The labor market is a “grossly underestimated” cause of inflation.
What is really putting pressure on inflation […] is just wage developments in Iceland.
Bjarni Benediktsson, former chairman of the Independence Party and Iceland’s former prime minister (2017–2024) believes that the labor market is a “grossly underestimated cause of inflation” in this country. He believes that the discussion about the role of public finances in the high inflation of recent years has been blown out of context.
In the latest podcast episode Chess after Dark, Bjarni said that he felt that a certain consensus had emerged among several media outlets and that the opposition was all convinced that the high inflation in recent years can largely be attributed to government finances. He felt that this discussion was widespread in society.
In my opinion, this is nonsense. This is a misunderstanding. We were improving the treasury's performance a lot from year to year, and the fiscal restraint was just responding well to the Central Bank's actions, said Bjarni.
What is really putting pressure on inflation in the country – and we need to find ways to better manage it – is just the wage development in Iceland. It is a much, much bigger issue than some 5 and 6 billion ISK cost-cutting measures in the Cabinet from time to time.
He referred to recent figures from Statistics Iceland on wage development in 2024. Earlier this month, Statistics Iceland reported that the total wage index in the fourth quarter had increased by 6.3 per cent between years.
This method that we have been using in recent years in these big collective agreements where by far the most has gone to those who are at the lowest income level – it is of course intended to ensure that final result. But when we look in the rearview mirror, we see that wages are repeatedly increasing all the way up the ladder. No matter how you spin this dice, you always end up with the side up that these big wage increases will result in more inflation than since the wage increases are more moderate and more in line with productivity growth.
Bjarni said that society will be stuck with higher interest rates in the long run if wages continue to be increased by 6-7 per cent each year.
Let's stop arguing about some 5 and 6 billion ISK cost-cutting proposals in the belief that that is what is causing the inflation. I think people are just turning a blind eye there. They are not discussing the big project, which is how we negotiate wages and conditions in Iceland, what we could have done differently and better to stop the wage slide.
He mentioned several reports on the labor market that have been published in recent years, including those from Katrína Ólafsdóttir and Arnór Sighvatsson. Most of them indicate that what characterizes the Icelandic labor market are higher wage increases than in comparison countries with the associated impact on inflation trends and, consequently, the interest rate.
Bjarni said that there continue to be signs of a dolphin race in the labor market. Asked how this development can be stopped, he said that he believes there is a need for deeper and better dialogue between the main stakeholders.
We have to accept the laws of economics in this. If you take out more than you put in, if you raise wages more than productivity growth allows, then there is every chance that you are undermining yourself and that you will end up with inflation beyond what you consider acceptable. If inflation is too high, you will get higher interest rates, which is the Central Bank’s tool to contain inflation.
Bjarni said he understands the views of union leaders who claim to speak for groups of individuals, many of whom are on bare-bones wage rates. These union leaders say that there is no wage drift in their particular group.
But if the result is always that agreements that are designed to secure the interests of these groups, if they then lead to wage creep for everyone else, then we just have to face it together. If we can’t get people around this table to agree to look at this with some realism and fairness, then we’re stuck in this same situation.
Who provided funding for wage payments in excess of collective agreements?
Bjarni agreed that it was a matter of great concern how much wage creep had occurred in the public sector, both in the state and in local governments.
Then people are raising wages above the collective agreements. I think the parliament should ask itself, where did the funding come from? Who gave funding for wages that were above the collective agreements. At least they didn't come from the Ministry of Finance into the budget bill. There is no budget line in the budget that says: - Listen, and then we have a bunch for wage increases above the collective agreements.
Bjarni welcomed the fact that inflation is now on the way down and the short-term outlook looks good.
But if we want to see a long-term interest rate level that is similar to that of neighboring countries, it doesn't work for people who want to be taken seriously in this discussion to just say "the hellish króna" or "public money is being mismanaged".
He referred to a recent article by Thomas Möller, a supporter of Viðreisn and the pro-Europeans, who advocated ensuring that wages do not rise more than productivity gains would allow once the euro has been adopted.
I read this and thought, "Thomas, this is wrong, this needs to happen now with the króna." The euro should not be used as some kind of leverage to get to this point. What happens then is that if you adopt the euro and try to behave like we do now, you take out the imbalance through unemployment. Those who think that this will just resolve itself with a new currency, they are wrong.
Bjarni emphasized that he was of the opinion that public money could be used much better, both by the state and local governments. It is a continuous project that never ends to use public money better.
Bjarni was positive about the new government's efficiency efforts but says the big question is which efficiency proposals from the Prime Minister's working group the government intends to implement.
He also believes it is a mistake to say that 30 billion of the 71 billion krónur efficiency proposals simply concern achieving 2% efficiency in public procurement.
Wait, who is going to settle it after all, whether you achieved 1% better procurement or whether you just achieved worse procurement. How is this supposed to be measurable in any context? Bjarni asked, adding that work had been done to improve procurement through Ríkiskaup, the Icelandic Financial Administration.
Source: Viðskiptablaðið (in Icelandic)
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