Thursday, 12 July 2012

Living standards in Iceland: Collapse or not?

The international press has been rather predominantly positive when it comes to judging the extent of the economic recovery of Iceland. The 4.2% GPD growth (1Q11 to 1Q12) is prominent and the fact that unemployment is not measured in double digits, and actually even slowly coming down, is something that amazes the international press.

I've raised my concerns regarding this rosy picture before. This post however is to check if another "eye-brow raiser" from Iceland, Heidar Mar Gudjonsson who has amongst other things supported the idea of Iceland adopting the Canadian Loonie, is right or not.

Basically, Gudjonsson said that "living standards" (i. lífskjör, according to this source, I haven't read the original one) had moved back 20 years due to the collapse of the krona. We can argue what is meant by "living standards" but based on this opinion of his he said that the Central Bank of Iceland was basically not correct when it claimed that recovery was back and sound. Einarsson and Sigurdsson, two economists at the Central Bank, replied saying that although living standards had dropped in the crisis they had never gone down as far as Gudjonsson estimated. They claimed living standards in Iceland were back down to 2004 levels.

A month ago, I wrote on a similar topic. The data I used there were on a quarterly basis so they weren't really usable here. So I dug into the data bank of Statistics Iceland and OECD and came out with the figures below.

Basically, Icelandic GDP measured in SDR and deflated with the G7 inflation index that the OECD publishes - this is an estimate of the true SDR inflation, I know! - has collapsed from almost 170 in 2007 down to 100 in 2010 (data was missing for 2011). In the meantime, GDP measured in ISK (deflated with the Icelandic consumer price index) topped in 2008 and is beginning to come back up again, hence the 4.2% GDP growth figures.

GDP in Iceland. The idea of "The Icelandic Miracle" is based on GDP measured in the domestic currency. Data from OECD and Statistics Iceland. My estimates.

However, Gudjonsson on one hand and Einarsson and Sigurdsson at the Central Bank on the other were more referring to wages rather than GDP. And when it comes to Icelandic wages measured in deflated SDR, the data is rather clear: the purchasing power of Icelandic wages abroad bottomed out in 1993 and we were pretty close to reaching that bottom again in 2009. So Gudjonsson is very right when it comes to living standards measured in the foreign purchasing power of Icelandic wages: they have crashed!

Data shows that wages in Iceland measured in deflated SDRs are back down to 1997 levels or thereabouts. Gudjohnsson estimated they were back down to 1993 levels, probably using another currency basket than the SDRs. In the meanwhile, the wage index measured in deflated ISK is slowly making its way up again, just as the economists of the Central Bank of Iceland claim. 

So now we can start arguing which one is a better measurement of the living standards in Iceland, or in fact any other country: the domestic-CPI deflated purchasing power of domestic wages measured in the domestic currency or the foreign-CPI deflated purchasing power of domestic wages measured in the foreign currency?

And for pity's sake, is this really a wise definition: "the recession is over if GDP growth measured in CPI-deflated domestic currency is not negative for two consecutive quarters"?


  1. Thank you , nice post. I guess even better would be to split the purchasing power of deomestic wage in two components , domestic consumption and foreign consumption and deflate each with the respective deflator?
    Then the question is what weights to use: I suggest a smoothened average of the consumption split before the crash ( given that imports after the crash have fallen a lot).

  2. What about distributional effects? I doubt the median citizen cares about the purchasing power of the plutocratic elite, but about their own...

  3. Yes, imports have fallen. But how much as a proportion of total consumption I'm not sure. I'll check on that some time in the future, this might be a good way to get somewhat more "correct" data out of the rather messy and limited Icelandic national accounts.

    Distributional effects should be accounted for. But divisional data on after-tax nominal income is edgy at best and as far as I know only stretches back to 2004. But we can at least stretch ourselves to back then when it comes to the income distribution. Will see if I have time to crack it soon.

    Cheers for the comments!

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