Karnit Flug: Wages in Israel are too low

Karnit Flug  picture: Flash 90
Karnit Flug picture: Flash 90

The Bank of Israel Governor has decried the failure of wages to keep pace with growth.

Governor of the Bank of Israel Dr. Karnit Flug has decried the failure of wages to keep pace with growth. Speaking at the Eli Hurvitz Conference on Economy and Society in Caesarea she said, "Alongside the welcome increase in labor force participation and employment, we are seeing only a moderate increase in real gross wages, by about 0.7% per year, on average, since 2003. This is in contrast to a more rapid increase that occurred in per capita GDP during that same time."

She continued, "We need to answer the question of why the real wage increased at such a low rate. Part of the answer lies in the composition of employees. We have seen an accelerated increase into the labor market of workers without experience, and thus at a low salary. Related to that, there is an increase in the rate of part-time jobs and a concurrent decline in work-hours per employee. There are also income tax reductions that led to an increase in net salary and moderated the pressures for an increase in gross wages. And there is a decline in the share of labor in GDP as part of a global phenomenon deriving from, among other things, technological changes, a low rate of investment that leads to a slow increase in capital per worker, and a decline in the share of collective wage agreements."

She said that the solution included, "A marked expansion of active labor policy. This policy includes providing up-to-date training and basic skills, placement services, mentoring services, incentives to recruit and employ weaker population groups, and subsidies of services that support employment. The result of an active labor policy in Israel, in GDP terms, is about one-third of the average in OECD countries, and it would be advantageous to adopt the OECD recommendation of markedly expanding this policy in Israel. The importance of a lifetimes training and studying, which refreshes and adjusts itself to technological changes affecting the labor market, is especially great in the dynamic labor market.

"The second area is aligning the education systems and professional training with the needs of a changing labor market and the needs of various population groups. A recently published OECD report found that the investment in this area in Israel is especially low, and is critical in order to deal with the needs of the labor market and with demographic trends. There is room to markedly expand professional technological education. However, one of the risks that should be taken into account, and avoided, is tracking - the delineation of youths professional path during school ages, on the basis of their belonging to a specific socioeconomic level, rather than based on the skills and interests that may be developed at an older age. Research conducted by economists in the Bank of Israels Research Department indicates that in the past, the labor market achievements of graduates of professional education were significantly lower than the achievements of academic-track graduates who are similar in cognitive skills and social-background characteristics. Another point that should be taken into account is that in a modern labor market that is dynamic and variable, a professional education, beginning in the school stage, is likely to become outdated by the end of a youths military service. For these reasons, general scientific technological content should be provided in the high school stage, which will enable youth to choose between professional and academic tracks at a later stage, and to concentrate professional education primarily in providing focused training after military service."

"The third policy area is focusing tailored policy tools on weaker populations with low skills and earning capacity. The earned income tax credit - negative income tax - should be expanded. It is a policy tool that, in contrast to allowances, contributes to reducing the incidence of poverty among workers, while increasing the incentive to work. The grant in Israel is markedly lower than similar programs around the world."

She concluded, "We need to closely examine, taking into account the different industries, the benefit to the economy of foreign workers, in terms of the negative impact of competition with domestic low-skilled workers, the drawing downward of wages, and the reduced incentive to bring in advanced technologies. We need to strengthen the mechanisms of enforcing labor laws, and focus them on weaker populations and to establish additional vocational centers that will encourage those who receive income assurance allowances to join the employment market and at the same time will allow the application of an effective employment test on recipients of the allowances."

Published by Globes [online], Israel business news - www.globes-online.com - on November 4, 2014

Copyright of Globes Publisher Itonut (1983) Ltd. 2014

Karnit Flug  picture: Flash 90
Karnit Flug picture: Flash 90
Twitter Facebook Linkedin RSS Newsletters Israel Business Conference 2018