Israeli Labor Market Flexible, but Offers No Safety Net to the Unemployed

Should we be emulating Scandinavia, where a flexible labor scheme is balanced by a generous unemployment benefits?

Eliyahu Hershkovitz

“Flexicurity” is the term used to describe the combination of a flexible labor market and the security of a welfare state — a safety net for workers coping with the vicissitudes of the capitalist labor market. Coined in the 1990s by Denmark’s then-Prime Minister Poul Nyrup Rasmussen, the model is unique to Nordic states and the envy of any country aspiring to their economic performance.

Denmark calls its model a “golden triangle.” Its three sides are flexible hiring and firing policies, a safety net of generous unemployment benefits and an active labor market that includes state-funded job training and employment subsidies meant to directly create jobs for the unemployed.

Eyal Toueg

For a recent report prepared at the request of MK Shelly Yacimovich (Labor), Knesset Research and Information Center economists Tamir Agmon and Itamar Milrad compared labor market policies in Israel to those in Denmark, Finland and Sweden and to other Organization for Economic Cooperation and Development member states.

Israel did not come out well in the comparison. While strong in labor market flexibility, its weakness in parameters such as unemployment benefits and job security contribute to poverty and to income inequality.

The flexibility of the Israeli labor market is somewhat surprising in light of the country’s fossilized public sector and the bulletproof job security in unionized segments of the private sector, such as the banks. The high job security in these fields is offset by the large proportion of contract and temporary workers, who can be fired quite easily.

In that respect, Israel is not alone. The British, Irish and Eastern European labor markets also have high flexibility and low security. Some OECD states, such as Italy, Austria and the Slovak Republic, offer little in the way of a safety net for the unemployed but their rigid labor laws make it difficult to fire workers. Workers in countries such as France, Germany, Netherlands, Belgium, Estonia and Portugal have both high job security — that is, low flexibility for employers — and a generous safety net for the few who lose their jobs.

In the Nordic states, in contrast, social security and flexibility in hiring and firing are about equally balanced. Employers have flexibility, the government offers a generous safety net for the jobless and the state is actively engaged in assuring workers have the skills to find work.

The report notes the potential downsides of this seemingly wonderful balance. Too expansive a safety net could be open to exploitation, for example by immigrants who have flocked to countries with particularly strong safety nets, such as Holland. They have few incentives to work.

Lots of low-paid jobs

Israel’s workforce participation rate rose to 63.7% in 2013, from 60.3% a decade before. At the same time, unemployment fell, to 6.2% in mid-2014 from 11.7%. This would seem to be great news — more workers and fewer unemployed. But according to the study, a whopping 90% of the new jobs created over the past 10 years pay less than the average wage.

In addition, research by the Economy Ministry found that in recent years the average salary of job being offered was just 60% of the national average wage. In 2012, 68% of salaried employees earned less than the average wage, which was about 9,100 shekels ($2,430) a month, 70% earned less than 10,000 shekels and 50% less than the median wage of 6,500 shekels. Only 6% earned more than 25,000 shekels a month.

Added to these wage gaps is the Israeli dichotomy: very low flexibility (that is, high job security) in some fields, mainly in the public sector, and very high flexibility in other fields, ranging from cleaners and security guards to high-tech employees. This dichotomy traces its origins to the rigid labor market in Israel until the 1980s. The economic crisis of that decade reduced the power of the unions, which now represent only a quarter of the labor force, very low compared to the 70% that is common in Nordic states. Entire sectors of the Israeli economy have zero collective bargaining power.

It is generally easy for a private-sector employer to fire a worker in Israel, the Knesset report concludes. On the OECD employment protection index, on which 0 is no protection and 6 is high protection, for permanent employees Israel scores 2.22, compared to an OECD average of 2.29. For temporary workers the score is 1.58, compared to an OECD average of 2.08.

Despite the many laws protecting employees, which include protection from being fired while pregnant or doing reserve duty, as well as the right to unionize, the Israeli labor market is very flexible. The report explains how rigid rules and a flexible market exist side by side: “Violations of labor laws in Israel are relatively high, and the resources invested in enforcing labor laws are relatively few,” the authors say.

The International Trade Union Confederation, which ranks countries based on the violation of labor laws on a scale of 1 to 5, gives Israel a 3, better than Turkey and the United States (4 for both), but much higher than the 1 given to Spain, Japan, Holland and the Nordic states.

In the Nordic states, a collective bargaining agreement signed in a particular industry covers all workers in that industry, whether or not they are union members. But once a collective bargaining agreement goes into effect, strikes are illegal. Labor contracts are enforced much more strictly than in Israel, including large fines for employers who violate them, while workers are better protected from layoffs than in Israel, said the Knesset report.

Under Denmark’s high labor flexibility, 25% of private-sector workers change jobs every year. But the safety net is much stronger, and the government provides much more direct support for employment. It may be easy to fire a worker in Denmark, but the unemployed receive 90% of their wages in unemployment compensation for a full two years. Until 2011, it was for four years. The government provides job counseling for the unemployed, professional training in the workplace or subsidies for employing new workers. The global economic crisis hurt Denmark too, but 60% of workers who lost their jobs during the crisis found new jobs within 13 weeks, and 80% within 26 weeks.

Tougher terms

Israel’s unemployment safety net is also lacking. To qualify for unemployment compensation, an Israeli must have worked 12 of the previous 18 months, compared to just six of the previous 36 months in Denmark.

The Finance Ministry added a provision to the Economic Arrangements Bill for 2015 — called hok hahesderim in Hebrew, it is supplementary legislation that accompanies each year’s state budget — that would further tighten unemployment eligibility requirements: To qualify, workers under 30 would have to provide proof of employment for 24 out of the 30 months previous to losing their jobs; those aged 30 to 35 would need to have worked 18 of the previous 24 months.

Israelis who are eligible for unemployment benefits receive less than their counterparts in other OECD nations. Salaried employers who lose their jobs receive between 65% and 76% of their wages, compared to 90% in Denmark. Jobless Israelis who enroll in a professional retraining program receive 70% of their salary, while their Finnish counterparts receive a higher unemployment allowance while retraining. The maximum period for receiving jobless benefits is particular brief in Israel, just 50 to 175 days, depending on age, compared to 300 days in Sweden. In addition, self-employed Israelis are not eligible for any unemployment benefits.

The Israeli government spends very little in such areas as removing barriers to employment, supporting the rehiring of workers and labor mobility. Generally under the purview of the Economy Ministry, this includes the negative income tax, benefits for scientists, professional training, subsidizing salaries for employers and the like. Israel spent just 0.15% of gross domestic product on these areas in 2010, compared to 1.91% in Denmark and 1.14% in Sweden. The OECD average was 0.6%.

If day care subsidies and other programs are included, it would bring the percentage to 0.31% in 2010, according to the Bank of Israel. Negative income tax for particular low earners, introduced in 2012, should raise the figure by about another 0.1 percentage point of GDP. The authors of the Knesset report add that state-run vocational training programs in Israel are inefficient and nothing has been done to improve them.