Collective Agreements At Risk From Inaction
18. June 2026Inaction Increases the Likelihood of Collective Agreements Being Terminated
For many years, a common argument in Iceland has been that inflation can ultimately be traced back to wage increases. The story is simple and easy to understand: when wages rise, businesses must increase prices, and higher prices lead to inflation. Simple problems invite simple solutions, and according to this logic inflation could be avoided by preventing wage increases or even reducing wages. But is the reality really that straightforward?
At a well-attended seminar hosted last week by VR, the Commercial Federation of Iceland (LÍV) and the Federation of General and Special Workers, the relationship between wages and prices was examined in greater depth through a review of both Icelandic and international research. The findings were clear: in the short term, wage increases have no measurable impact on inflation, while in the longer term prices, wages and import costs tend to move together. However, correlation does not imply causation. Where a causal relationship can be identified, it generally runs in the opposite direction: prices rise first and wages follow.
Moderate Wage Increases Have Limited Impact on Prices
This is not to suggest that wages have no effect on prices. Labour costs are, of course, one factor in price formation. However, they are far from the only factor. In the grocery retail sector, for example, labour costs account for less than 10 per cent of total costs, meaning that the effect of moderate wage increases on prices is limited.
Last year, wages increased by approximately 3.5 per cent, yet food prices rose by 5.5 per cent. It is clear that wages accounted for only a small fraction of those increases. At the same time, the largest companies in the grocery sector reported strong financial results and paid tens of millions of krónur in bonuses to their chief executives. Food price increases, meanwhile, have a direct impact on inflation, alongside other factors, not least housing costs, which remain the largest and most persistent contributor to inflation.
When the current collective agreements were negotiated and approved, employees accepted a significant degree of risk by agreeing to wage increases below the rate of inflation, in the hope that businesses and public authorities would also play their part and that inflation and interest rates would fall. This experience demonstrates clearly that even when wage growth is modest, inflation does not automatically decline. Inflation is far more complex than that. Even if employees had agreed to a wage freeze, it would not have prevented businesses from increasing prices or public authorities from raising charges and fees, both of which contribute to inflation.
Employees Pay the Price Three Times
Excessive price increases and fee increases do not occur by accident. They are the result of decisions made by private and public organisations, and in some cases by democratically elected representatives.
Employees pay for each such decision in three ways. First, through higher prices. Second, through indexed contracts that increase in line with inflation. Third, through high interest rates, which in turn drive up housing costs. This is the inflationary spiral that must be broken.
Understanding the composition and nature of inflation is essential if we are to address it effectively. Simplistic explanations that identify a single scapegoat — namely employees — amount to little more than political rhetoric. Calls for wage cuts as a response to the current situation are nothing more than a defence of the right of companies to set prices as they see fit.
One of the key conditions for bringing inflation under control is to halt unnecessary price increases, and businesses have the power to do precisely that. At the same time, municipalities are being called upon to reverse excessive increases in charges and fees and to freeze further increases. Combined with meaningful action on housing, such measures could help reduce inflation and create the conditions necessary for collective agreements to remain in force for their full term.
The Time for Action Is Now
The time to act is now. With every day that passes without meaningful action, the likelihood increases that we will be left with no option but to terminate the collective agreements.
Halla Gunnarsdóttir, Leader of VR
Jakob Tryggvason, Leader of RSÍ
Andri Reyr Haraldsson, Vice-Leader of RSÍ and Leader of FÍR
Eiður Stefánsson, Leader of the Commercial Federation of Iceland (LÍV)
Gunnar Sigurðsson, Leader of VM
Óskar Hafnfjörð Gunnarsson, Leader of MATVÍS
Source: Morgunblaðið 18. June 2026 (Icelandic)