News - 18.06.2026

Failure to Act Increases the Likelihood of Collective Agreements Being Terminated

For a long time in Iceland, it has been argued that inflation can fundamentally be traced back to wage increases. The story is fairly simple and easy to understand: when wages rise, business owners need to raise prices, and price increases lead to inflation. Simple problems have simple solutions, and therefore inflation could supposedly be avoided by preventing wage increases, or even by lowering wages. But is it really that simple?

At a very well-attended meeting hosted by VR, LÍV and Fagfélögin last week, the relationship between wages and prices was examined in greater depth, drawing on both domestic and international research. The findings are clear: in the short term, wage increases have no measurable effect on inflation, while over the longer term prices, wages and import prices tend to move together. However, this correlation says nothing about causation, and where a causal relationship does exist, it is generally the reverse—that is, prices rise first and wages follow afterwards.

Moderate Wage Increases Have Limited Impact on Prices

This is not to say that wages have no impact on prices, because labour costs naturally influence pricing. However, they are not the only factor. Labour costs account for less than 10% of costs in grocery retail, meaning the impact of moderate wage increases on prices is limited. Yet last year, following wage increases of approximately 3.5%, food prices rose by 5.5%, and it is clear that wages played only a negligible role in those increases. At the same time, the major companies in the grocery sector are reporting strong financial results and paying their CEOs bonuses amounting to tens of millions of Icelandic krónur. Food price increases, on the other hand, have a direct impact on inflation, along with all the other contributing factors, not least housing, which remains the largest and most persistent driver of inflation.

When the current collective agreements were signed and approved, employees took a considerable risk by accepting wage increases below inflation in the hope that companies and the authorities would do their part and that inflation and interest rates would fall. This experiment demonstrates clearly that even when wages increase only modestly, it is not enough to curb inflation; the issue is far more complex. Even if employees had agreed to freeze their wages, it would not have stopped companies from raising prices or the authorities from increasing fees and charges, both of which contribute to inflation.

Paying for Price Increases Three Times Over

Excessive price and fee increases do not appear out of nowhere. They are decisions made within private and public enterprises and sometimes by democratically elected representatives. Employees pay for each such decision in three ways: first through higher prices, then through indexed contracts that increase as inflation rises, and finally through high policy interest rates, which lead to higher housing costs. This is the spiral that must be broken.

It is important to understand the composition and nature of inflation in order to address it effectively. Simplistic explanations that single out one scapegoat (employees) are, above all, political propaganda. Calls for wage cuts as a response to the current situation are nothing more than an attempt to defend the rights of companies to price their goods and services however they see fit. One key prerequisite for reducing inflation is to stop price increases, and companies have the power to do so. At the same time, municipalities are being called upon to reverse excessive fee increases and freeze their tariffs. Together with genuine action on housing issues, this could reduce inflation and create the conditions needed for collective agreements to remain in force for their full term.

The time for action is now. The likelihood that we will be left with no option but to terminate collective agreements increases with each passing day that no action is taken.

Halla Gunnarsdóttir, Leader of VR
Jakob Tryggvason, Chair of RSÍ
Andri Reyr Haraldsson, Vice Chair of RSÍ and Chair of FÍR
Eiður Stefánsson, Chair of LÍV
Gunnar Sigurðsson, Chair of VM
Óskar Hafnfjörð Gunnarsson, Chair of MATVÍS

This article was originally published in Morgunblaðið 18 June 2026