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After a long night of wrangling, the Finance Ministry and Histadrut labor federation reached a much-awaited collective agreement for public-sector workers yesterday, averting a planned general strike.

Government employees will receive a partly retroactive 6.25 percent raise instituted gradually, as well as a one-time NIS 2,000 grant with their next paycheck.

The Histadrut rejected the Finance Ministry's demand that it allow government institutions to fire workers more easily or move them to different positions. The treasury was also unable to convince the labor federation to allow merit-based pay or the differential raises that would have given low-salaried employees a proportionally bigger raise than their counterparts earning higher salaries.

Finance Minister Yuval Steinitz and Histadrut chief Ofer Eini signed the deal under the threat of a public-sector strike that would have brought to a halt vital services such as those provided by government offices, courts, the postal service and the railway system.

"This is one of the few times that a public-sector pay agreement has been reached without having to resort to even a single day of striking," said Eini.

Steinitz said this shows that negotiations are the best method.

"We've proved that dialogue and mutual trust are the best ways to lead the Israeli economy through this period," he said.

The deal applies to the pay increase that Israel's public-sector employees, who have been working without a collective agreement for the past two years, will receive for work carried out beginning in 2009, irrespective of their monthly wages.

Public-sector workers will receive an initial 2.25 percent raise in January, which will rise to 4.25 percent in January 2012 and to 6.25 percent the year after.

The relatively small scope of compensation is considered a feather in the treasury's cap, since Finance Ministry officials had previously expected to have to provide much higher compensation.

Steinitz and Finance Ministry director general Haim Shani had said during negotiations that they agreed public-sector workers deserve additional pay and that the only question remaining was precisely how much they would be given.

The total cost of paying between 750,000 and 900,000 public-sector workers is estimated at between NIS 1.5 billion and NIS 2 billion for 2011, a figure already accounted for in the state budget. The state will also receive tax revenues from that total, meaning the actual cost to the government is considerably lower.

With the agreement, the government has held off any public-sector work stoppage until at least the end of 2012, or six months after the end of the term covered in the agreement. For its part, the Histadrut agreed to cancel the bulk of its outstanding labor disputes.

The deal contains two provisions the labor federation considers to be particularly important - grants for working mothers and larger pensions - that were absent from previous agreements.

Not all public-sector workers are covered by the deal, however. Three groups left out of the agreement - social workers and employees of the Foreign Ministry and the State Prosecutor's Office - will continue to negotiate with the treasury in the hope of reaching a deal of their own.