Israel's Economy Will Return in April, Analysts Say, but Not to Normal

The best projection leaves 300,000 Israelis jobless, forcing the government to act to prevent them from becoming chronically unemployed

נתנאל גאמס
Netanel Gamss
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People shop before Israel imposes a third national lockdown to fight climbing coronavirus infections, in Jerusalem December 27, 2020.
People shop before Israel imposes a third national lockdown to fight climbing coronavirus infections, in Jerusalem December 27, 2020.Credit: AMMAR AWAD/ REUTERS
נתנאל גאמס
Netanel Gamss

Israelis are focusing these days on two figures; the daily count of new coronavirus cases and the number of vaccinations. After those come the unemployment figures and the blows the labor market has taken since the coronavirus crisis broke out, threatening to set Israel back years.

Assuming most Israelis will get vaccinated over the next two months and the economy will gradually return to normal, one of the main questions concerns the post-pandemic job market. No one expects to return to the good old days of 3.5% unemployment. The Bank of Israel forecasted two weeks ago an unemployment rate in late 2021 of 7.7% in the most optimistic scenario.

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The pessimistic scenario, based on a slower vaccination rate, projects 11% unemployment for late 2021, slightly below the 12.7% of mid-December. Thus, the best projection leaves 300,000 Israelis jobless. The government will have to act to prevent them from becoming chronically unemployed.

Betting on furloughs

According to the Central Bureau of Statistics, 220,000 Israelis were on unpaid leave in December but that figure could climb. The agency found this month that half of organizations furloughing employees aren’t bringing them back because they don’t foresee the need. If the issue is supply and demand, a revived economy should solve the problem. However, the companies put on a forced diet may like their new look, and furloughed workers will remain outside.

While other countries used a flexible furlough model, Israel bet on sweeping furloughs – an employee either works full-time or sits at home and collects unemployment benefits, says Prof. Yotam Margalit, senior fellow for the Israel Democracy Institute’s Labor Market Reform Program and a Tel Aviv University faculty member. “We’ll start evaluating the price of this gamble in two months,” he said.

Margalit says that while the current lockdown differs from the first, when there were many questions about how long the economy would stay shut, employers are still trying to gauge where the wind is blowing. “The infection rate is high, and there’s fear of the virus variants’ impact on reviving the economy,” he said. “Because the furlough method requires choosing between full employment and full unemployment, many employers prefer avoiding the possible error of bringing back workers too early.”

Israeli police officers check cars at a checkpoint during a nationwide lockdown to curb the spread of the coronavirus, in Tel Aviv, Israel, Sunday, January 10, 2021.Credit: Sebastian Scheiner,AP

Amnon Reder, chairman of Manpower Israel, says many customers are forward-looking; while 70% stopped hiring in March, 90% are hiring now. “There’s much more optimism than during the first two lockdowns, despite the high infection rate,” he says. “Organizations increased efficiency and can manage lockdowns and working from home. There’s much less uncertainty than in the first lockdown. There’s more demand for workers now, though not like the peak in January-February 2020.”

Reder says not enough people are applying for entry-level positions, because they’d rather collect unemployment benefits until at least June. “It will take months until they feel the ground shake beneath their feet. It’s a serious problem,” he notes. “Some work ‘under the table.’”

Reder adds the use of sweeping furloughs has long been the wrong solution. Perhaps it could be applied in outlying areas or by age group, but “there’s no logic for someone under 30 living in central Israel to sit at home and collect unemployment,” he says. “100,000 to 150,000 people are furloughed for no good reason. Once they lose eligibility, they’ll all find work, even if they have to compromise, but it won’t happen until after the election.”

Wait for April

Prof. Zvi Eckstein, head of the Aaron Institute for Economic Policy and dean of the Tiomkin School of Economics at the Interdisciplinary Center Herzliya, said lockdowns and other restrictions will end around April, and that employers can prepare for full operations then. Eckstein estimates that 60% of working-age Israelis (25-64) are employed, and that figure will jump immediately to 72%, as happened between the first two lockdowns in August.

He says the government should set an employment rate target of 78%, the pre-pandemic rate, for 2022, but warns of conflicting interests. “There’s a huge gap between politicians’ interests and what’s good for the economy,” he says. “Raising employment rates should be the target, and not giving benefits to one population group based on who they voted for. Absent a firm government policy and dramatic steps to restore the labor market, the economy will pay over the long term the price of an ongoing political crisis.

People shop before Israel imposes a third national lockdown to fight climbing coronavirus infections, in Jerusalem December 27, 2020.Credit: AMMAR AWAD/ REUTERS

Margalit says the government should have demanded that some furloughed workers undergo job training. “The productivity gaps between us and (Organization for Economic Cooperation and Development member states) are widening, and some of this stems from the amount of investment in human capital,” he says. “In this case, there was a missed opportunity to exploit the crisis to improve human capital.”

Eckstein echoes the sentiment, but adds a different angle: “Training requires guidance first. Some people don’t need training, and they only need to know where their talents fit. Many people need to finish training and then need to see there’s demand for these workers. One of the most difficult problems is that there’s no body responsible for this.”

Fewer opportunities

The virus may have been blind regarding who it infected, but the economic damage was uneven. Employment among the top 20% of wage earners (based on 2018 figures) ages 25-64 dropped 16% in April compared to 2019, while it fell 51% for the bottom 20%. That gap began shrinking in June, but the second lockdown in October caused a 29% drop in employment for the bottom fifth compared to 6% for the top fifth. The hardest hit jobs did not require academic degrees or were part-time.

Eckstein says the problem of low employment is widespread in low-wage groups, both young and old. “If there won’t be incentives for returning to work when employment rates start rising, the main difficulty will be returning people to work,” he says. “Even when the economy reopens, entire branches won’t return so quickly – like entertainment, tourism and restaurants. It’ll take time until businesses that collapsed function again. Without supportive government policy and adapting the labor market to the new world, we will be in bad shape, with long-term high unemployment.”

Bad signs in 2019

Margalit says experience from previous crisis teaches that when young people enter the labor market during times of crisis, it takes years or even over a decade for them to match the salary levels they would have had without the crisis. “The groups entering the labor market now will pay the price of this crisis long-term,” he says. “They lost at least a year of accumulating experience, job opportunities will be fewer, and their starting salary will be lower. This combination has repercussions that go much further than the first year or two after the crisis.”

Margalit also fears for those 55 and older. “Even in a normal labor market, they are employed considerably less. Employers prefer returning younger workers,” he says. “There’s fear that some older workers will give up looking and leave the labor market. That’d be bad news in many respects, firstly for their families who will lose income.”

Pensions would also be hit, he says. “Beyond this, it also hurts overall productivity,” he says. “These people have high productivity potentials, and many could find themselves at home for a long time. We saw this problem in relatively small amounts before the crisis, but now it’s liable to be much worse.”

People shopping in Tel Aviv's Levinsky Market amid Israel's third lockdown, January 6, 2021. Credit: Moti Milrod

Tali Larom, a senior researcher in the Aaron Institute, says the crisis threatens to erase years of growth in workforce participation dating back to the early 2000s, mainly the weaker socioeconomic groups. “We saw for 17 years employment growth, salary growth, a decrease in poverty and inequality and the entry of less educated groups into the labor force,” says Larom. “These achievements didn’t just happen but stemmed from government policy to increase employment and wage-earning capabilities of weaker populations, through reforms in entitlements, the tax system, negative income tax and raising the minimum wage.”

Eckstein adds Israel’s strength in the last decade was based on employment growth, particularly among weaker groups. “This phenomenon mostly stopped in 2019,” says Eckstein. “Employment rates among Arab men dropped and didn’t rise among Haredi men. This crisis, given the current policy could set us back 10 to 12 years, and the economy will expand less.”

Marian Tehawkho, senior researcher at the Aaron Institute, fears weaker groups will struggle more to recover from the crisis. “We saw indications not only that the weakest population suffered the most but also that its ability to return to work is much more limited,” she says. “We saw after the first lockdown when the labor market started recovering and employment rose, Arab unemployment continued to deepen. The situation for academics was better, but they’re a minority. The broader picture worsened. The weak didn’t really return to the labor market.”

“Odds are poverty and equality rates in 2021 will be among the highest Israel has known,” concludes Eckstein. “We’ll return to the situation of the early 2000s, perhaps worse. It will be a tough blow to the labor market, especially when there’s no budget and no government plan and comprehensive economic strategy. It doesn’t look good.”

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