Furthermore, collective redundancies have surfaced again in the past two months, after a pause in the early part of the year. In May and June, a total of 637 workers were laid off in collective redundancies in the tourism, fish processing, and retail sectors. These layoffs are closely linked to headwinds in the export sector, not least in tourism. Naturally, such group layoffs do not show immediately in registered unemployment data, as most of those who lost their jobs have a 3- to 6-month severance period. We also hope and expect that that a large share of these workers will find new jobs in coming months and therefore be on the unemployment rolls for only a short time.

Unemployment inches upwards

In June, there were 6,722 persons on the unemployment register, which translates to a 3.1% unemployment rate, according to the report from the Directorate of Labour (DoL). In June 2023, the registered unemployment rate was 2.9%. The composition of unemployment has changed considerably by length of time. The group of long-term unemployed – those without work for more than 12 months – declined by 45 between years. On the other hand, the number of persons out of work for 6-12 months increased by more than 500 over the same period. We interpret this to mean that 2023 was still affected to a degree by job losses during the pandemic. Nevertheless, the surge in the 6- to 12-months group indicates that it will take longer for laid-off workers to find jobs again than it did a year ago.

Companies leaning towards trimming down staffing levels

Recent surveys among company executives shed some light on the direction the labour market could take in coming quarters. Two such surveys were taken this year: one conducted by Gallup for the Central Bank (CBI) and the Confederation of Icelandic Employers, and the other by Deloitte, as a part of its survey among corporate financial officers in 13 European countries.

The Gallup survey indicates that labour market tension will continue to subside. This spring, some 22% of firms were planning to add on staff, as compared with 30% in Q1/2024 and 25% in the same quarter of 2023. Just over 14% of firms were planning to downsize in June, as compared with just under 13% in Q1/2024 and 13% in spring 2023. Developments differ markedly, depending on whether or not the company in question is engaged in goods/services exports. In the tradable sector – i.e., among firms in export-related activities – the share planning to recruit staff declined considerably, both between years and between quarters, and those planning to downsize rose sharply. However, the share of companies in the non-tradable sector that intend to lay off staff has declined.

Developments in responses to questions on whether survey participants consider their companies short-staffed tell a similar tale. A year ago, just under 43% of executives reported that their companies were understaffed, down from a high of 54% at the beginning of winter 2022. By this past spring, however, the share had fallen to a three-year low of just over 29%.

Furthermore, Deloitte Iceland recently published the results of its corporate survey among executives from large firms. The same survey was also carried out by its sister companies in 13 European countries. The survey shows a marked year-on-year change in executives’ expectations vis-à-vis revenue growth, investment plans, and last but not least, staffing. Expectations among Icelandic respondents shifted from being far above the 13-country average to being below average, as the chart indicates. The survey, taken in April, reflects staffing plans through spring 2025.

History contains recent precedents for a cooling labour market

It is convenient to compare the current outlook to the situation in 2019. That year was characterised by the collapse of WOW Air and a 15% YoY decline in tourist numbers, from 2.3 million to 2.0 million, according to data from Isavia on departures from Keflavík Airport. Also in 2019, unemployment shot up from 3.1% at the beginning of the year to 4.8% at the year-end. On the heels of this came the pandemic and the related spike in unemployment, which makes it pointless to speculate on how things might have developed from 2019 until now.

In autumn 2018, one of every five participants in the Gallup survey said their firms were understaffed. A year later, that share had fallen to just over 14%. Furthermore, the share of respondents planning to recruit workers and the share planning to downsize were similar in size in autumn 2018 – just under 20% in both cases. A year later, the share planning to recruit had fallen to approximately 15%, while the share planning redundancies had risen to roughly 23%.

Fortunately, the tourism industry is now stronger in many ways than it was in summer 2019. Although tourist numbers will probably not increase this year, there are few indications that they will fall as much YoY as they did at the end of the 2010s. As a result, demand for workers will not contract to the same degree as it did then. On the other hand, factors such as a high real interest rate weaken the overall resilience of the Icelandic economy more than they did before.

As the charts show, the Gallup survey responses and the results of Statistics Iceland’s (SI) labour force survey correlate fairly strongly. It is therefore reasonable to conclude that the employment rate will taper off and the unemployment rate will rise in coming quarters, given the trend towards declining understaffing levels shown in Gallup surveys in the recent term.

Nonetheless, we think it unlikely that unemployment will rise as rapidly in 2024 as it did in 2019. The effects of shifting winds in the labour market will probably show more in a falling employment rate, with reduced immigration and slower population growth than in the recent past. Various labour-intensive sectors such as tourism and construction have relied heavily on immigrants to fill job vacancies.

Historically rapid population growth has then played a major role in the recent demand pressures in the housing and rental markets. In coming quarters, we could see reduced tension in the labour market coupled with slower population growth and weaker demand pressures in the housing market.