Workers, Employers and the Distribution of Israel’s National Income – Labor Report 2015

Worker in front of a production site

Low Productivity is the Result of, among others, Lowering the Cost of Labor

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Economists, government officials and the OECD often cite the low productivity of Israeli workers. With the exception of the export industries, led by high tech, productivity in Israel is among the lowest to be found in OECD countries. The explanations usually refer to a low level of human capital, a high level of defense expenditures, a large proportion of young workers without experience, and economic activity in the informal sector.

But there is another explanation: the policy of assisting employers by lowering the cost of labor. This policy, which has been in effect at least since the Emergency Stabilization Program in 1985, has been a “success story.” The cost of labor has indeed decreased; however, this occurred at the expense of the economy as a whole.

A. Low Productivity and Policy to Lower the Cost of Labor
The “success” is evident in the following figures:
• The earnings of a large percentage of Israeli workers are defined as low wages (up to two-thirds of the median wage) – a percentage that is among the largest among OECD countries. Low wages reflect low investments in workers – in the form of vocational training, working conditions, mechanization and automation, which augur low productivity;
• The workplace participation of Israeli women grew during recent decades – but 36% of them received low wages in 2014 (up to two-thirds of the median wage) – a figure that indicates employment that does not require prior education or professional training — and augurs low productivity;
• A significant proportion of Israel’s workforce consists of foreign workers, employed at low wages and under inferior working conditions, in many cases as a cheap alternative to investing in mechanization– also auguring low productivity.

B. Decrease in the share of workers in the national income
In recent decades, the share of workers, both employed and self-employed, in the national income has decreased. In 2015, that share amounted to 57% – the lowest share since 2000, when it was 65%. This is a process that occurred in most OECD countries, but it is no consolation, as the circumstances accompanying that process differed from country to country, and as did the response. The result of the decrease in the share of workers in the national income is a long-term adverse effect on productivity: “cheap” laborers do not require instruction and professional training, and they, in turn, are not able to invest in the education of their children, certainly not when fiscal policy is based on the transfer of a good part of the burden of financing social services from the state to households. All these factors result in low productivity – perhaps productivity that will be even lower in the next generation.
The Central Bureau of Statistics does not publish figures on the division of the national income by income decile. It is reasonable to assume that such figures would point to an even larger shrinkage in the share of workers in the national income, due to the fact that the category of “workers” also includes persons with especially high salaries, like senior managers in public corporations, whose salaries have experienced significant growth during the past decade. Figures published by the State Revenues Authority at the Ministry of Finance based on the tax model of that authority reveal that between 2007 and 2015, the average income for individuals in the top one percent grew by 7% – from some NIS 130.6 thousand per month to NIS 139.5 thousand per month (in 2015 prices). During the same period of time, the average salary in the economy as a whole hardly changed. In 2015, the income of the top one percent amounted to 13% of all earned income.

C. “Foreign Workers” – A Permanent Feature of the Israeli Labor Market
Since 1967, workers from the Palestinian Authority have constituted an integral part of the workforce in Israel, and since the first intifadah, they have been joined by persons whom Israelis call “foreign workers.” In both cases, the common assumption is that these workers constitute a temporary phenomenon. However, the figures presented in this report show that they are a significant and permanent element in Israel’s labor market. The government of Israel denies this and continues to fight the phenomenon with one hand and encourage it with the other, without deciding which way to go.
One way would be to recognize the vitality of workers from abroad to the Israeli economy and to equalize their rights and status with those of Israeli workers.
Another would be to invest resources in a long-term program to increase mechanization and automation in construction and agriculture, which would reduce the dependence on cheap labor, and to build an alternative long-term care system so as to make it feasible to employ Israeli care-givers.
Regarding Palestinian workers, in the short term their employment is useful to Israeli employers, who receive cheap, accessible labor, while it is also useful to the Palestinian economy, which benefits from the wages of Palestinians employed in Israel. In 2013 those wages amounted to 12.3% of the Palestinian Authority’s GDP. However, in the long run this arrangement has an adverse effect on both sides. It is an obstacle to the development and maintenance of an independent economy on the part of the Palestinians, and it has a harmful effect on Israeli workers and on the productivity of the Israeli economy, due to institutionalization of the norms of low wages and no professional training.

High Productivity for Senior Managers?
It appears that the only workers with high productivity are senior managers, if one is to judge from their remuneration, which increased between 2014 and 2015, especially that part of their remuneration based on stock options. The cost of the annual compensation of directors general of the 100 largest corporations on the Tel Aviv Stock Exchange was, on average, NIS 5.1 million, or NIS 426 million per month – 44 times the average wage (NIS 9,592 in 2015), and 91 times the minimum wage (NIS 4,650).

Call for Change in the Trend of Lowering the Cost of Labor
After three decades of lowering the cost of labor, it is time to change direction. Increasing productivity in Israel involves increasing investment in the real economy (rather than, for example, in financial products), and in achieving a regional political solution. But it also requires transitioning to a more generous and egalitarian wage policy, on the one hand, and increasing the share of the state in financing social services, including the education and training of workers, on the other.