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Iceland’s unemployment rate lowest for 20 years

Iceland’s unemployment rate lowest for 20 years

| Text: Hallgrímur Indriðason, photo: Björn Lindahl

Unemployment goes up and down and is almost always connected to the strength of the economy. This is also the case now, as Iceland’s economy has begun to grow again after the pandemic – largely because of tourism. The unemployment rate in June was 2.5 per cent, the lowest for 20 years. Although this is in itself a positive thing, it has some negative side effects.

Katrin ÓlafsdóttirKatrin Ólafsdóttir, assistant professor in economics at The University of Reykjavik, says that these numbers show a slight delay in getting foreign staff.

“It has been the case in Iceland that when we need workforce, we import it. This doesn’t seem to happen as fast now as before. We are seeing probably the best year in history in tourism and that might be the biggest reason for this low unemployment rate. 

“There is also a housing shortage for people working in this sector, which increases the problem. And Iceland is also competing for labour with other countries. We have usually been able to get workers from countries such as Poland but that seems to be more difficult now,” says Ólafsdóttir.

Despite this, the number of working immigrants to Iceland has increased from 42,278 in the middle of last year to 49,889 this year. That is an increase of over 7,600, which may explain the growth in tourism this year.

The unemployment rate is especially low among women, only 1 per cent. Ólafsdóttir says the main reason is that the staff shortage is mainly in the service industry. 

“The last few years there has been a shortage in kindergartens, health care and other sectors with a high proportion of female workers. You can always get a job there so I think that any woman who is looking for a job can get it.”

Ólafsdóttir says this could make companies do certain things to make better use of the staff they have, for example, take larger groups on tours.

“This can lead to less efficiency and even shorter opening hours.”

Tourism workers have not returned

Jóhannes Þór Skúlason, Managing Director at the Icelandic Travel Industry Association, partly confirms Olafsdottir’s analysis.

Jóhannes Þór Skúlason“It has been more difficult for us to get Icelandic staff. Before the pandemic foreigners represented roughly 33 per cent of tourism staff. Now they’re 40 per cent, which is about 12,000 people.”

Skúlason adds that before the pandemic, one in every three foreign workers in tourism had permanent residence in Iceland. He thinks that percentage is lower now. Skulason says this is a consequence of Icelanders leaving the tourism sector during the pandemic.

“Official statistics show that after the pandemic, the number of staff changed in two sectors. The number of tourism workers fell by 9,000, of whom 5,500 were Icelandic, while the public sector gained 5,000 staff. So Icelandic workers went to the public sector where the jobs are safer and the salaries better. It takes time to get these people back because it’s hard to leave the safety offered by the public sector after such a big shock.”

He expects, however, that in three to five years the percentage of foreign workers returns to what it was before the pandemic.

Skúlason says that it has been easier this year to attract workers from abroad. Last year this was extremely hard to do. But it is still difficult to get people with the right skills. 

“The staff we can get is mostly inexperienced and the percentage of them is bigger than before. We are having problems getting people with the right skill set, such as waiters, cooks, tour guides, bus drivers and so on. Hotels and accommodations can hire inexperienced people but that also means that they have to use a lot of time and energy to train them.”

He points out that last year, 8.3 per cent of jobs in tourism were vacant. Now that figure is 4.3 per cent. Skúlason also notices that more workers come from Southern rather than Eastern Europe.

“I know that Mediterranean countries now get more tourists than staff from Poland. So maybe the economy is shifting a bit.”

The main problem, according to Skúlason, is not getting staff, but getting the right staff.  

Source: Icelandic Tourist Board

In July this year, there were only 3,322 fewer tourists than the record year 2018. Source: Icelandic Tourist Board.

“We expect to receive between 2.1 and 2.2 million tourists in Iceland this year and we have the manpower to cope with that. But the question is what service we want to give them. The shortage of qualified staff diminishes the companies’ capacity to grow and make tourism a more valuable industry. It’s important that we get qualified staff and the longer that takes, the more difficult it will be to get the balance right between quality service and pricing.” 

Salary pressure increases

But back to the economic effect of low unemployment. When there is a low unemployment rate, the pressure for higher salaries increases.

“We haven’t seen anything of that kind right now. But the current collective agreements will expire at the end of January so I would think that this would increase the pressure in negotiations for new agreements. There is already a sombre mood within the trade unions, and this only adds to that. But I don’t see any salary increase before negotiations begin,” Ólafsdóttir says.

And she also adds that this situation could lead to increased inflation. 

“The inflation has been on its way down, but I don’t think it’s likely that it will go down as rapidly as it has in the last two months any time soon.”

Ólafsdóttir says that all these numbers indicate pressure on the economy.

“If this goes on it will lead to even higher interest rates. I think that the summer tourism peak will end by the autumn. The question then is whether the foreign staff who have finished their jobs will leave Iceland or register as unemployed. But what we don’t know just yet is how this will affect certain lines of work. Will we for example see some expert shortage in the autumn? This is something to keep an eye on.”

Ólafsdóttir is worried that this situation might lead to more conflict between employers and workers – which will get even worse if the central bank increases interest rates.

“This situation makes it necessary for the government to step in and do their bit to calm things down. That has not happened in the last few months. If the government doesn’t do that, thing will be difficult.”

A great need for labour

There is a need for more labour in almost all sectors in Iceland. But tourism has seen the greatest increase in demand. 

“We expect to receive between 2.1 and 2.2 million tourists in Iceland this year and we have the manpower to cope with that. But the question is what service we want to give them." says Jóhannes Þór Skúlason, Managing Director at the Icelandic Travel Industry Association.


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