Insight

Iceland: light at the end of the tunnel?

When faced with an economic crisis, Icelanders used to simply buckle down and work harder for a while. Now they're faced with the unusual situation of having no jobs to go to. This economic crisis has hit everybody hard, and especially the unemployed.

Jun 19, 2009 | By Berit Kvam

In the Nordic region we are used to seeing Iceland top the employment rate and enjoying the lowest unemployment figures. But a few autumn months in 2008 changed all that. Unemployment in Iceland was 2.8 percent in the first quarter of 2008, and jumped to 7.1 percent one year later.

"We expect it to top ten percent before the end of the year. That's nearly double the earlier record from 1995."

Stefán Olafsson, sociologist at the University of Iceland, dishes out the depressing figures. He sits on the board of Iceland's Social Insurance Administration, he is part of the committee in charge of developing a new welfare system and he also participates in many international research networks, like the Nordic Network for Social and Welfare Policy Research

A tiger with a broken back

In the midst of the crisis he remains optimistic. Ten percent unemployment is no worse than what many other countries struggle with - including Nordic neighbours Finland and Sweden. In fact, ten percent unemployment is the expected EU average by the end of 2009. Even the Celtic Tiger is down with a broken back - Ireland expects to see unemployment rise to well above the EU average this year.

"Iceland was called the Nordic Tiger. Maybe it's not such a clever move to try to be a tiger after all," says Stefán Olafsson.

He says Iceland has experienced economic roller coaster rides in the past. In two years, from 1967 to the end of 1968, GDP dropped ten percent. Purchasing power was reduced by 18 percent while unemployment was four percent. The next unemployment record came with the early 1990s crisis, when it reached 5.5 percent in 1995. 

Even though unemployment is no higher in Iceland than in many other countries, this is an unusual situation if you look at the factors making up the crisis; high unemployment, personal debt, lower living standard and increased emigration. When several unfortunate circumstances like this come in one swell swoop, you're faced with dire consequences.

Mr Olafsson also looks at how the crisis will impact on the welfare system. Can the state coffers support the extra costs in the wake of the crisis?

Working mentality 

Economic downturns have normally meant pay cuts.

"People have adjusted by working more for a period of time. That's in line with the Icelandic mentality. If we now are facing ten percent unemployment, we have a problem. In Iceland unemployment benefits aren't very generous," says Stefán Olafsson.

Someone loosing their job are secured 70 percent of their previous income, but only for three months. There is also a cap on benefit pay linked to the average income. After three months everybody gets the same average sum, which corresponds to half the Icelandic average wage. If both earners in a household loose their jobs, they will struggle to make ends meet - especially if their personal debt is high. 

"For now, most people have avoided this, but that could change in the months to come. Those who remain unemployed after three months are facing a severe cut to their income."

Active measures needed

The high level of unemployment increases the risk of more people of working age being forced out of the labour market. There has been an increase in people seeking disability benefits lately. One reason could be the fact that this pays more than the unemployment benefit. And history shows people on disability benefits are less likely to return to the labour market than those on unemployment benefits. 

"That's why it is necessary to increase the drive to re-educate people and stop them from falling outside the labour market," says Stefán Olafsson.

Indebted families

The economic crisis brings another challenge: young, first-time property buyers become heavily indebted.

"The privatisation of Icelandic banks in 2003 was the beginning of the speculation economy we now see the results of. Since then banks have been flooding the market with money. The National Bank says 20 percent of Icelandic households are in negative equity. That is because house prices have dropped while debts keep rising as a result of a too high rate of inflation, and local currency mortgages have been index-regulated. Banks also offered foreign currency loans, and people with these loans are in real trouble now the Icelandic Krona has collapsed. When it re-stabilises, these debts will adjust too, allowing for a more positive long-term prospect. But in the short term, people are in big trouble.

Lowered living standards

Purchasing power has fallen by ten percent in Iceland since last autumn. It is expected to drop a further 10 percent by the end of 2009.

"This could be a good thing - we have spent far too much as it is, and it gives Icelanders a chance to reflect on which values we want to build our society on," says Stefán Olafsson.

He points out that growth in later years has been extremely high, and that the reduction in purchasing power is from a very high starting point. The problem is that everything has happened at once: reduced purchasing power, high personal debt, unemployment.

"But there are glimmers of hope too. Pensioners aren't particularly hard hit, for instance, despite a near 25 percent reduction in pension funds. This means some pension policies need to cut payments already next year, but with no more than 10 percent. The state covers around half of people's pensions. This has been a controversial policy, but now it pays off. And the minimum guaranteed pension rose by 20 percent at the start of the year. It remains to be seen of course whether the state can manage the increase in payments.

Emigration 

Unemployment rates hit their last high in 1995, with 5.5 percent. 1,600 people left the country then. Between 1992 and 1998 some 4,600 people emigrated - 1.5 percent of the total population.

"If there is a direct correlation between lost jobs and emigration, we're facing around three percent of the population leaving the country over the next three to five years, because of the doubling in unemployment," says Stéfan Olafsson.

He points to the Faroe Islands which lost 12 percent of the population to Denmark during the 1990s crisis.

"We won't get anywhere near that number," he says.

There chance of getting a job abroad is also not so great, because the crisis is international. Mr Olafsson reckons a maximum of two to four percent of the population will emigrate.

"The great shame is that most of those who go will be young people, and it is always a risk loosing people with high education."

Iceland has seen a lot of labour immigration in the past few years. In 2008 the foreign workforce made up seven percent of the total population.

"Many stay, but many have left, and that eases the pressure somewhat.". 

Will the welfare state survive?

This time around Iceland's employment sector has suffered the worst, because it is where the country is most vulnerable. People in Iceland are used to buckling down and work more to solve their own economic problems. Now there are no jobs to be had, and the level of social benefits is lower - something which is reflected in the unemployment benefit. That's when family becomes very important. But there are always those who are worse off. Researchers say one way out is to raise taxes for high earners. The previous government lowered taxes for high earners and investors to such a degree that the richest paid nearly no tax at all. Now taxes are on their way back up.

"At least that is a step which can help keep social benefits on a level which is good enough for those who need them. And you can always hope that Iceland, the first country to fall in the face of the crisis, will be the first to emerge from it too," says Stefán Olafsson.

Stefán Olafsson Stéfan Olafsson

Stefán Olafsson is Professor at the University of Iceland. He sits on the board of Iceland's Social Insurance Administration, he is part of the committee in charge of developing a new welfare system and he also participates in many international research networks, like the Nordic Network for Social and Welfare Policy Research