Country Report Iceland July 1998 Main report

Economy: Real wages surge as agreed rises come on stream --

Largely as a result of 1997 wage settlements in the public and private sector that came into effect at the start of 1998, real wages were 9.8% higher at the end of April than a year ago. A tightening labour market has also contributed to wage pressures as unemployment continued to decline in 1998, from 3.7% at the end of December to 3.4% at the end of April. Unemployment remains higher among women than men, at 4.9% and 2.4% respectively. Despite rising employment, a survey by the National Economic Institute indicated that employers were planning to take on a greater number of new staff than they envisaged laying off. Demand for engineers and IT specialists remains particularly high and there is also substantial demand for new labour in the fish and transportation sector.

-- but despite this inflation is subdued

Despite the rapid rise in wages, tightening of the labour market and booming consumer demand, inflation remained subdued throughout the first half of 1998. Factors playing a role in counteracting the expansion of domestic demand include high real interest rates -- the discount rate at 6.8% is 2.8 percentage points higher than its major trading partners -- and increased competitive pressures, along with increased productivity. These factors have prevented employers from pushing up prices to absorb wage increases, although inflation did accelerate slightly between the first and second quarter from 0.4% to 0.7%. This was mainly attributed to rising costs of housing, transport, food and non-alcoholic beverages.

Prices, wages and unemployment (period averages; % change year on year unless otherwise stated) 1997 1998 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year 1 Qtr 2 Qtr Consumer price inflation 1.7 1.8 1.6 1.9 1.8 2.2 2.2 % change, quarter on quarter 0.1 0.7 0.6 0.6 - 0.4 0.7 Wage index(a) 1.4 5.6 6.9 7.8 5.4 12.9 9.8(b) Unemployment© (% of labour force) 4.7 4.4 3.3 3.3 3.9 3.8 3.4(b) (a) Based on average monthly wages. (b) April only. © National definitions; not seasonally adjusted. Sources: Central Bank of Iceland, Economic Statistics Quarterly; Statistical Bureau of Iceland; OECD, Main Economic Indicators.

© 1998 The Economist lntelligence Unit Ltd. All rights reserved
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