Huliot Advanced Flow Systems, a maker of advanced pipe systems and innovative plastic products based in Kibbutz Sde Nehemiah, is looking for workers. Last week it got 20 applications, half of them referred to the company by the National Employment Service. But just on the basis of a preliminary phone call, none of them worked out. The applicants said they were on unpaid leave and getting unemployment pay, so why take an offer? A few said they would be willing to work off the books so they could keep collecting benefits.
Oren Volosky, Huliot’s operations manager, says he is paying the minimum wage but he lets his employees work a lot of overtime and night shifts that increase their pay substantially. The company sells its products to construction companies, which have been working normally during the pandemic, and he needs to hire 10 workers immediately to fill orders.
It’s not easy work, which is why Huliot generally hires young people looking for jobs who will stay for no more than a few months. In most cases, they want to save a little money before taking a post-army trip abroad.
Volosky said he didn’t have such a hard time hiring people during the first wave of the coronavirus. The company was able to recruit easily because young people were ready to work. However, the government’s promise to continue paying jobless benefits until June 2021, or until the unemployment rate falls below 10%, has created a significant perverse incentive to stay unemployed, maybe while collecting a little money unofficially on the side.
However, not every business can pay workers off the books. In manufacturing, for example, everything is reported to the tax authorities. In hotels, restaurants and agriculture, employers have traditionally stretched the rules, but these days if they want to receive government compensation for lost business they have to show how many employees they have on the books. They also aren’t as free as they once were.
The efficacy of many of the government’s economic programs to help cope with the fallout from the coronavirus has been subject to much debate. One is the mechanism that encourages employers to put their workers on unpaid leave knowing that the government will pay them jobless benefits. That’s what caused the unemployment rate to soar to 27.6% in April. Today it is making it harder to bring down the rate even as the economy has reopened.
Last week, the Central Bureau of Statistics reported that the unemployment rate in the first half of July was 12.3 percent. These are people who are still furloughed and were counted as part of the workforce before the onset of the pandemic in March and were laid off or their places of employment closed.
That 12.3 percent is a big drop from April, but it was still higher than June’s 11.8 percent. Meanwhile, the number of people registered with the National Employment Service looking for work has been growing faster in recent weeks than the number reporting they have found jobs.
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Since the onset of the coronavirus crisis, the government has launched several programs to encourage Israelis to go back to work, among them loans to employers to help them get through liquidity dry spells and grants to companies that take back furloughed employees. But at the same time, it has told workers they can count on benefits for close to another year and have awarded everyone one-time grants on two separate occasions, once at Passover and another now.
The job crisis has led many young people to move back home with their parents because they can no longer accord to pay rent. They have lost a degree of independence but they can save some of the unemployment benefits by living rent-free. They can even add to their income by working off the books.
The Income Tax Authority is well aware of the phenomenon but has no plans to address it by cracking down on employees or (the few) employers. Together with the Finance Ministry, its focus is on restoring the job market to its pre-crisis state as quickly as possible. Businesses need to get as much air as they can even if it means some exploit government programs. They’ll go after them later when the economy has recovered.
The under-the-counter economy is nothing new to Israel. According to the Organization for Economic Cooperation and Development, the black economy accounted for 22 percent of gross domestic product before the crisis, among the highest in the West.
Shadow economies thrive for several reasons. One is high tax rates, another is when people feel the system isn’t fair and equal and there’s little sense of social solidarity, and a third is in a crisis. Israel’s tax burden by international standards isn’t high, but the sense of fairness and solidarity isn’t high either. The crisis and the public’s lack of faith in the government have made things worse. Government programs that encourage off-the-books employment have made it worse still.
The harm caused by the black economy is self-evident, but the character of this emerging black economy adds another dimension to the problem: Many young people will get used to the idea of not working, won’t be getting on-the-job experience and will come to expect that the state is there to help them. If the government doesn’t come through, then they will find a way to come through for themselves by working off the books.
It’s not only factories that are reporting a reluctance among the young to work right now. Restaurants say they can’t find delivery people and hotels can’t find cleaners. The state wanted to provide a safety net for the unemployed but the solution it came up with is encouraging long-term joblessness and the black economy.
Germany gets its right
It’s another reason why Israel should be adopting the German model, in which workers get part of their salaries from their employers and part from the government. That way, they continue to work even if only part-time while undergoing retraining. It’s a model that enables them to upgrade or adapt their work skills but preserves the employer-employee relationship through the crisis. The unpaid leave model breaks it.
One reason to take the model of Germany and other European countries seriously is that they have been contending with high unemployment rates since the 2008 economic crisis. They have accumulated experience in a way that Israel, whose jobless rate has been low for many years, has not. Israel didn’t need to think much about retraining or security nets. Now it is working by trial and error, and that’s coming at great cost to the budget in terms of wasted spending and lost tax revenues.
Israel’s haphazard approach has also angered the self-employed, who feel their needs have been ignored while money is going to places where it’s not needed. This in itself could create a problem later in the form of a tax revolt.
These missteps are not coming only at a monetary cost to the government but at a social cost, too. How much the latter will cost us is anyone’s guess, but its impact will be felt by us all.