Lower Pay for Bankers Doesn’t Mean Higher Pay for Anyone Else

Slapping caps on bankers' salaries might be popular but would achieve absolutely nothing for the working poor.

Workers at Pri Hagalil factory in Hatzor Haglilit protesting dismissal plans, Jan. 2015. Wooden pallets burn in what appears to be a parking lot as a couple of dozen workers look on.
Gil Eliahu

Due process is a fundamental principle of U.S. law, one aspect of which aims to constrain the powers of the legislature by requiring it to consider the implications of a proposed law on citizens’ legal rights before passing it.

Both the Association of Banks in Israel and the Israel Insurance Association have attacked as an infringement of due process a bill that the Knesset passed this week capping executive pay at banks and insurance companies.

The new law limits the top salaries at the affected organizations to 2.5 million shekels ($650,000) a year, or 35 times the annual wage of the institution’s lowest-paid worker. It was railroaded through in part due to a phone call between opposition Knesset member Shelly Yacimovich (Zionist Union) and Finance Minister Moshe Kahlon while the bill was under debate in committee. But no one in the Knesset actually studied it properly, no public debate on it has been held and the parties that would suffer haven’t been given an opportunity to state their objections, the insurers and bankers argue.

In the United States, the absence of procedural justice would suffice to immediately quash the draft law. In casual Israel, considerations such as due process or the duty to hold a public heading before passing a law that has no precedent anywhere in the world have little sway among MKs. Not only did they not consider the matter or weigh any evidence, but they probably couldn’t even explain the bill’s goals, much less why last-minute changes should have been made.

If the goal is to narrow social gaps, it will not be achieved by reducing the pay of a handful of banking and insurance executives. If the hope is that linking the highest and lowest wages in an organization will raise the latter, that’s probably not going to happen either.

For pay at the bottom to rise, we must first figure out why it’s so low.

And it is low. In a report on the Israeli economy it issued two months ago, the Organization for Economic Cooperation and Development noted that 22% of Israeli workers are low-paid, compared to the OECD average of 16%. Of the 16 most advanced OECD member states, only South Korea and the United States have a higher percentage of low-paid workers.

In contrast to the Knesset, whose members apparently believe low pay is caused by hard-hearted bankers, the OECD attributed its prevalence in Israel to the tremendous social gaps and to low productivity. “One of the main challenges of structural reform in Israel is to increase competition and efficiency in the economy’s sheltered sectors: their efficiency relative to exposed sectors is lower than the OECD average,” the organization writes. “The result is low pay for a large proportion of the workforce and, often, high prices, although here factors other than weak competition are also at play.”

Its analysis shows that most of the low-paid workers — people earning less than two-thirds of the median pay — are insufficiently skilled and tend to work in menial jobs in protected, inefficient sectors. Meaning, their low pay represents their poor skills and the inefficient work they do, because the sectors in which they work are inefficient.

It’s a vicious cycle. The industries are inefficient and therefore do not invest in technology and innovation. Instead they rely on cheap labor and settle for low productivity. In the absence of innovation, the industries cannot become more efficient and cannot employ less people for better pay, and around it goes.

It seems, based on the OECD paper, that the working poor are exploited in Israel. Real wages did not increase between 2003 and 2014, while productivity increased somewhat. Since wages should reflect productivity, the relative proportion of poor workers in increasing productivity has diminished.

Yet the OECD feels that it isn’t a question of exploitation, but of the effect of structural changes that resulted in many more poor workers being employed in the last decade. The increase in supply of the working poor created, by the nature of things, pressure on their pay. Thus their wages increased by less than productivity did.

The answer: Better training

The huge increase in the supply of poor workers is one of the economic miracles Israel has experienced, but it didn’t come for free. Their pay eroded relative to productivity because they’re in surplus. That surplus of the working poor also spurred the tendency of uncompetitive companies in Israel to rely on cheap labor rather than technology and costlier workers.

Meanwhile, that supply of poor workers has begun to diminish and their pay has increased thanks to jacking up the minimum wage. It’s too soon to say how these changes will affect the community of working poor and their pay.

Meanwhile, instead of boosting the minimum wage again, the OECD suggests helping poor workers through negative income tax, which wouldn’t run the risk of widening unemployment, as minimum wage hikes do. Israel spends only 0.1% of its GDP on negative income tax, compared with 0.4% to 0.5% in the U.S. or Britain, though Israel has a heavy load of working poor.

There are a lot of ways Israel could help the working poor before reaching the bizarre weirdness of slapping caps on banker pay. Negative income tax is just one of many possibilities.

The OECD urges Israel to expand education among the disadvantaged groups: core studies for the ultra-orthodox, improving the achievements of education in the Arab community. Specifically, the OECD reminds of the need to increase resources for weak students. It also notes the inefficiency of the Israeli education system, which achieves less with the same resources than other developed nations; and hints at the need to shift some power from the Education Ministry to the schools.

Inefficiency isn’t some province of education. The OECD devotes a whole chapter to Israeli economic inefficiency in general, because of the heavy concentration in certain industries. These protected industries are characterized by much lower productivity than their counterparts in other countries; while industries left on their own, without protection, mainly Israeli export industries, achieve the same or better productivity than their overseas peers.

Boosting productivity through exposure to competition is a complicated endeavor. Among other things, the OECD suggests ways to boost productivity in Israeli banking. It supports a lot of the steps already taken and also suggests turning the Postal Bank into a system that would support (presently nonexistent) smaller banks.

Nowhere does the OECD say that banker pay is an obstacle to increasing the banks’ productivity, or a way to increase salaries for the working poor at the banks. Not that there are many like that. The Israeli banking system is bloated with unnecessary manpower but they earn relatively well.

So, there’s work to be done in narrowing social gaps and improving pay for the working poor. But instead of pushing unthought-through proposals through the Knesset about pay at the banks, what the Knesset should be doing is seriously discussing Israel’s structural problems regarding education and productivity. That is the due process that would help the working poor. But the Knesset isn’t going there.