Why Letting in More Foreign Workers Won’t Lower Housing Prices

Increasing the cost of manpower might spur greater efficiency and technological advance by the industry, which could offset much of the increase in wage costs, ultimately resulting in lower housing prices.

Nimrod Glickman

It’s been many a year since Israeli women heard wolf-whistles from Hebrew construction workers. Israeli builders protest that they’d love to hire Israelis and would pay top shekel, but that Israelis balk at dirty physical labor. So they hire Chinese instead.

Builders say that so often, that everybody shrugs and figures it’s true. But there are Israeli garbagemen. Why would Israelis be prepared to collect malodorous trash but not to tile a floor?

The Bank of Israel decided to check. It found that from 2000 to 2012, because of Israeli government policy and the second intifada, about 42,000 Palestinian and foreign workers were ejected from the Israeli construction industry. They were replaced by about 40,000 Israelis (of whom three-quarters were Israeli Arabs).

More interestingly, a third of those 40,000 went into the hardest construction jobs – the “wet” ones (tiling, plastering and so on). The figures belie the contractors’ claim that Israelis won’t do wet work in construction, which is physically hard and dirty.

In other words, the statistics show that Israelis will work in construction, even if not with alacrity. They don’t actually want to – nor do Israeli Arabs, and not because it’s hard and dirty or because construction workers have a bad reputation. You could say the same about garbagemen. It’s mainly because the pay is low.

It’s a lot lower than one should pay for hard and dirty work that requires skill to boot. Construction workers deserve to earn more than the average wage.

An industry in stagnation

Indeed, back in the days when Hebrew construction workers wolf-whistled at passing women, builders made more than the average wage. In 2011 a committee headed by Bank of Israel deputy governor Zvi Eckstein analyzed the ramifications of foreign workers in the construction industry.

It identified a watershed moment in 1967, the year of the Six-Day War. Before, construction had been a Hebrew business; after the war, it was manned by Palestinians (and later, Romanians and Chinese).

Before 1967, the industry had few foreign workers, high pay and large capital investments. After 1967, the market was flooded with cheap Palestinian labor (and later, cheap foreign labor), and investments ground to a halt. Capital investments in construction were higher than the business-sector average before 1967; today it’s lower.

So Israeli construction is heavy in low-paid workers and light in investments in capital and technology – which are hallmarks of an industry with low productivity.

Shockingly unproductive

Indeed, its productivity is shocking. Since the 1970s, in other words, for 40 years, productivity per worker in construction hasn’t changed. While the rest of Israel’s business scene advances, construction is stagnating. Once construction led the business sector in productivity and wages; now it lags. In the 1960s, a Hebrew construction worker made 5% more than the average wage in Israel. Today he gets 85% of the average wage for work that, all agree, is hard and unattractive.

The figures explain why there aren’t many Hebrew, or Israeli Arab, construction workers. Why should they work in hard, dirty construction when other unskilled jobs will pay more?

The reason pay imploded in construction is of course the influx of low-cost foreign workers, first Palestinians, then Romanians and Chinese. The industry has become low-cost with no need to advance technologically.

But not only is the Israeli construction industry lagging behind the rest of the business sector in Israel; it’s also backward compared with builders elsewhere in the world. Construction technology has advanced enormously in the last 50 years, improving productivity and causing wages to rise.

In most countries, where construction is recognized as an important industry with heavy investments, unskilled workers actually get quite high pay. But not in Israel. The relative pay of construction workers in Israel is the second-lowest in the developed world.

The rub is that the Israeli construction industry’s addiction to low-cost foreign workers not only stopped it from advancing but actually hurt its productivity and lowered wage levels, which deterred Israeli workers even more. These developments may well be one of the reasons housing prices are so high in Israel.

Naturally, replacing the foreign workers with Israeli ones at this stage would cause wage costs to climb by about 20%, estimates the inter-ministerial committee. And that would raise housing prices by another roughly 3.5%, it assumes. That assumption is a problem, since it assumes no other change in the industry beyond replacing the foreign workers with costlier local ones.

How not to lower housing prices

In practice, increasing the cost of manpower might spur, 50 years late, greater efficiency and technological advance by the industry, which could offset much of the increase in wage costs, ultimately resulting in the opposite effect – lower housing prices.

Further evidence of the trends can be seen in the time it takes to build an apartment home in Israel, which hasn’t changed much since the 1980s – if anything, it takes longer now. Even considering that apartments are fancier today, more accessorized, it’s hard to understand how three decades of technological advance have passed, yet it still takes 23 months to build an apartment in Israel.

The explanation of course is that the technology didn’t advance in Israel because of the addiction to low-cost foreign workers.

From that perspective, Finance Minister Moshe Kahlon – who has vowed to lower housing prices in Israel – is making a bad mistake when thinking of letting in another 20,000 foreign construction workers. He should be doing the opposite, and wean the Israeli industry off the cheap foreign labor. No to the Chinese and others; yes to industrialization and skilled Israeli workers.