News - 23.11.2021

Are wage increases hurting the Icelandic economy?

Let’s start by going over a few facts. Facts that seem to be confusing to newly elected MPs from the Independence Party and company executives, as well as the Governor of the Central Bank, the Chamber of Commerce and SA (Confederation of Icelandic Employers).

Why is inflation rising in Iceland?

Here are a few facts:

  1. Inflation in Europe has rarely been higher and is at 6% in the United States. The pressure on price increases as a result of this, and the sharp rise in commodity, energy and fuel prices, has put considerable pressure on domestic inflation and will continue to do so.
  2. Companies owe more than households, and much of their debt is in the form of overdraft loans. Interest rate hikes will therefore put pressure on prices and inflation due to increased interest costs for companies and lower purchasing power of households, which will push for higher wages to cover the higher cost of living.
  3. Sharp rises in the housing market and exchange rate fluctuations, with housing prices rising by 17% over the past 12 months, have driven inflation far above the Central Bank’s target. Not wage increases.
  4. The wage policy that has been pursued for the last 12 years has yielded 4% purchasing power on average per year without high inflation.
  5. The OMX10 Stock Exchange Index has risen by 33% since the beginning of the year. If wage costs were so cumbersome for the companies, their profits should have decreased, but on the contrary, they have increased and the companies’ performance has seldom or never been better. Based on the financial statements of companies on the Stock Exchange, they can easily support wage increases. These facts do not indicate that companies are shying away from wage costs or the market’s belief that collective wage agreements and economic growth will be the death of them.
  6. Wage costs of listed companies have decreased as a percentage of turnover.

Despite what is described above, the news keeps repeating that the coming wage increases will hurt the companies in this country! This is a tune we have often heard before, and it was quite loud before the last contractual wage increases.

It has been stated in the media that contractual wage increases will increase the wage costs at Festi hf. (Krónan, N1, Elko) by 9% and it can be understood that it can not afford to raise wages next year without raising commodity prices or laying off employees. However, bonus payments and senior executives’ exorbitant wages are another matter. Let’s just examine what this means for this fine company. 9% higher wage costs for Festi is an increase in wage costs by ISK 910 million over a twelve-month period.

Festi hf.’s profit for the first nine months of this year was ISK 3.6 billion, while it was ISK 1.7 billion the previous year and around ISK 2 billion in 2019. Profits have increased by ISK 1.9 billion between years, or by 106% since the year 2020, and since 2019, profits have increased by 73%, or by ISK 1.6 billion. As these figures show, Festi has more than just coped with the wage increases that have occurred this year. After all, the stock market does not consider the company to be hurting from excessive wage costs, as its price on the stock market has risen by 27% this year. Based on the company’s earnings forecast, it can be estimated that this year’s profit will be around ISK 4.5 billion, which is an increase of ISK 2.2 billion from the previous year, or a 100% increase between years.

Based on the company’s performance this year, it is well equipped to handle the coming wage increases next year. But this cost increase is only about 40% of the profit increase that has occurred this year compared to the previous year and about 20% of the profit that can be estimated this year. We can easily share the profits that have been created at Festi hf. between employees and the owners without altering the commodity price for the consumer.

So one may ask whether this great and increased profit is due to higher margins, which in turn raises the question of whether wages are chasing inflation or vice versa?

It will be exciting to enter into future wage negotiations when companies such as Festi hf. are performing as well as this.

Ragnar Þór Ingólfsson,
President of VR.