A national effort against inflation

Sólveig Anna Jónsdóttir, chairman of Efling, and the author, Stefán, after collective agreements were signed.

By Stefán Ólafsson

The labor movement took the initiative to take a new path in collective bargaining this time. The scheme began focusing on seeking compensation through more means than direct salary increases.

At Efling, an idea was developed to aggressively pursue the restoration of the public transfer systems (child benefits and housing support), which normally results in the greatest wage improvement for lower and middle-income groups.

The state’s contribution would thus play a key role. It opened up the possibility of going ahead with moderate wage increases thus creating leeway for companies and the public sector for a rapid price reduction. If the reduction in inflation becomes sufficient, the conditions for a reduction in interest rates will be created.

The Union Alliance of ASÍ unions developed such a path and proposed it to the Confederation of Employers (SA) and later to the government. Collective Agreements in that spirit have now been signed. Then the next chapter of the struggle begins. The labor movement will push for stronger price control than before and collect the wage benefits that households now have to receive through a reduction in the cost of living.

Price control as a priority

With the modest salary increases agreed upon, there is no shortage of equipment for companies to reduce inflation strongly and directly lower prices in many areas – starting right this year and even more so in the coming years. Imported inflation has also been decreasing a lot and that is helping. Also, the profits of companies in Iceland have been at record levels in the last three years. All this creates a considerable scope for lowering prices for consumers.

Public entities also enjoy much smaller wage increases than previously expected, and this also creates room for them to reduce fees that rose above 3.5% at the end of last year – and so keep increases at a moderate level in the future.

The path to economic stability and a lower level of inflation is thus straight and wide. Workers expect the companies and service providers to contribute to this common journey initiated by the labor movement. The stakes are high that the experiment will be successful. The economic management of the government and the central bank must aim in the same direction. For example, demand pressure on prices accompanying too fast growth in the tourism industry must be curbed.

Interest rates have to go down at the same time

Inflation should be down to around 3.5% next year and then further down towards the central bank’s inflation target (2.5%) or lower in the following years. These are realistic goals created by the collective agreement. Along with this, it is inevitable that the central bank will lower the policy rate and that banks and pension funds will strongly reduce mortgage interest rates, both nominal and real.

The reduction in interest rates will ease the household’s housing debt payment burden and facilitate faster development of housing, which is much needed. It is necessary to hold back excessive increases in housing prices, which have been difficult to contain in recent years.

Welfare reforms for households

The government’s contribution is significant in preventing low wage increases from affecting lower and middle-income groups in a bad way. Households in those groups will receive significant wage benefits from the reforms that accompany the increased state contribution of 20-25 billion per year, both to the strengthened transfer system and other welfare reforms.

Without this contribution from the public sector, large groups of people currently struggling to make ends meet would have had to bear an even greater burden to bring inflation down. In fact, the welfare reform accounts for about two-thirds of the wage increases that will occur in the first year of the collective agreement and thus come as a significant increase in wages. The wage situation of low-wage workers and middle-income groups will therefore improve soon.

With this collective agreement, it has been shown that when the members of the labor market and the public sector work together and row in the same direction, it is possible to improve conditions and at the same time lay a better foundation for stability in the economy and in the income of households.

In the future, the responsibility will fall especially on the companies, service providers, and financial institutions to deliver to the public the reductions in the cost of living that need to come quickly, both with a reduction in prices and interest rates. If all parties do their part, the situation of households and the national economy will improve in the coming years.

The author is a professor emeritus at the University of Iceland and an expert at Efling.

The article was first published in Morgunblaðið on March 9, 2024.