Real wages fell by 0.3% MoM in July but have risen by 3.4% in the past twelve months, whereas inflation stands at 4.3%. Although inflation is quite high, real wage growth remains robust, although it has settled down somewhat from its February 2021 peak of 6.2%.

The past year’s wage movements are due mainly to contractual pay rises that took effect at the turn of the year and affected a majority of employees in the labour market. This is compounded by the shortening of the work week, which constitutes the equivalent of a change in wages and has pushed wage indices markedly upwards.

Public employees lead in wage hikes

A detailed breakdown of the wage index is available only through May. Breaking the index down by wage-earner group shows that municipal employees’ wages rose most between May 2020 and May 2021, or by 14.5%. They are followed by State employees, at 10.7%, and then private sector workers, at 5.8%. A large proportion of the rise in the wage index, which measured 7.5% YoY in May, is therefore due to the public sector. It is worth noting that on the whole, the shortening of the work week affected public employees more than those in the private sector, and the impact of the public sector on the wage index was commensurably stronger.

Real wage boost for low-income workers

It is interesting to examine which occupations in the private sector have received the largest pay rises. General workers benefited from the largest proportional pay hikes between May 2020 and May 2021, or 8.4%, followed by workers in service and sales, with 7.3%. Over the same period, specially educated workers’ wages rose least (3.9%), followed by specialists’ wages (4.2%). Because inflation measured 4.3% in May, the latter groups’ real wages remained flat or deteriorated slightly in the twelve months leading up to May 2021, whereas the former groups’ real wages rose 3-4% over the same period.

According to the median value for total wages in 2020, the lowest-paid groups received the largest proportional rise in pay. The median for service and sales employees is the lowest, at ISK 569,000 per month, followed by general workers, at ISK 594,000. The living standards agreements made in 2019 emphasised general unit-based increases and special rises in pay rates. As a result, wages rise proportionally more further down the pay scale, and vice versa. Accordingly, pay rises have been concentrated among the groups with the lowest wages, although real wage growth has been limited for most groups in the private sector.

Private consumption firming up

There is a strong correlation between developments in private consumption and real wages. The link between the two was severed when COVID came to town, though: private consumption shrivelled up in 2020, while real wage growth actually gained steam. The collapse in private consumption was presumably due to the sudden spike in unemployment, widespread shortages of various services, and an overriding sense of uncertainty. Related economic indicators imply that private consumption is picking up at present and will continue to do so in coming months. As a result, it is highly likely that the historical correlation between it and real wages will be restored soon. SI is scheduled to publish Q2/2021 private consumption data next week.

Real wages have been more or less immune to COVID, showing unusual resilience in the midst of an economic downturn. In the coming term, real wage growth will be driven mainly by contractual pay rises, which are set to take effect at the turn of the year. As a result, it can be assumed that the pace of the increase will ease in coming quarters. Developments further ahead will depend largely on the next round of wage negotiations, which are slated for the latter half of 2022.