"Productivity is rising while wages are being eroded"

Hebrew University's Prof. Yossi Zeira's research contradicts the Bank of Israel's claim that productivity is falling.

Productivity in Israel rose much more quickly than wages, and the answer to the question of where the gap between the two went can be found in the business sectors profitability data, according to Hebrew University of Jerusalem Professor Yossi Zeira.

Last week, the Bank of Israel released data regarding the rise in wages over the past twenty years. The researchers concluded that wages in Israel were rising at a similar rate to productivity, or GDP per worker but only if trends are examined over 20 years at least, and not shorter periods.

The answer to the question How much did wages rise? is significantly influenced by the point that one chooses to compare to, said the Bank of Israel report, perhaps in preparation for the anticipated criticism of its conclusions.

Professor Zeira says, in an amused tone, that the study and its conclusions reminded him of the well-known saying about the three types of lies: "There are lies, damned lies and statistics." Zeira, a respected, veteran economist with a self-declared social outlook, took part in advising the organizers of the social protests in 2011, when he coordinated the Spivak - Jonah economic committee, which was established as an alternative to the Trajtenberg Committee. Since then, he has consistently claimed that wages in Israel have been stagnant since 1999-2000, while productivity continues to rise.

In addition to the conclusion that the Bank of Israel reached, Zeira was surprised by the researchers decision to begin their examination in 1990, and not 1980, when data collection began. Zeira is convinced that this was a manipulative choice, and not a random one. The researchers at the Bank of Israel demonstrated themselves what they described regarding the impact of the choice of year, when they chose the least suitable year for examining the link between real wages and work productivity, he claims, In 1990, productivity was relatively high because it was a year that we came out of a recession as a result of Aliyah [immigration] from the former Soviet Union. On the other hand, it was a year of unemployment, which began rising in 1989, due to a short recession in that year, and rose more afterwards due to the massive immigration. Unemployment caused wages to drop. As a result of these unusual factors, in 1990, wages were particularly low, and productivity was particularly high - therefore, it is obvious that it is an unsuitable year for a reference point.

In favor of choosing 1990, it is after the period of hyper-inflation and the economic stabilization plan. Beyond this it is difficult to think of any year that was not influenced by external circumstances.

If the Bank of Israel really intended to manipulate the data, then why didn't they begin in 1992 or 1995, which would have been even more suitable for the end results?

He said, "The choice of 1990 was convenient because the gap between productivity and salaries was very high and it was a round number. In 1995 the gap was closed to a great extent because productivity fell very much between 1990 and 1995."

Erosion of more than 20% Zeira's analysis, which begins in 1980, when the Bank of Israel first began reporting data, leads to absolutely different conclusions than those reached by the Bank of Israel. "Until the end of the 1990s wages rose together with work productivity but have since ceased to rise. According to the Bank of Israel, the real wage index with the cost of living deducted, was 102.3 in 2000 and 101.3 in 2013. In those years work productivity consistently rose. In the business sector, for example, work productivity rose 22% during those years. In other words, the wages of workers in the business sector have been eroded these past 15 years by more than 20%. This is a grave problem, larger in scope than any distortion on competitiveness without underestimating its importance."

Why? Isn't it possible to claim that this was a positive development which shows that the economy became more competitive?

"Economic theory and empirical experience in Israel, the US and other countries teaches us that in a competitive economy, wages must rise together with per capita employee output. Major deviation from this reflects a failure in the employment market. If employees don't receive productivity rises in their wages - then they have lost out."

What are the reasons for this is your opinion?

"Freezing wages as has happened in Israel over the past 15 years and in the US since the beginning of the 1980s is a phenomenon defines as "one-off" in economic research and it's very difficult to explain it. The explanation given by the Bank of Israel in its research is very simplistic: real wages have been frozen since 2000 as a type of correction after they rose too much in the 1990s. This explanation is not proven seriously and even contradicts what we know about the economic history of Israel in the 1990s. it is unreasonable that wages in Israel rose is such an extreme way in the 1990s, when many of those years had high unemployment."

More reasonable explanations according to Zeira are the weakness of the Histadrut (General Federation of Labor in Israel), which made do with linking wages to the Consumer Price Index, keeping its value instead of struggling for wage hikes, as required by a rise in productivity. Another reason is growing privatization of public services, moving from public employees to contract workers who have lower wages. Foreign workers are another reason. He adds, "Another possible explanation for wage stagnation is the minimum wage which influences all salary sectors."

Zeira also found Bank of Israel data to show that in the 1990sa the private sector typically made profit of 6-8% but this rose consistent after 2000 to 16.7% in 2013.

The Bank of Israel said in response, "The fact that the pace of the rise of wages is sensitive to comparison points was stressed in the document we published, as well as the fact that in 1996 the output gap was similar to 2013, and this was the most reasonable reference point. Setting the reference point in 1980, for example, would suffer from a period of high inflation and therefore represent a different economic reality."

"Examining wages data did not deal with profitability in the business sector, an important and interesting subject in itself, as are other subjects in which the bank's publications deal with."

Published by Globes [online], Israel business news - www.globes-online.com - on December 1, 2014

Copyright of Globes Publisher Itonut (1983) Ltd. 2014

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