Governor of the Bank of Israel Amir Yaron came to a session of the Knesset Finance Committee on Tuesday, and presented a fairly encouraging forecast for inflation in 2025. The most optimistic forecasts project inflation, which was running at an annual rate of 3.2% in December, rising by about 0.5% in January, because of rises in tax rates, but moderating later in the year and reaching just 2.1% in August, which is in the middle of the Bank of Israel’s 1-3% target range. According to the central bank’s own research department, inflation will be 2.6% in 2025, falling to 2.3% in 2026.
Are these forecasts too optimistic? A glance at the labor market in Israel over the past two months could indicate that they are. Until a few months ago, analysts were divided on the effect of the tight labor market on price rises in Israel, and the Bank of Israel was not concerned about wage pressures that might fuel inflation. At the time of the last interest rate decision, Yaron said, "Supply constraints in the labor market continue to hamper economic activity," but he did not warn of a jump in wages.
Low unemployment
In the Knesset Finance Committee session, Yaron said that real wages were higher than they were before the war, but that they were "below the long-term trend." But given the unemployment figures and the demand for workers, the fear is growing of wage pressures that will fuel inflation and cause problems for the Bank of Israel’s plans. According to Central Bureau of Statistics figures, wages rose by 6% in the first nine months of 2024, after rising by more than 10% in 2023.
The narrow measure of unemployment in Israel, which examines the number of people out of work, was just 119,000 at the end of 2024 (2.6% unemployment). At the beginning of the war, the IDF drafted about 300,000 reserve soldiers, a number that gradually reduced. Today, the broad measure of unemployment, which includes the unemployed, people on unpaid leave, and reserve soldiers on duty, is just 137,000 (3%). At the beginning of the war, the figure was almost 400,000, or 8.5%.
A situation of almost full employment might look ideal: people are working and consuming, and the economy is functioning, certainly an encouraging picture in wartime. On the other hand, though, such a low unemployment rate empowers salaried workers, causing upward pressure on pay. Pay rises tend to fuel inflation: more money in people’s hands means greater demand, greater consumption, and rising prices.
The low unemployment rate is accompanied by fairly high demand for workers. The number of job vacancies is about 10% higher than the average in the year before the war. Initial forecasts therefore indicate that wages will rise by about 6% in 2025.
IBI Investment House chief economist Rafi Gozlan says that the labor market is continuing to heat up. "A high ratio between the number of job vacancies and the broad unemployment rate indicates an especially tight labor market. Such figures were last seen during 2022," he says. "This situation highlights the importance of dealing with the supply constraints, which will affect the growth environment, wages, and inflation." Gozlan estimates that any improvement will only be gradual, and that therefore "the current labor market is driving further wage rises and a rapid rise in the rate of inflation."
At Meitav, the assessment is that the shortage of workers is mainly in jobs that do not require an academic degree, while the number people seeking jobs that do have such a requirement Is actually on the rise. According to Meitav, "the ratio between the number of people seeking work and the number of job vacancies in the economy as a whole has fallen from 2.3 in 2022 to 2.1 today, but among people in occupations requiring a degree, the ratio has risen from 1.9 to 3.7."
Pay upgrade
Besides the low rate of unemployment, the Governor of the Bank of Israel’s remarks in the Knesset indicated additional pressures on pay that are liable to emerge later on. Yaron cited Israel’s low labor productivity in comparison with developed countries, arising from gaps in basic skills and low public capital.
"Education is the best springboard for people to progress in this respect," Yaron said. If the government tackles the problem, workers with low skill levels will be upgraded, which should also mean higher pay. Yaron also mentioned the low rate of employment among haredi men (48%) and Arab women (42.8%). Expansion of the workforce among these populations will reduce pressure on wages for employers.
Published by Globes, Israel business news - en.globes.co.il - on January 29, 2025.
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