Icelanders Demanding Up to 50% Pay Rise Show Crisis Ripples

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The latest round of economic distortions following Iceland’s spectacular collapse seven years ago is now playing out.

Icelanders representing about one-third of the workforce are demanding pay rises as high as 50 percent in some industries, threatening to cripple the island’s recovery just as policy makers move closer to removing capital controls. The development is unsettling some of the island’s biggest businesses, who say industries will struggle to turn a profit.

Orri Hauksson, the chief executive officer of Siminn hf, Iceland’s biggest telecommunications company, says the island only enjoys a “fictitious” stability thanks to the currency restrictions that have existed since 2008. But now, given the “huge wage increases, you’ll find that companies will experience downward pressure on their profit margins,” he said in an interview in Reykjavik.

Iceland’s unions want monthly wages for their lowest-paid members to be raised from 200,000 kronor ($1,500) to about 300,000 kronor, according to SGS union. The state mediator’s office has been bombarded by more than 36 labor disputes, with failure to reach any accord already leading to several strikes across the country.

No Meat

The industrial action has meant Icelanders are running out of staples such as meat, as veterinarians overseeing health and safety in slaughter houses refuse to work. In the services industry, a lawyers strike means couples embroiled in divorce and child-custody cases have been unable to reach settlements. If the labor disputes aren’t resolved by June 6, up to one-third of Iceland’s workers will go on strike, unions have threatened.

Icelanders work longer hours than their Nordic counterparts, with the Organization for Economic Cooperation and Development estimating they put in 16 hours more a week than Danes in 2013, on average. But pay growth has barely kept pace with inflation and Icelanders saw real wages rise little more than 3 percent in the six years through 2014, statistics office figures show.

Meanwhile, Iceland is struggling to unwind capital controls in place since its biggest banks defaulted on $85 billion in debt almost seven years ago. The central bank on May 13 warned that wage increases could jeopardize the process, which the government had hoped to push forward this year.

Finance Minister Bjarni Benediktsson told Morgunbladid his ministry will unveil bills on lifting the capital controls within the next few days.

Hauksson says he worries about the fallout on businesses. “Prices can’t be easily raised in the short term” to compensate for a surge in employee pay or if an exit from the capital controls drives down the exchange rate, he said. Though he chooses to remain “optimistic” on Iceland’s economic outlook, “one can also envisage a negative scenario in which the stability that we’ve had for the past few semesters is derailed,” he said.