Agreement signed in response to failure of collective agreement assumptions
On 8 October 2026, an agreement between VR and SA was signed in response to the failure of the assumptions underlying the collective agreements. The agreement introduces a new review provision allowing the term of the collective agreements to be shortened if inflation develops beyond a specified threshold.
The government became directly involved in the negotiations, which significantly helped pave the way for an agreement. A proposal for one-off interest subsidies is intended to provide support to indebted households.
The outcome provides workers with protection against persistently high inflation and gives employers, municipalities and the state an incentive to honour the commitments made in connection with the collective bargaining process. VR, LÍV and Fagfélögin worked hard to ensure that municipalities and companies would join workers in helping to bring inflation under control by moderating price increases. With this agreement and the government’s package of measures, we hope the objectives of the collective agreements — lower inflation and lower interest rates — can be achieved.
New review provision in the agreements
The new provision states that if annual inflation in October 2027 is above 4.3%, or six-month inflation is above 3.8%, the term of the collective agreements may be shortened by up to two months.
The provision gives workers a degree of protection against continued high inflation. If the threshold is exceeded, the agreements may expire earlier, allowing the trade unions to return to the negotiating table sooner for the next round of collective bargaining.
Government package of measures
The government has also announced further measures to support workers and households. The measure that was particularly important in securing the agreement is the proposal for one-off interest subsidies, which will provide relief to indebted households if inflation remains high.
These interest subsidies are progressive and linked to inflation, meaning that the amount increases as inflation rises. If annual inflation at the end of October 2027 is above 3.8%, one-off interest subsidies totalling ISK 1.3 billion will be paid at the beginning of 2028. The amount will rise to ISK 2 billion if inflation is above 4.0%, or ISK 3 billion if annual inflation is above 5%.
Keeping increases within 2.5%
The government’s package of measures includes actions intended to strengthen the position of workers, ease pressures on businesses and promote stability.
The state will not increase fees that directly affect the Consumer Price Index by more than 2.5% in 2027, with the exception of the kilometre charge. The same applies to fees charged by government institutions.
The Icelandic Association of Local Authorities has also encouraged municipalities to limit increases in general fees to no more than 2.5%. Municipalities will in turn encourage companies they own to do the same.
The Confederation of Icelandic Enterprise has also stated that it will encourage its member companies to explore every possible way of limiting price increases.
Seven months of campaigning delivers results
By the spring of 2026, it had become clear that the review assumptions in collective agreements in the private sector were at risk of failing. Persistent inflation and high policy rates were placing a heavy burden on families, while wages were failing to keep pace with rising prices.
In March, VR decided to join forces with the Commercial Federation of Iceland (LÍV) and Fagfélögin to explore ways of ensuring that the collective agreements could remain in force for their full term, until the end of February 2028. Together, these unions represent 45% of workers in the private sector.
Everyone must contribute
During the term of the agreements, workers have faced higher housing costs, loan repayments and living expenses, while collectively agreed wage increases have remained below inflation.
VR’s position was that everyone should contribute so that workers would not be left to bear these burdens alone. Large groups of VR members have experienced reductions in real wages, and stopping that decline was a key priority.
VR and its partner unions put forward numerous proposals for solutions. Over recent months, they have also encouraged public debate on the causes and consequences of the economic situation, both by organising open meetings and publishing articles, while the situation continued to worsen as the year progressed.
Months without action
The summer passed without any response from the Confederation of Icelandic Enterprise. In August, it finally became clear that the assumptions underlying the collective agreements had failed.
VR appointed a negotiating committee to prepare for the collective bargaining talks that were then expected, as all indications at the time pointed towards termination of the agreements.
In late summer, VR, LÍV and Fagfélögin once again demanded that all parties join workers in helping to bring inflation under control, warning that otherwise there would be no alternative but to terminate the agreements.
When September arrived, VR and its partner unions approached companies and municipalities directly and asked them to contribute. The unions sent letters to a large number of companies and almost every municipality, requesting responses.
The government’s budget proposal, presented that same month, did not strengthen the assumptions underlying the collective agreements.
In the final stretch
The deadline for terminating the agreements was 16:00 on 8 October 2026. Just over 24 hours earlier, several other trade unions had reached an agreement with the Confederation of Icelandic Enterprise to extend their agreements until the end of 2027. VR’s assessment was that this agreement did not sufficiently protect the interests of VR members.
VR and its partner unions held intensive meetings with the Confederation of Icelandic Enterprise from August until the very last minute, putting forward numerous proposals and seeking to address the concerns raised by businesses.
In the final stages, agreement was reached on a review provision that allows the unions to return to the negotiating table earlier if inflation remains high. Just as importantly, an improved version of the Prime Minister’s proposal for one-off interest subsidies was secured, providing significant support to indebted households if inflationary pressures are not brought down.