally, but after a few unexpectedly favourable inflation measurements, the probability of slight growth in real wages has increased. We also expect nominal wages to rise by 5.1% in 2025 and 4.7% in 2026. If the main assumptions underlying our forecast are borne out, real wages will grow by 1.4% in 2025 and 1.7% in 2026.
Various worker groups’ wage rises moving towards equilibrium
Recent data on wage rises among various worker groups and sectors, which extend through July 2024, show signs of movement towards equilibrium. The chart shows a certain turnaround in relative wage developments in the private and public sectors this past March. Wages rose markedly with the signing of new contracts for a large share of the private sector, which took place concurrent with the expiry of contracts affecting a large proportion of the public sector.
But the most recent data suggest that the public sector is now rebalancing, with wages moving towards an annual rate of increase comparable to that in the private sector. This implies that private vs. public sector wage developments are shifting towards a better balance, which reflects the landing of the economy alongside falling inflation. A fairly broad consensus has been reached on wage agreements, although contracts have yet to be signed for part of the labour market, particularly the public sector.
Developments by occupation also suggest greater equilibrium
The most recent data on wage rises by private sector occupation, which extend through July 2024, indicate that pay hikes are relatively well balanced across the private sector. Wages have uniformly risen in excess of the price level, which shows a positive trend in the labour market.
Pay rates for those working in transport and storage rose the most, or 8.6%, in the twelve months to July 2024. In other occupations, pay rises are close behind, at 6-7%. The smallest increases over the specified period were in the financial and insurance sector and in retail and wholesale trade, where pay rose 6.5%.
These numbers show a similar balance in various parts of the private sector, suggesting that wage drift is not in evidence. A more balanced pace of wage increases across segments of the private sector also reduces the probability of wage drift.
Reduced demand pressures in the labour market curb wage drift
Unemployment was somewhat higher in the first three quarters of 2024 than over the same period in 2023. It has averaged 3.5% thus far in 2024, as compared with 3.2% a year earlier. We forecast that unemployment will measure 3.7% in 2024 as a whole.
Further ahead, however, we expect unemployment to taper off slightly. We forecast it at 4.1% in 2025 and 3.8% in 2026. These figures are based on registered unemployment, but in general, SI’s unemployment numbers fluctuate more widely.
As is noted above, reduced demand pressures in the labour market curb wage drift and play a role in our expectations of slower pay rises in the coming term. Nevertheless, it is quite likely that inflation will fall even further, fuelling fairly robust real wage growth.
Private consumption could be set to grow in the near future, after contracting slightly in H1. As we discussed recently in our reporting on the October spike in the Gallup Consumer Confidence Index, the index tends to move broadly in line with private consumption. Presumably, the jump in October is due in part to the policy rate cut early in the month. Over time, lower interest rates could affect households’ proclivity to save, as the saving rate is still quite high. The above-described developments in real wages are also conducive to stronger private consumption. In September, we forecast that private consumption would grow by just under a percentage point this year, even though it had contracted in H1. It seems to us that the developments outlined above align well with that forecast.
Analyst
