Real wages fell by 0.1% MoM in October but have risen by 2.9% in the past twelve months, whereas inflation stands at 4.5%. Real wage growth has slowed somewhat by this measure in recent months, although it remains strong in historical context.

The past year’s wage movements are due largely to contractual pay rises that took effect at year-end 2020 and affected a majority of employees in the labour market. The wage index also rose by 3.7% MoM. Moreover, the shortening of the work week has had a strong upward impact on index values in the past year, as the indices measure regular wages per hour worked.

Wage rises driven by the public sector

A detailed breakdown of the wage index is available only through August. Examining the index by employee group shows that public sector workers have received the largest pay rises in the recent past. From the beginning of 2019 (when the Living Standards Agreements took effect) until July 2021, local government employees received the largest proportional pay rises, or nearly 25%. Next in line are State employees and private sector workers, at 18% and 16.6%, respectively, for the same period.

The Living Standards Agreements provided for unit-based wage rises, and because pay is generally lower in the public sector than in the private sector, public sector workers’ pay has risen by a larger percentage. Furthermore, the shortening of the work week affects the general wage index, and the work week has been reduced more for public sector workers than for their private sector counterparts. According to SI, from November 2019 through June 2021, the impact of the shorter work week increased the wage index by 1% for private sector workers, 2.7% for State employees, and 3% for municipal employees.

Real wage boost greatest for low-income workers

SI also publishes a breakdown of wage developments by occupation. From August 2020 until August 2021, general workers’ wages rose most, or by 9%, followed by workers in service and sales, with 8.3%. Over the same period, specially educated workers’ wages rose the least (4.7%), followed by specialists’ wages (4.9%). Because inflation measured 4.3% in August, the former groups’ real wages rose by 3-4%, while the latter groups’ real wages remained virtually flat between years.

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 540,000 per month, followed by office workers, at ISK 580,000, and general workers, at ISK 590,000. This is the same impact as could be seen in the groups mentioned above. When unit-based pay rises are negotiated, the proportional increase grows larger further down the pay scale, and vice versa. In addition to this, workers who receive lower wages are likelier to be paid according to contractual pay scales than their higher-earning counterparts are. The Living Standards Agreements provided for larger unit-based rises in contractual pay scales than in pay negotiated directly between employer and employee.

Further wage hikes in the offing

In the coming term, real wage growth will be driven by contractual pay rises set to take effect at the turn of the year, and by the GDP growth supplement provided for in the Living Standards Agreements, which will probably be invoked in May 2022. Based on our macroeconomic forecast and SI’s population projections, the GDP growth supplement could add ISK 10,500 to regular monthly pay scales and ISK 7,875 to other wages. Longer-term developments in the labour market will depend largely on the next round of wage negotiations, which are slated for the latter half of 2022. The Living Standards Agreements remain in effect through the end of 2022.