Israel's Finance Minister Defies Economists on Unemployment Benefits

Israel Katz's call to preserve benefits spurs fears of continued high unemployment rates

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A man enters the main branch of Bank Hapoalim, Israel's biggest bank, in Tel Aviv, 2016.
A man enters the main branch of Bank Hapoalim, Israel's biggest bank, in Tel Aviv, 2016.Credit: AMIR COHEN/ REUTERS

The elections are over for now, but Finance Minister Yisrael Katz is continuing to pursue policies counter to the advice of his professional staff and business organizations. With the unemployment rate rapidly dropping, Katz announced on Wednesday that he would seek to rescind rules due to set into motion an automatic drop in jobless benefits.

The announcement came after the Central Bureau of Statistics reported earlier on Wednesday that Israel’s broad unemployment rate had fallen to 12%, equal to half a million people, in the first half of March. Using the jobless measure by which benefits rates are calculated, unemployment dropped to 9.8% in the first half of March.

The government program enacted at the start of the coronavirus crisis when the jobless rate was soaring calls for a 10% drop in benefits to Israelis out of work due to the pandemic if the broad unemployment rate falls below 10% for a full month.

If the latest jobless figure holds or falls in the second half of March, benefits are due to be cut May 21, that is, a month after the second-half March data are released. (When the unemployment falls below 7.5%, the benefits to that group will end altogether).

The great majority of those who currently qualify are people on unpaid leave, a category that under pre-COVID rules would not have received benefits at all. The average monthly benefit today is 4,500 shekels

Canceling the 10% drop in unemployment benefits would cost the treasury about 200 million shekels ($60.5 million). However, changing the rules will require Knesset legislation and in the current political environment, it’s doubtful that Prime Minister Benjamin Netanyahu’s government will be able to muster enough support.

The cost of continuing the program is marginal in budgetary terms, but employers and economists say the scheduled reduction in the benefits will encourage benefit recipients to seek employment. The program expires altogether in July, at which point they fear recipients will suddenly pile into the labor market.

Israelis sit at a coffee shop in Tel Aviv, March 2021.Credit: CORINNA KERN/ REUTERS

That view is shared not only by treasury economists but by the Bank of Israel. Moreover, employers have over the last few weeks reported that even as the Israeli economy has begun to reopen as COVID restrictions are removed, many workers are opting to stay on unemployment until the benefits run out at the end of June. Many businesses, such as hotels and restaurants, haven’t been able to resume full operations, slowing down the economy’s post-COVID recovery.

Israel’s broad unemployment rate, which encompasses the traditional rate plus a handful of other categories instituted during the crisis, was 19.1% in January, the peak of the third lockdown. It began falling in February as lockdown measures were eased. The last of them ended March 7, when restaurants and events halls were allowed to reopen.

Since the statistics bureau’s previous jobless report covering February was released, some 150,000 people have returned to the labor market, mainly those who had been out on unpaid leave due to the coronavirus. However, another approximately 200,000 people remained on unpaid leave in the first two weeks of March.

Economists say the Israeli unemployment rate will remain elevated in 2021 and 2022, relative to pre-COVID levels. The treasury’s chief economist predicts that average unemployment will be 8.6% this year in its most optimistic scenario.

The dispute between Katz and treasury officials is wider than the issue of the benefits reduction. Katz, for instance, has initiated a program to pay thousands of shekels to all unemployed that return to the labor market in the framework of an economic program he unveiled during the election. Treasury officials, on the other hand, would prefer to focus on incentives to get the lowest paid back in jobs.

Dubi Amitai, chairman of the Business Sector Presidency, which represents most of the country’s employers, said he opposed Katz’s plans. “We’re in favor of anything that will get people back to work. Right now that’s the law and we’ve been waiting for this moment,” he said of the scheduled benefits cuts.

“The economy is facing a labor crisis, and the government needs to do everything it can to get people back and get the wheels of the economy moving,” Amitai said.

Consumers line up to enter a clothing store at a shopping center in the city of Beersheba, February, 2021.Credit: Tsafrir Abayov,AP

Shai Berman, CEO of the Israel Restaurants and Bars Association, said any change in the policy would be a big mistake. Granting jobless benefits to people on unpaid leave was “the biggest economic and social disaster in the State of Israel in the last 30 years.”

“The economy is desperate for workers at the same time that the government is paying them to stay at home instead of returning to the labor market,” Berman said. “It’s not hard to separate between the endless election cycle and the preservation of this system. Everyone agrees it’s inefficient.”

“The Finance Ministry is behaving as if it’s not interested in the economy resuming normal activity, said Veronica Rosenberg, CEO of the Israel Association of Cleaning Service Providers, whose members have also felt the brunt of the government’s generous jobless-benefits policies.

“There are a lot of job openings in all sectors. Employers are calling workers back to their jobs. It’s not clear to me why Katz refuses to encourage them to return to work and wants to pay them to sit at home,” she said. “There’s no economic logic to the decision, no employment logic or any other kind.”

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