Unions Seek 40% Pay Hikes for Iceland Workers

(Bloomberg) -- Unions in Iceland are seeking wage rises for the lowest paid workers of more than 40 percent over the next three years, demands that employers say could destabilize the economy by pushing inflation way above the central bank’s target.

Two of the biggest unions want a jump in pay to help those on the minimum wage cope with spiraling housing costs. They are demanding an initial monthly increase of 42,000 kronur ($353) from Jan. 1, in a plan they estimate will add 9.1 percent to overall labor costs in the first year.

“Our demands are very responsible,” said Ragnar Thor Ingolfsson, head of VR, which represents 35,000 workers in the retail and service sectors. “They fit with our definition of economic and social stability.”

Union demands carry weight in Iceland, which has the highest unionized rate in the world at 85 percent. VR and the Federation of General and Special Workers are aligned in their demands and together represent about three quarters of unionized workers on the north Atlantic island.

With a majority of Icelandic contracts running out in the coming months, the two unions kicked off the negotiations last week by formulating their demands.

Perilous Times

The call for higher wages comes at a perilous time for the economy, which is facing a slowdown after a tourism-led boom helped the country recover from financial collapse in 2008. The krona has tumbled almost 8 percent against the euro this year, forcing the central bank to intervene.

At the same time, policy makers are growing concerned about inflation pressures, saying earlier this month that they have the “will and tools” necessary to keep price growth on target. The central bank’s latest Stability Report lists the tourism sector and higher oil prices among the factors posing increased risks to the financial system.

But it’s the upcoming wage talks that are “critical for the development of inflation,” deputy governor Rannveig Sigurdardottir said in an interview in Reykjavik on Tuesday.

Unions Seek 40% Pay Hikes for Iceland Workers

Iceland already has some of the highest interest rates in Europe, with the central bank benchmark at 4.25 percent and mortgage rates at as much as 6.3 percent. Housing prices, meanwhile, have surged 50 percent in real terms over the past five years.

To be sure, Icelanders are far less indebted than they were in the wake of the financial crisis, when debt to disposable income reached about 250 percent. It’s now at 151 percent, the lowest in the Nordic region.

But that will do little to persuade unions they are on the wrong track. A major lack of cheap housing means 1 in 7 Icelanders can’t afford to buy a home. According to the Housing Financing Fund, Reykjavik has the highest rental prices of all the Nordic capitals, with low income earners spending half of their wages on rent.

The problem is that wages have already risen way above inflation, economic growth is now “shifting down a gear” and “inflation expectations are rising,” said Halldor Benjamin Thorbergsson, head of the Confederation of Icelandic Enterprise.

“It’s our responsibility and duty to find a solution that will create the circumstances for our companies to regain competitiveness,” Thorbergsson said. “Economic reality limits our options.”

According to Statistics Iceland data, nominal wages have already gone up 44 percent in the last 5 years.

Political Test

Unions Seek 40% Pay Hikes for Iceland Workers

The negotiations represent a major test for Prime Minister Katrin Jakobsdottir and her Left-Green Movement. Her coalition government has forecast average pay rises of 6 percent in its 2019 budget and wants to help the less well-off by raising child benefit. It has also earmarked 25.4 billion kronur in housing support.

Gylfi Zoega, and economist at the University of Iceland and an external member of the central bank’s rate-setting board, argues that the unions’ demands risk weakening growth and pushing up inflation.

“There’s a lot of anger that can be traced to the troubles on the housing market,” Zoega said in an interview. However “the proportion of wages to GDP and factor income is unusually high right now. There’s no leeway for overall wage increases,” which would merely result in house prices “going up even further.”

Consumer price inflation is already edging beyond the bank’s comfort zone, with the rate now above the central bank’s target of 2.5 percent. Islandsbanki expects inflation to reach 3.5 percent at the end of the year -- but that won’t deter the unions.

“In my opinion, the doomsday predictions of our counterparts’ lobbyists are greatly exaggerated.” he said.

©2018 Bloomberg L.P.