The average wage in the Israeli economy has risen 7% in the past year, while many Israelis haven’t felt the increase. According to economists, the reason is that many young workers who previously earned low wages are no longer in the job market and this pushes the average up - not because we all earn much more. Moreover 250,000 young Israelis seem to have left the job market.
These numbers also have an impact on inflation and the interest rate. Bank Hapoalim noted this week that wages in the business sector jumped by 7%, and that their rapid rise poses a risk of inflation in the future, but they also noted that in the past year this wage increase has hardly affected inflation. This is a paradox, because an employee who earns more money can also spend more money and push prices up. However, this phenomenon has not occurred.
Bank Hapoalim offers an explanation for this, which is an increase in labor productivity. In other words, companies that managed to keep the same number of employees or even fewer employees working the same hours as before, but profits increased. A similar explanation could be the cooling off in hiring juniors by tech companies, for example.
A decade-long low and the fictitious increase
Meitav chief economist Alex Zabezhinsky examined this question using several indicators. For example, if everyone's wages have improved, then total wages in the economy should also increase. However, in reality, it seems that the rate of increase in the total wage in the economy has actually moderated, especially this year compared to recent years, to the point of becoming decade-long low.
Another sign that this is not a "real" increase is the gap between the number of jobs and the rate of wage increases. Zabezhinsky explains that the phenomenon of an increase in the rate of average wage rises compared with a decrease in the number of employees has recurred several times in recent years, and that the average reflects a change in the mix of employees.
Another variable that affects the average wage is the point of reference and comparison to exceptions in the economy. For example, when the June data is published, the headlines proclaim that the average wage in the economy has climbed sharply, but the comparison will be to June last year, when the 12-day war with Iran took place, during which an unusual decline in wages was recorded.
Zabezhinsky insists that the data presented by the Central Bureau of Statistics is lacking. In the US, for example, there is another indicator that examines a focus group and the monthly changes in their wages.
But what is affecting the deceptive phenomenon in wages does not lie only in the improvement in efficiency with the introduction of AI technologies and the cuts in hiring new workers at lower wages.
The effects of the war and the connection to emigration
Another characteristic of the Israeli market is a tight job market with historically low unemployment alongside a decline in labor force participation, or in other words: hundreds of thousands are disappearing from the labor market.
A report by the Ministry of Labor, which surveyed the market last year and published a report last month, shows that unemployment figures are historically low at 3.5% this year. The employment rate, on the other hand, stood at 60.3%, lower than 61% in the pre-war period.
The report also shows that the employment rate of men in the north dropped significantly from 79% before the war to 64% in the second half of 2025. The employment rate of Arab women improved to 48.6%, but the rate of haredi men integrated into the market has trod water in recent years at 53%.
A study by Prof. Momi Dahan of the Hebrew University, published this year, shows how strong the phenomenon is following the war. Most of the population added to the working age population in the wake of October 7 joined the pool of non-participants in the labor market.
In contrast, in the previous decade, most of the addition joined the market, and the phenomenon is especially prevalent among young men.
Prof. Dahan also found that the annual growth rate of the working age population fell by about 2%, and he attributes this, among other things, to Israelis who left the country.
He further explains that at the same time there was a significant expansion in the number of IDF wounded and victims of hostilities and their families. "It is true that the unemployment rate remains low in historical terms and has hardly changed," writes Prof. Dahan. "However, it would be a wrong conclusion to say that the job market was not affected by the war. It seems that the main change is reflected in the disengagement from the job market by nearly 250,000 Israelis if we compare the number of non-participants in May 2026 to that in September 2023."
Prof. Dahan tells "Globes," that he thinks that the wage increase reflects a slow increase in the number of participants in the labor force compared with the past, as well as an increase in demand in the tech sector.
Consumption in the economy has not returned to its previous level
The trend of young men disengaging from the job market began even before the war. A study by the chief economist at the Ministry of Finance last year found that in recent years there has been a decline in the participation rate of people younger than 34, and an increase in the participation rate of workers over 35.
The decline was particularly felt among those aged 18-24, and it came at the same time as a decline in the number of students at academic institutions. The entire decline is attributed to men, while among haredi and Arab women there has been an increase in participation.
Previously between 2014 and 2022 the sharpest decline was recorded for Arab men (8%) and haredi (men 6%), along with a more moderate decline for non-haredi Jews (1%).
"These findings raise concerns about economic trends in the medium and long term and emphasize the importance of taking steps to increase job market participation rates, by reducing negative incentives to work and by improving the skills and competencies relevant to the job market of young age groups," the chief economist’s study said.
And what is the connection between all of this and inflation? Zabezhinsky says the Bank of Israel's concern lies not only in the rate of wage rises in the economy but also in that population that does not participate in the job market.
According to him, economic consumption in the services sector has not yet returned to its pre-war level, and this is true for the hotel, restaurant and education sectors.
"In the service sectors, both in consumption and in credit card data, demand still appears low. These are industries that, once the economy returns to normal, and people return to buying services there, it will be much more difficult to replace workers with technology, and then the pressure on wages and, accordingly, on inflation may increase, because there are not many workers available," Zabezhinsky concludes.
Published by Globes, Israel business news - en.globes.co.il - on August 18, 2026.
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