Mind the Pay Gap: Moshe Kahlon Shoots Himself in the Foot

Importing large numbers of guest workers is antithetical to the treasury’s goals of raising productivity in order to increase the housing supply and reduce prices.

Finance Minister Moshe Kahlon outside the weekly cabinet meeting in Jerusalem, Nov. 22, 2015.
Emil Salman

Finance Minister Moshe Kahlon surprised with his bold and moral choice to put the inequality index at the top of the treasury’s work plan for 2016.

On Thursday the Finance Ministry published seven measurements by which its performance this year should be evaluated. The first is the gross Gini index, which economists use to measure income inequality.

Very ambitiously, the Finance Ministry aims to reduce the Gini coefficient in Israel from 0.47 in 2015 to 0.44 in 2016 and 0.4 in 2018.

That’s an important statement. By choosing to make the Gini ratio the No. 1 gauge for measuring the Finance Ministry, ahead of more classic measures such as tax revenues or the deficit as a percentage of the gross domestic product, the treasury is demonstrating its awareness that inequality is Israel’s greatest socioeconomic problem. Kahlon deserves our support for that unprecedented move.

It was not the only bold move. The fourth performance standard named by the Finance Ministry is housing starts. Kahlon promised to increase them to 60,000 in 2016, from 50,000 in 2015. Again, he set a transparent, quantifiable goal — which will make it that much easier to pillory him and the treasury if they fail to meet it.

That’s an impressive risk to take. So too is making the sixth goal the narrowing of Israel’s productivity gap with other developed countries. In this area as well, the Finance Ministry set quantitative goals for each year.

Well done, Kahlon, at least at the declarative level. But as they say, the devil is in the details.

Two things immediately stand out. One: No operative measures accompany the treasury’s stated goal of decreasing income inequality. It is the only one of the seven measures the Finance Ministry announced for which no quantifiable goals are set. There is a value to the declaration itself, but no substance to the promise.

In other areas, the treasury contradicts its own statements. A key part of increasing the number of housing starts, according to last week’s announcement, is to fill the quotas for foreign workers set by the government and to increase the quota. Remember, the government decided to increase the number of foreign construction workers to 20,000 (including workers from China, despite claims that importing Chinese workers is tantamount to human trafficking). Now the Finance Ministry proposes to fill the quota and increase it, too.

As for its choice of the gross Gini index as a yardstick, it’s no coincidence. The choice is a binding one, but it isn’t the usual measure, which would be the net Gini index.

Young employees working at a high-tech company.
Bloomberg

Mind the wage gap

Net Gini measures income inequality after government intervention — that is, after collecting taxes from the rich and making transfer payments to the poor. The gross Gini index is the one before government intervention. It only relates to gaps arising from the labor market — wage gaps between workers.

If you ask Prof. Zvi Eckstein, who led the committee that consolidated recommendations for employment reform, specifically in the construction industry, picking the Gini index is a little weird, because gaps can be narrowed from the top down, too.

“If all the high-tech workers were thrown out, we would resolve most of Israel’s wage gap problem,” Eckstein points out. His committee chose a more focused measure — that of raises among the lowest-earning 20% of workers.

In any case, assuming the Finance Ministry doesn’t mean to start setting bear traps for high-tech workers, its focus on narrowing wage gaps in Israel is being interpreted as a move to raise wages for the poor.

But that doesn’t fit with increasing the quota of foreign construction workers.

In his reports, Eckstein showed that construction is the most important industry for unskilled workers. There are two reasons for this. The first is that it is a huge industry that employs hundreds of thousands of unskilled workers. Second, because it traditionally pays relatively high wages to unskilled workers because it involves hard physical labor plus the need to learn skills.

Worldwide, construction worker salaries are the correct benchmark for judging wages of the unskilled. It was the same here too, once: construction workers made the best salaries n the business sector, until 1967.

In that year the picture changed. Today pay for construction workers is about 20% less than the norm in the business sector. Actually, in the developed world, Israeli construction workers make about the least.

After 1967

Palestinian construction workers in the West Bank settlement of Susya, in 2014.
Reuters

What happened in 1967? That was the year Israel conquered Judea, Samaria and the Gaza Strip, and the domestic construction industry was flooded with low-cost Palestinian labor; then more and more Chinese workers, and Romanians and Bulgarians. Thus an industry that should have been a distinguished haven for the unskilled became an incubator for low-cost foreign labor, where Israeli workers cannot compete.

Pay shrank in parallel with another development in the construction industry: productivity collapsed. Productivity per worker had been about the same as the business-sector average in the 1960s; today it’s 60% of that. Again, the turnaround year was 1967 and again, Eckstein has no doubt as to the reason: the inundation of cheap labor caused addiction by the industry, which stopped investing in industrialization and technology.

Elsewhere in the world, construction is an advanced technological industry. Here, it’s backward. According to Bank of Israel figures, for instance, it takes longer to build a housing unit in Israel now dwelling is longer now than it did in the 1980s — around two years, which is insane by international standards.

There is no question that continuing to import cheap foreign construction workers will assure productivity does not improve. Since construction is a key sector, and since its productivity will continue to lag, so will total economic productivity.

In short, importing cheap foreign construction workers contravenes the Finance Ministry’s own goal of building more housing units in Israel, in order to lower their price. And naturally, importing foreign construction workers utterly contravenes the Finance Ministry’s own statement that it means to narrow social gaps in Israel through measures to jack up the lowest salaries. Could it be that Kahlon says he is going to do all these things, but will wind up achieving the opposite?