The purchasing power of the public mitigated the effects of the recession – Efling corrects the misrepresentations of SA and the Chamber of Commerce

24. 06, 2021

Lately, it seems that the main spokespersons of employers have gone astray in their analyses of the Covid-recession: the origins, the scope and the ability of Iceland to get out of it again.Efling corrects the misrepresentations of the spokespersons of employers in a recently published report.The spokespersons of employers have stated the following:

  • That high wages in Iceland had begun to reduce economic growth and exacerbate unemployment before the Covid-crisis hit, that is, in the year 2019.
  • That the wage raises of the “Quality of Life” agreement from 2019 to 2021 made the recession deeper than it would have been (if the collective agreement had been set aside).
  • That high wages in Iceland will reduce the upswing at the end of the disease prevention measures and exacerbate inflation.

Efling – union rejects all these claims. There are, in fact, solid arguments for the opposite conclusion, that the maintenance of the purchasing power of common wage earners throughout the crisis significantly mitigated the effects of the recession. The answers of Efling to the abovementioned claims of the Chamber of Commerce and the Confederation of Icelandic Enterprise (SA) are the following:

  • If the “Quality of Life” agreement had been set aside, the recession would have been even deeper, because domestic demand would have been reduced even more and more jobs would have been lost.
  • The maintenance of the purchasing power of wage earners, despite a small increase in inflation, has a positive effect on the upswing, which has already begun and seems to be a dynamic one.
  • Analysts (at the Central Bank, the Bureau of Statistics, ASÍ, Íslandsbanki and Landsbankinn) mainly attribute the rise in inflation to changes in the rate of exchange, pricing developments abroad and the flow of capital to the country and abroad. There has been little correlation between wage raises and inflation in the past few years.

Therefore, there is an excellent reason to be wary of the one sided and misleading formulations of the main organizations of employers regarding wage matters and recessions.It is also important, during the upswing, not to slow down, with regards to the measures of the government or the maintenance of the purchasing power of the public.The state must, therefore, not reduce its input too soon or resort to budget cuts or tax-hikes on the public. Doing so would weaken the upswing and even result in a new recession.