5.1 Aftermath of the financial collapse
Against expectations and studies, Iceland survived the financial collapse even though the banks’ debts were many times larger than the size of Iceland’s entire economy. Iceland used financial measures such as devaluation to support its economy, but the main changes had to do with Iceland’s actions as a welfare state. That is, Iceland utilized and even strengthened its social security networks.
Tourism has had a significant impact on Iceland’s employment situation. The employment situation has improved over the years; and employed people are able to pay taxes and have more income, which decreases the number of people dependent on social protection and unemployment allowances. Tourism has a large impact on Iceland's economy because almost one in ten people in Iceland work in tourism. However, tourism alone cannot explain all of the economic growth that has taken place, or provide a single answer as to why Iceland has survived the most difficult times.
5.2 Inflation’s effects on people’s lives
The financial crisis and its economic effect had an enormous impact on Iceland’s citizens.
The impact affected to the inflation and the everyday life and also had longer-lasting effects in the following years. One the main impacts of the inflation was that the price of everyday necessities increased at a rate which was rapid for modern western country, especially for a Nordic welfare state. Usually, inflation in Iceland is around 2% per year, a figure which indicates that the economy of the country is growing well, and also that there exists a good employment situation for the country’s people. They have work but also can afford to buy their groceries, pay rent, energy and everything related to everyday life expenses. Inflation in 2007 in Iceland was already high (5%), which was an indication of high increased prices.
However, in 2008-2010 inflation was already over 10%, which meant that prices increased
44 even more quickly. This increase affects the everyday life; therefore, people could not afford to spend at a similar rate as before.
Increasing inflation also could have had an effect on Iceland’s exports and imports: at the same time the currency of Iceland, the Krona (ISK), ceased to be a floating currency and was given a fixed value. This value was also different inside the country and outside. The value of imported items was now different than before and not able to change flexibly. This could have effected the prices of imported goods in stores; if the inner value was different, people could not afford such items any longer. Iceland’s government tried to fix the currency value so that it would not lose its total value during the financial crisis in 2008-2010. These currency value measures were taken during the period 2008-2017.
After the most difficult times in 2008-2009, between the years 2015-2016 inflation has settled near 2%, which makes price increases more humane for average people. Currency restrictions have for the most part been removed, which helps tourism and country’s import and export (MTV 2017). This way, employment is able to increase, and foreign currency is also available more easily than it was during the period of restrictions.
5.3 Improvements in employment
Iceland’s unemployment rate was 2% percent in 2007, a number which is considered to reflect a full-employment situation in society. After the financial crisis’ impact in 2008, in 2010 the unemployment rose quickly to 7.6% percent: thus the unemployment rate was four times larger than before the crisis. This had a significant impact on people’s lives. Hemerijck (2012) writes a country needs to maintain its safety nets. If people lose their jobs they can lost their homes as well, if they cannot pay the cost of housing. This leads to the situation in which a country loses a ta payer, possibly has to pay unemployment benefit and needs to support housing allowance.
45 Loss of employment may also lead to rising public medical expenses and social security allowances. Iceland’s situation in 2008 could have led to a rising amount of unemployed people, raising the costs of paying social benefits but also taking a high toll on peoples’
welfare. Iceland began securing its social security network and to ensure that people would not drop out of the society.
Males’ unemployment in particular peaked at over 9%, while females’ employment still stayed at 6%. It is statistically interesting that females’ unemployment kept rising until the year 2010, although the employment situation for males had already begun to recover. The unemployment rate for young men and women has been double that of other age groups.
This means that either graduating young people were not hired after the graduation, or that they were first to be dismissed. It could also mean that they did not have long-term contracts, but more temporary ones, or that employers thought they that young persons could find a new job more easily. Because the financial situation continued over several years, this phenomenon could be the result of all of the mentioned unemployment scenarios.
The unemployment situation is similar for all age groups, meaning that the older the employee is, the more likely is that he was employed during 2007-2016. This was the situation for both females and males. The unemployment situation has taken almost ten years (from 2007 to 2016) to recover to the pre-crisis figures, but youth unemployment is still higher than in other age groups. After 2010, females’ and males’ unemployment was decreasing and in 2016 the unemployment rate was under 3%, which is considered to indicate full employment.
Until 2007, total employment in Iceland was 83,5% but decreased to 80,5% between 2011-2012. This was the lowest employment period between 2007-2016. After 2012, the employment rate recovered to 83,6%. Recovering employment figures have probably helped Iceland’s financial situation. Although there was no find a reason to increasing income support for homes, can be seen that income support payments were peaked in 2014. The peak of the financial crisis itself was mostly over after 2010 but why has the income support
46 increased all the way to 2014? There could be a legislation change which has allowed the payments even more of the homes. Or possibly if mortgage payments have started after a period of non-payments, people find they need support for these. This could need more research, if there is not a clear reason known.
Studying unemployment benefits reveals that from 2007 to 2009 unemployment allowance expenditures grew ten times. This figure shows that the unemployment situation was very difficult for people and that they had to lean on public employment services and their unemployment benefit. To a country of any size, it can be difficult to prepare ten times increasing cost in two years but this would mean that people would not lost their home, which has an enormous difference when people’s welfare is considered. Expenditures for unemployment allowances were still higher in 2013 than in 2007, even though economic recovery had taken place. This situation could mean that people relied on temporary jobs which change often, and that they had to rely on unemployment allowance. Another possibility is that part-time workers needed unemployment allowance to support living costs because their income did not cover those costs.
5.4 Iceland’s social protection
Although during the years 2007-2013 Iceland had financial difficulties, the country still wanted to invest in their citizens and families. Hemerijck (2012) writes that countries have begun to demand activity from those who receive social security benefits. The unemployed have to search for work in certain ways or at certain times in order to receive unemployment allowance. The government’s aim is to decrease expenditures and avoid debt burden. As Hemerijck (2012) and Jackson (2009) write, countries should take care of and invest in people for the future.
During the period of difficult financial times and increasing of the debt burden, Iceland has increased sickness and healthcare expenditures. Healthcare expenditures have been steady
47 in comparison to budget of the GDP. When comparing the monetary amount of expenditures, one can see that expenditures have increased almost every year except for 2010. A similar situation obtains with regard to old-age pensions and services to elderly people. Julkunen (2017) writes that it is difficult to define the welfare state. There are some indicators that show how country, or a welfare state has invested into people. Iceland has invested to citizens not only monetary but Iceland has maintained healthcare, services for elderly, services for children and unemployment services and even increased them when needed.
Iceland took these steps in order to protect their citizens’ welfare and to ensure that the damage done to the country would not increase even further.
There was not done much deeper look to the Iceland’s debt problem or how the public financing or funding could change during the coming years. These could be studied more in a future and there is possibility that political climate can change easily during any circumstances.
According to the Hemerijck (2012), the costs of care for the elderly will continue to rise in many European countries because the population is getting older in structure and birth rates have fallen in few decades; for example, such a situation has occurred in Italy (Eurostat 2017). At the same time, there are fewer young working people than there are pensioners.
This situation will cause economical structure difficulties in the future, when employees are needed to cover the social security costs of retiring employees. In addition, taxation may also require changes in order to cover all of the welfare state’s expenditures. In Iceland, birth rates have been good compared to many other European welfare states. Iceland has invested in the family and child allowances but also in public daycare services. Birth rates in Iceland have fallen in the last decade, probably because of the difficult financial situation and uncertainty of employment. The unemployment situation of young people has made their situation challenging. According the United Nations Development Programme (2016) Iceland has improved their Human Development Index (HDI) over the years of crisis.
Improvements in index supports the evidence that Iceland’s investments to healthcare and education during the years of crisis have been affective.
48 Between 2007-2016, Iceland steadily maintained its investments in public’s safety. Iceland increased police forces’ expenditures in 2009 and 2011, an action which could indicate that the country wanted to maintain safety in society. Expenditures for Fire protection services decreased for some reason in 2016, but no reason was found for this decrease. It decreased about 25% in total from the previous year. There could be structural reasons or the funding changes in budgets but if this continues it should be investigated more closely. Iceland had to rely on income support in a difficult financial period. Iceland’s income support expenditures increased from 1 350 000 thousand ISK in 2007 to 4 750 000 thousand ISK in 2014. After 2014 the figure decreased but is still high. This increase indicates that people were in trouble in their everyday life and needed financial support from the government.
Increasing income support costs indicates that incomes dropped severely, or that the amount of income support was increased at times. Julkunen (2017) and Hemerijck (2017) write that a welfare state should have social support that can help their citizens when necessary.
Iceland’s measures indicate that Iceland had their safety net working and that they wanted Icelandic households to survive.
5.5 Financing social protection
Esping-Andersen (1990) describes different welfare states and their structures. According to Esping-Andersen (1990), there are three social policies: Liberal Social Policy, Conservative Social Policy and Socialist Social Policy. Iceland is part of the “Nordic Socialist Social Policy”-type of welfare state, in which the state provides public services such as children’s daycare and healthcare. These services are mostly financed from taxes and other public financing.
Studying statistics regarding Iceland’s financing of social protection from 2007-2013, it can be seen how the structure of financing the social protection has changed during these years.
For the average Icelandic citizen, structure changes could mean more direct payments from them and less through public funds. In Iceland’s case, public financing has remained the primary means of financing. The central government’s financing was increased during the
49 years 2007-2009. After this period it was decreased, but at the same time local governments’
financing was increased. This seems to have been done in order to compensate the structure, but the financing has remained mostly publicly funded. Employer’s contribution to the social financing dropped during the most difficult financial years (2008-2009), which could be because of the decreasing employment situation. In 2013 it still covered over 30% of the financial contribution. Between 2007-2013, Iceland’s funding of social protection has retained its similar structure and public funding was the main means of financing the social protection. When people are working, employers can increase social contributions, but this requires a stable employment situation. Employment can also increase the amount of privately-paid insurance because people are able to afford to pay for private and volunteer insurance payments.
In conclusion, Iceland has remained as a country with a Nordic Social Policy welfare system during the difficult years between 2007-2016. They have changed the country’s financial structure, but Iceland has still put the people’s well-being ahead of country’s finances. It has decreased the ratio of patient-healthcare personnel and kept the healthcare expenditures of the GDP at the same level through these years. Even though GDP has decreased and then increased again the main public services have remain intact. People have been offered public unemployment allowances, childcare, healthcare and services for elderly people. Iceland has been able to recover quickly because it did not let unemployment increase severely and the country also invested in public services.
Charts for the thesis have been created from the data of the Statistics Iceland and Eurostat.
The data was challenging to collect, and it was brought together by including several factors such as gender, age and available years of the set of data. Also journals and articles were used to bring information for the reasons of the financial crisis and how the crisis was handled in terms of welfare state. Defining the welfare state is done by using the classic and modern literature. Finding relevant journals of the financial crisis was difficult for the study, since these articles were often written between the years 2007-2011. Another challenge was that several articles were altered or removed from the internet during the writing period.
Finding the substitutive articles were time consuming and challenging. These challenges raise the importance of this research and its findings.
50 The main area of the study requiring further research was, what kind of affects the crisis had to Icelandic life in long-term? Is Iceland capable of maintaining welfare state model over the coming years, even if the economy would not grow? Also, social protection expenditures could be studied in a more detailed manner. This could give more information where exactly in social protection contributions has been invested. And could these kind of investments be used to protect other countries from sudden changes in societies?
51
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