Iceland’s economy is one of the fastest-growing in the OECD, driven by foreign tourism and strong domestic demand. The labour market is tight and wage growth robust, while high wage compression helps maintain a highly egalitarian economy. Inflation is persistent and broadening, and inflation expectations have de-anchored. The fiscal stance is tightening but consolidation could be faster to support monetary policy. Despite progress, barriers to entry remain in many sectors. Structural reform could raise productivity while also contributing to disinflation. Higher and broader taxation of greenhouse gas emissions, and investing in lower-cost actions to cut emissions, would help achieve further reductions efficiently. Immigration has increased rapidly since the late 1990s, driven largely by strong economic growth and high standards of living. This has brought important economic benefits, including by boosting the working age population and helping Iceland to meet labour demands in fast-growing sectors. However, challenges regarding the integration of immigrants and their children need to be addressed. More effective language training for immigrants and improved skill recognition procedures are called for. So is enhancing teachers’ preparedness to accommodate students’ diverse educational needs. Better integration also requires meeting the housing needs of the immigrant population, including through expanding the supply of social and affordable housing.

THEMATIC CHAPTER: ADDRESSING THE CHALLENGES AND UNLEASHING THE BENEFITS OF IMMIGRATION