Analysts see pay rises pushing inflation higher

Shekel credit: Shutterstock Vladirina 32
Shekel credit: Shutterstock Vladirina 32

A very tight labor market is creating upward pressure on wages that could upset the Bank of Israel's inflation projections.

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.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2025.

Shekel credit: Shutterstock Vladirina 32
Shekel credit: Shutterstock Vladirina 32
Israeli apartments Credit: Shutterstock Apartments sold and rented

A selection of recent real estate deals in Israel in Tel Aviv, Ra'anana, Netanya, Mazkeret Batya, Maalot-Tarshisha and Beersheva.

MK 84 bombs credit: Reuters IMAGO US shipment of MK-84 900 kilogram bombs arrives in Israel

One of the first steps taken by US President Donald Trump was to release the heavy deep-penetration bombs, which former President Joe Biden had halted the supply of.

BIG Glilot credit: Tel Aviv online BIG Glilot - Israel's biggest shopping center set to open

The shopping center will send shockwaves through the retail sector in Tel Aviv and the Sharon region and could put some of the area's malls out of business.

Inflation credit: Tali Bogdanovsky January CPI reading lifts inflation, housing prices rise

In the twelve months to the end of January 2024, inflation has risen to 3.8%, the Central Bureau of Statistics reports.

Credit Card payment terminal credit: Seika Chujo Shutterstock Cyberattack again disrupts Israel's credit card payments

Check Point chief of staff Gil Messing: "These are the capabilities of a state actor. This does not necessarily mean Iran, but in the past Iranian entities have been behind such attacks.

CyberArk offices credit: Eyal Izhar CyberArk buys US co Zilla Security, reports strong Q4

CyberArk, which will pay $165 million for the US identity governance and administration company, has surpassed Teva to become Israel's second most valuable company.

mSphere credit: Mer Group Mer launches armored vehicle awareness protection system

mSphere's comprehensive monitoring eliminates blind spots, enhances detection capabilities, and enables crews to identify and respond to potential threats swiftly and accurately.

Mortgage taking credit: Shutterstock Steep fall in mortgage taking in Israel in January

Mortgage taking was down 50% from the preceding month but up 30% from January 2024, the Bank of Israel reports.

Shekel-dollar ASAP Creative Shekel rebounds against dollar

Bank Leumi: The possibility of further appreciation of the shekel, raises the question of whether portfolio owners with high exposure to foreign exchange have a reason to hedge their investment portfolio.

Amnon Shashua  credit: Eyal Izhar Shashua's Mentee Robotics unveils robot for manual work

MenteeBot V3.0 takes on lifting tasks that would typically be strenuous for human workers over extended periods.

New housing credit: Satenik Guzhanina Shutterstock 50% of housing deals in 2024 were developer loans

What made 2024 distinct was that 50% of deals involved special offers by contractors and developers for apartments not yet built, the Ministry of Finance reports.

Donald Trump  credit: Reuters/Brendan McDermid Trump administration reaffirms AI chip restrictions on Israel

Sources say the US will demand Israel passes regulations to prevent tech leakage to China and may even include removal of the restrictions as part of a multilateral Middle East agreement.

Accountant General Yali Rothenberg credit: Cadya Levy Israel raises $5b international bond

Accountant General: This is an important public offering that indicates the financial stability of the State of Israel and the high confidence of global investors in the Israeli economy.

Check Point Chairman Gil Shwed and CEO Nadav Zafrir credit: Check Point Check Point teams with Wiz to challenge Palo Alto

The veteran cybersecurity company has formed a strategic partnership with Israeli company Wiz to provide end-to-end cloud security.

Mobileye autonomous taxi  credit: Mobileye Mobileye to team with Lyft on Robotaxis in Dallas

Ridesharing giant Lyft CEO David Risher said that his company will launch the robotaxis in Dallas in 2026.

Voyantis founders credit: Guy Sidi Israeli predictive AI co Voyantis raises $41m

Voyantis combines predictive and prescriptive AI to eliminate guesswork traditionally involved in assessing a customer’s potential value.

Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018