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‘Crazy’ Labor Agreement Ties Iceland Wage Increases to Rate Cuts

‘Crazy’ Labor Agreement Ties Iceland Wage Increases to Rate Cuts

(Bloomberg) -- Trade unions and employers in Iceland ended months of deadlock by agreeing to make wage increases dependent on the central bank cutting interest rates.

The unusual arrangement also involved the government extending parental leave and cutting taxes. It provides options for a shorter working week and includes a clause designed to ensure workers receive an extra pay hike when the economy grows at a certain rate.

Economist and policy makers slammed the deal, arguing that it places undue pressure on the central bank.

“This isn’t okay,” said Gylfi Zoega, an economist at the University of Iceland and a member of the central bank’s monetary policy committee. “The central bank is an independent institution,” he said. Putting the central bank in a situation where it can’t deal with rising inflation “is a crazy idea,” he said.

Gylfi Magnusson, the chairman of the central bank’s supervisory board, described the arrangement as “strange.”

‘Crazy’ Labor Agreement Ties Iceland Wage Increases to Rate Cuts

“There are many clauses which are very strange, about interest rates and indexation, for instance,” he said in an interview in Reykjavik. “I can’t see how any of those are an improvement for wage earners.”

The agreement announced late on Wednesday comes as Iceland’s economy is slowing sharply after years of fast growth, partly as a result of the demise of Wow Air, a local low-cost carrier.

It follows months of fraught wage talks, with unions urging the government to provide additional support to those most in need.

Workers’ representatives had been expressing particular concern about Iceland’s tradition of tying rent prices to inflation. Surging property prices and a lack of social housing are a traditional bone of contention in Iceland.

According to details of the arrangement, those on a minimum wage are to receive four monthly pay rises totaling 90,000 kronur ($755) over a period of 3 years and 8 months, well below the unions’ initial demand for 125,000 kronur.

Here are the main government measures supporting the deal:

  • A total of 42 measures designed to boost living standards
  • Parental leave extended to 12 months
  • Changes to the tax system and to child benefits may result in income increases of up to 411,000 kronur a year for a family of four
  • Measures to boost social housing
  • Increase in child support of 16 percent
  • Central and local governments promise not to increase public fees by more than 2.5 percent in 2020, or less in case of low inflation

The measures, some of which must now be approved by parliament, will increase prosperity and reduce inequality, Prime Minister Katrin Jakobsdottir said.

To contact the reporter on this story: Ragnhildur Sigurdardottir in Reykjavik at rsigurdardot@bloomberg.net

To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net, Nick Rigillo

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