News - 19.12.2024

Attack on Wages and Rights of Wage Earners in 2024

The year 2024 was far from a quiet one. Wage disputes and two elections left their mark on the year, and the political landscape underwent significant change, warranting extensive analysis. However, this article aims to delve beneath the surface and focus on the manifestations of austerity policies during the past year.

VR has recently drawn attention to the essence of austerity and the attack it represents on the wages and rights of wage earners. Firstly, austerity entails cuts to public spending, neglect of infrastructure, and privatization of essential services. Secondly, it manifests in high interest rates as a measure to combat inflation. Thirdly, it appears in attempts to erode the rights and conditions of general wage earners. Austerity is often framed as a means to balance government expenditures and stimulate economic growth, but in reality, it is a calculated approach to safeguard the interests of asset owners at the expense of those who work, owe debts, or rent their homes. The manifestations of austerity in 2024 were diverse and far-reaching.

Collective Agreements in the General Labour Market
At the beginning of the year, key government officials and political leaders in the field of public finances solemnly echoed the calls of employers for the labour movement to "act responsibly" in the upcoming collective bargaining negotiations. At that time, inflation was 6.6%, interest rates had been high for over a year, and the Central Bank Governor declared that collective agreements were "the single greatest uncertainty" for the anticipated interest rate reduction process. This rhetoric aligned with the core narrative of austerity, which attributes inflation primarily to the notion that wage earners are too well off and enjoy excessively high wages. However, there is little evidence to support such claims. Within the labour movement, there was much debate on how to respond to the coordinated pressure. The result was that unions in the general labour market signed four-year collective agreements with such modest wage increases that, in times of inflation, they could easily result in real wage reductions. These agreements were then intended to serve as the blueprint for all subsequent negotiations.

The imperative to discipline the entire labour market into similar agreements was so strong that, when a small group of around 170 VR members employed in passenger and baggage services for Icelandair at Keflavík Airport requested a correction to their terms — including the removal of split shifts, which fail to hold up to scrutiny — the Confederation of Icelandic Enterprise (SA) initiated a vote on a lockout. This lockout, while aimed at a small group of Icelandair employees, would have affected all 25,000 members of VR. Such aggressive tactics are virtually unheard of in the Nordic countries, and even less so in other OECD nations, where lockouts are either outright prohibited or subject to much stricter controls than those in Iceland. The threat of a lockout cannot be interpreted as anything other than an assault on the rights of wage earners aimed at pressuring them into accepting lesser terms.

A similar conclusion can be drawn regarding the recent actions of SVEIT, an association of companies in the hospitality sector. SVEIT has established a "union" that is not a union and signed a "collective agreement" that is not a collective agreement. Trade unions are, by definition, organizations of working people, not employers. Collective agreements, in turn, are meant to be negotiated with the involvement of the workers who are subject to them.
These developments illustrate how austerity measures are not only aimed at reducing public spending but also at diminishing the bargaining power and rights of wage earners in Iceland.

Interest Rates That Never Drop
With the signing of the collective agreements, the labour movement took a risk on behalf of wage earners. This risk was based on promises from employers to avoid price hikes and from public authorities to refrain from raising fees. The premise was that this would reduce inflation, which would, in turn, lead to lower interest rates. It is worth emphasizing that this logic is rooted in an inflation theory that is far from universally accepted. Nevertheless, this was the outcome, and borrowers braced themselves for an interest rate reduction cycle. But then a month passed. And another. And another. And another. And another. And yet another. An increasing number of homeowners saw their fixed interest rates expire, forcing them to either endure skyrocketing repayment burdens or switch to inflation-indexed loans, watching their debts grow. It wasn't until early October that interest rates were reduced slightly, followed by a further modest reduction in November — in the midst of an election campaign where much was at stake for the ruling parties. The banks responded by raising interest rates on inflation-indexed loans, effectively neutralizing the impact of lower rates on non-indexed loans.

The next interest rate decision is scheduled for February, which will mark nearly a year since the collective agreements were signed. The claim that "moderate" collective agreements would lead to lower interest rates ultimately proved false. As a result, ordinary people are being hit with a double blow, forced to pay both for inflation, through higher prices, and for the cost of controlling inflation, in the form of higher interest rates and inflation adjustments.

Fees That Don’t Stay Put
One of the positive outcomes of the most recent collective agreements was the introduction of free school meals, a government initiative that reduces both poverty and inequality while providing significant support to families with children during financially challenging times. As part of the agreement, both the state and municipalities committed to capping fee increases at 3.5%. However, property taxes were excluded from this arrangement, and they have since risen sharply in line with increases in property values. This increase hits ordinary people hard, as it reflects a policy approach that treats housing as an investment opportunity rather than a place to live. High property prices prevent young people and renters from securing a permanent home and have a direct impact on both inflation indices and inflation itself.

Moreover, several municipalities have blatantly disregarded the call for modest fee increases, particularly regarding preschool fees. Wage earners working regular hours have been forced to bear the cost of hundreds of thousands of ISK in additional preschool fees annually in certain municipalities. Kópavogur led the charge last year, and most recently, Fjarðabyggð announced its plans to participate in this attack on the financial well-being of parents and on gender equality.

Finally, mention must be made of the 50% increase in the contribution to the Natural Disaster Fund, which has resulted in higher mandatory insurance premiums. While the financial impact of recent natural disasters cannot be downplayed, it is nonetheless a questionable decision to impose a permanent insurance cost increase on the general public at a time of high interest rates.

Constantly Rising Prices
Turning now to the price increases that were supposedly not supposed to happen, both meat producers and vegetable farmers have announced price hikes for the new year. Confectionery manufacturers, meanwhile, seem eager to fully exploit the rise in global chocolate prices as justification for continued price increases.

When it comes to meat, 2024 was notably the first year in which meat processing plants were exempt from competition law provisions. These changes were meant to benefit consumers, but in reality, the amendments to the legislation were drafted by vested interests. The changes were so substantial that the Reykjavík District Court has ruled the law unlawful.

Vegetable farmers, on the other hand, point to rising electricity costs. While the extent of the issue may be exaggerated, the fact remains that the government has failed to protect households and small businesses from the marketization of electricity. In 2024, electricity prices for households increased by over 13%, nearly double the rate of the consumer price index. For a full year, the Consumers’ Association has called for the introduction of a profit cap on electricity sales to households, a measure that is supported by the much-discussed Third Energy Package. But the government has remained conspicuously silent, leaving households to compete with large corporations for electricity — a competition that will continue to drive up prices if no action is taken.

Use of Public Funds
A hallmark of austerity policy is that the general public ends up paying dearly for it. This comes in the form of higher housing costs, rising prices, deteriorating public services, and increased fees. The primary justification for such a policy is typically framed as a need for "fiscal discipline" to tackle economic instability, pay down public debt, and reduce the budget deficit. This rhetoric was especially prominent during the lead-up to the recent elections, with campaign promises heavily focused on how to cut public spending, all under the guise of ensuring the "proper use of public funds." There is likely no wage earner who objects to the proper use of public funds. After all, we pay a significant portion of our income in taxes, and we expect to benefit from these contributions through access to education, healthcare, welfare, and well-maintained infrastructure. However, there are few examples of cuts to public spending that have genuinely benefited wage earners. On the contrary, fees increase, services are reduced, and we end up paying more for less. Alleged "cost-saving measures" by the government often end up increasing long-term costs and sometimes even create new revenue streams from the state treasury into private hands.

Two striking examples of this in 2024 are the "new arrangement for nursing home housing" and the construction of the Ölfusá Bridge. Instead of the state and municipalities taking responsibility for building nursing homes (and thereby ensuring the provision of healthcare services in the country), the task is now being transferred to private parties. These private entities will construct the buildings and then invoice the state for rent. This approach is modeled on practices in the UK, where studies have shown that the more areas privatization reaches, the more public funds leak into investment funds and tax havens. The owners of the housing for nursing homes will always hold a monopoly position in relation to the state, as there will inevitably be a shortage of spaces due to an aging population. This is, however, a fantastic arrangement for real estate companies, as they can set their own rent rates while the state foots the bill.

In November, the Minister for Infrastructure, serving in a caretaker government, participated in a groundbreaking ceremony and signed a construction agreement for a new bridge over the Ölfusá River. The project follows a so-called Public-Private Partnership (PPP) model, a collaboration between the state treasury and private companies. But, in classic Icelandic fashion, the risk has not been fully transferred to the private sector. Instead, much of the responsibility has been shifted onto the state. To pay for the project, road users will be charged a toll. According to the Icelandic Automobile Association (FÍB), the toll per trip will be 60–80% higher than if the state were to finance the project directly. The excess cost will go toward higher interest rates and the private sector’s share of the profit. The result is that taxpayers and road users will pay up to 50% more for the bridge than would be necessary under direct public financing.

What Will Happen in 2025?
As this article is being written, all signs point to a new government coalition led by Samfylkingin (the Social Democratic Alliance), Viðreisn (the Reform Party), and Flokkur fólksins (the People's Party) taking the reins of power. This government will face significant challenges, with the most critical tasks being to honor the promises made by the previous government in connection with collective agreements and to implement emergency measures for groups of renters and borrowers who have suffered the most under the policy of high interest rates. There is an urgent need for extensive infrastructure development in Iceland, whether in healthcare, education, welfare, or transportation. Above all, the new government must avoid the pitfalls of austerity policies and heed the lessons learned from past experiences and research on what works and what does not in economic management. Wage earners should not be forced to shoulder any further burdens beyond those they are already bearing.

On the labour market, it is essential to convene the ASÍ and SA Review Committee to assess the successes and failures of the collective agreements. It is clear that employers must fulfill their commitments and help prevent further price hikes. At the same time, they must collaborate with the labour movement to protect wage earners from unfair increases in electricity prices, preschool fees, and property taxes. Additionally, the social partners on the labour market have a shared responsibility to push for housing solutions that work for people. Without such action, there is a real risk that the current collective agreements will result in a reduction in real wages, turning them into agreements of wage erosion. In such a scenario, it would have been better not to have signed the agreements in the first place.

Halla Gunnarsdóttir,
Chair of VR

This article first appeared in Heimildin