Income from labor in Israel has been eroded more than in other OECD countries according to an OECD report published yesterday. Figures cited in the report indicate that income from labor in the business sector in Israel accounted for 66% of business product in 2016, compared with 77% in 2001. This drop in income from labor complements another pattern characteristic of the Israeli economy in recent years - most new jobs here featured low productivity and low wages.
The OECD report focuses on low productivity. The report states that four low-productivity jobs have been created for every new high-productivity job (which usually pays a high salary) in the developed countries in recent years. Examples of the sectors in which new jobs have been created include tourism and catering in which wages are especially low and social benefits are correspondingly poor. In sectors with high productivity, on the other hand, such as high tech and finances, there was no substantial job creation, despite the key role they play in business activity. In some of the countries reviewed in the report, there has even been retrenchment in high-productivity sectors, for example in the financial services sector in the UK. Tens of thousands of jobs have been lost in the sector in recent years as a result of Brexit and the global economic crisis.
The phenomenon described in the reports is familiar to everyone who follows the Israeli economy. Israel's employment figures look wonderful: growing participation in the labor force and unemployment at its lowest point in decades. The explanation for these figures, however, is Arabs and haredim (ultra-Orthodox Jews) joining the labor market. These new workers found jobs with low productivity and low wages, thereby dragging down overall productivity in the economy. This pattern puts Israel's image as the startup nation in a different light. The phenomenal growth economic activity and high tech is not reflected in more high-tech jobs, which continue to account for only 10% of the labor force in Israel. "High tech is great, but it provides only 230,000 out of 2.4 million jobs," Bank Leumi (TASE: LUMI) chairperson David Brodet recently told "Globes."
Brodet headed a long-term team for strategic economic planning, which pointed out the state's failure to increase the number of people working in high-productivity jobs. Economists such as Governor of the Bank of Israel Dr. Karnit Flug attribute this failure mainly to the system of educational and professional training, which does not provides its graduates with the necessary expertise. Another way of increasing productivity has been proposed by Ministry of Finance Accountant General Rony Hizkiyahu, who advocates a dramatic increase in infrastructure investments and improvement in the ease of doing business in Israel. Histadrut (General Federation of Labor in Israel) chairperson Avi Nissenkorn argues that increasing the minimum wage will increase productivity because it will force employers to invest in mechanization instead of relying on cheap labor. Economists opposed to increasing the minimum wage have warned that the measure will increase unemployment and eventually harm the poorer wage earners because employers will prefer buying automatic payment facilities in supermarkets to hiring cashiers. Meanwhile, the Ministry of Finance chief economist has also admitted that raising the minimum wage will not increase unemployment.
High tech distorts the picture
The OECD report does not recommend ways of increasing productivity, but it indicates that productivity is becoming the West's main problem. A low rate of increase in productivity, or GDP per hour worked, has been slowing economic growth since the beginning of the year, but the report emphasizes that this only the tip of the iceberg in this problem: "Moreover, in many countries, employment has increase most in recent years in activities with relatively low labor productivity, dragging down overall labor productivity." Some sample numbers: in the US, for example, 12.1 million new jobs were created in 2010-2016. The average number of new low-productivity jobs during this period was 9.7 million, four times the number average of new high-productivity jobs (2.4 million).
According to the report, restaurants, health, and caring for senior citizens and children were the sectors with the greatest increase in the number of jobs in the developed countries. The decrease in the average salary is the main consequence of the pattern described in the report. The average wage increased in Israel, but it should be kept in mind that the average wage figures frequently give a misleading impression of the situation because they are greatly affected by the rapid salary increases in sectors with a shortage of employees, such as high tech. This increases the average wage and conceals the erosion of wages paid in other sectors.
"A rise in productivity results from smarter labor, not more labor," the report explains, referring mainly to technological developments enabling employees to produce more added value in the same time span. The manufacturing sector has traditionally ben the spearhead of a rise in productivity. Hotels, retail trade, and transportation were the economic sectors with the fastest rise in productivity in the more developed countries over the past 15 years. Financial services lost ground following the 2008 crisis; its contribution to increased productivity in recent years has been marginal. Economies of scale are reflected in the manufacturing sectors; in the services sectors, however, productivity is spearheaded by small and medium-sized firms.
The report mentions Israel as a country that has succeeded in maintaining its competitiveness thanks to relatively stable unit labor cost (ULC). The most prominent figure where Israel is involved is the decline in the relative proportion of wages in total economic output from 77% in 2001 to 66% in 2016. The median and average wage in Israel barely increased at all in the first decade of the century. In recent years, however, the average wage has been rising by 3% a year. The rise in wages is attributable to a growing shortage of employees in the high-tech sector and in higher salaries in mainly in development centers owned by international companies on the one hand and the increase in the minimum wage from NIS 4,300 to NIS 5,000 per month on the other hand, as well as wage agreements in the public sector, which guaranteed an 8% rise in wages over six years.
Published by Globes [online], Israel business news - www.globes-online.com - on June 27, 2018
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