T HE SHORT TERM

The short-term challenges primarily concern the resurrection from the consequences of the deep recession of which the unemployment problem is by far the greatest. Although Iceland‟s present unemployment rate is below the EU average, it is still significantly higher than at any time since the end of the Second World War. Iceland has always been a traditional “work society” with plenty of opportunities for jobs and overtime in case of temporary financial hardship in a family. Thus, in the past decades, Icelandic families have been used to solving their financial problems (e.g. associated with periodic recession and pay cuts, or in relation to financing of home buying or ambitious con-sumption levels) by increasing their work load (frequently that of the man of the family). Conse-quently, high levels of employment participation and extensive opportunities for extra work and overtime have featured in Iceland as an important means of adapting to fluctuations in the economy.

Higher unemployment and lower job rates have made this option more difficult to pursue. This ex-plains why Icelanders – and the Icelandic government – tend to look at the present level of unem-ployment as a more serious problem than is the case in countries that are more used to long spells of high unemployment.

New patterns of unemployment

The unemployment problem is unevenly distributed across social groups, with the young and new school leavers being particularly badly affected. Some industries have also been more affected than others have, and a number of specific groups must become the focus of specific measures. The number of immigrants increased rapidly in the 2000s, particularly in the last 5 years before the fi-nancial collapse, and only about a fifth of them left the country after the onset of the crisis. Given the higher unemployment rate among members of this group, there clearly is a great need to im-prove social integration on the way out of the crisis. There is also a need for awareness of relatively small groups with particular difficulties in the present circumstances (such as unemployed people above the age of 50), since they may find it particularly difficult to re-enter the labour market be-cause of the tougher competition from younger labour and migrants.

Lack of preparedness as concerns active measures

Strengthening the variety and effectiveness of activation measures is particularly important since Iceland has not had to put great efforts into this area in past decades because of the then long-term high employment level. While measures have obviously been in place, they have been few and far between. Accordingly, expenditure on activation measures has been rather low (Ólafsson 1999 and Ólafsson and Stefánsson 2005). It is therefore quite a challenge to strengthen the measures and re-sources in this area in a very short time. The recession is felt all over the country, but the capital area and the Southwest (Reykjanesbær) are by far the hardest hit, and the measures should therefore concentrate more on these areas.

Dangers associated with using the disability pension system as a buffer

Research has shown that from the early 1990s, the flow of new entrants into the disability pension system typically increased in the wake of increased rates of unemployment (Thorlacius and Ólafsson 2008 and 2010; Ólafsson 2005). In view of the present crisis, it was therefore to be ex-pected that the flow of people into disability pensions would have reached unprecedented heights.

This could have had severe long-term consequences for the economy as well as for individuals who have the ability to work, but, in some cases, would be stuck outside the labour market due to the stigmatisation associated with being a disability pensioner. The Icelandic welfare systems has been aware of this threat and many have mentioned the difficult consequences that Finland experienced in this respect following its deep financial crisis in 1990-94. The Finns talk about the “lost genera-tion”, referring to groups of individuals lost to the labour market and society because of the crisis (Kiander et.al. 2001). In Iceland, there has been considerable public concern that this must not hap-pen, and the government has taken steps to avoid it happening as described in the previous chapters.

Access to finance for job creation

The most efficient means against unemployment is job creation. One of the immediate consequenc-es of the crisis was that invconsequenc-estments dropped to an all-time low in 2009 and 2010. Government fi-nances were in turmoil and private firms were often over-indebted due to excessive leverage levels and/or increase in foreign debts levels with the collapse of the currency (Zoega et.al. 2010). How-ever, in Iceland the occupational pension funds represent a source of finance that has not been ex-ploited for direct commercial investments until now. Thus, the management of the funds is currently considering how to invest the capital without jeopardising the rights of future pensioners.

Danger of inflation

There is a considerable danger of a growing wage-price spiral similar to that of the periods of high inflation experienced before the advent of the Social Pact in 1990. The demands of the trade unions for wage rises in collective bargaining may again become aggressive in an attempt to regain the considerable losses of purchasing power. During the 1960s and 1970s in particular, pay increases following policy-induced reductions in real pay tended to be quite high, usually leading to an explo-sive inflation with a wage-price spiral threatening to run out of control. Given the unusually large reduction in real wages over the last two years, such a development is a real danger if collective bargaining runs into problems. The problem is aggravated by the high debt levels of many house-holds. Most mortgages and other loans are indexed to the price level, and the debt burden therefore increases with rising inflation. Another underlying difficulty is that it is much easier for the export industries to pay higher wages, while other sectors (especially construction, commerce and low-value services) are in grave difficulties. Thus, the importance as well as the difficulty of the art of balancing in centralised bargaining is considerable this time.

Social inclusion of the immigrant population

Lastly, given the overall size of the immigrant population in Iceland (some 8% of the population) and their higher unemployment rates due to the crisis, the problem of social inclusion of this group into the labour market and the society in general may present significant challenges in the years to come.